The Difference Between Finance And Economics

Although they are often taught and presented as very separate disciplines, economics and finance are interrelated and inform and influence each other. Investors care about these studies because they also influence the markets to a great degree.
Economics is a social science that studies the production, consumption and distribution of goods and services, with an aim of explaining how economies work and how their agents interact. But modern economics is in fact often very quantitative and heavily math-oriented in practice.

When economists succeed in their aims to understand how consumers and producers react to changing conditions, economics can provide powerful guidance and influence to policy-making at the national level. There are very real consequences to how a nation approaches taxation, regulation, and government spending; economics can offer advice and analysis regarding these decisions.

Economics can also help investors understand the potential ramifications of national policy and events on business conditions. Understanding economics can also give investors the tools to predict macroeconomic conditions and understand the implications of those predictions on companies, stocks, markets and so on.

Investors have an erratic history with economists, listening to them carefully at some times and all but ignoring them at others. While some investors may ignore economists' concerns and pile their investments into the latest booming sector, others will carefully track data on GDP (Gross Domestic Product ). inflation and deficits to inform their investing decisions.
Finance in many respects is an offshoot or outgrowth of economics, and many of the notable achievements in finance were made by individuals with economics backgrounds and/or positions as professors of economics. Finance generally focuses on the study of prices, interest rates, money flows and the financial markets. Finance seems to be most concerned with notions like the time value of money, rates of return, cost of capital, optimal financial structures and the quantification of risk.

While economics offers the pithy explanation that the fair price of an item is the intersection of supply, demand, marginal cost and marginal utility, that is not always very useful in actual practice. People want a number, and many billions of dollars are at stake in the proper pricing of loans, deposits, annuities, insurance policies and so forth. That is where finance comes into play - in establishing the theoretical understandings and actual models that allow for the pricing of risk and valuation of future cash flows

Finance also informs business managers and investors on how to evaluate business proposals and most efficiently allocate capital. Basically, economics posits that capital should always be invested in a way that will produce the best risk-adjusted return; finance actually figures that process out.
As finance tries to concern itself with assessing the value of financial instruments, it is not surprising that one of the most common applications of finance in the markets is in the determination of fair value for a wide range of investment products.
It is important for investors to avoid "either/or" arguments regarding economics and finance;
both are important, and both have valid uses and applications. In many respects, economics is "big picture" (how a country/region/market is doing) and concerned about public policy, while finance is more company/industry-specific and concerned about how companies and investors evaluate and price risk and return.
The two disciplines seem to be converging in some respects. It seems that academics in finance are trying to incorporate more and more theory into their work and appear more academically rigorous. At the same time, there is at least a movement within some schools of economics to lean more heavily on math and appear practical and applicable to everyday business and policy decision-making processes.