Page 403 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes 4. Forward Market

In a forward market, on future date, there is an agreement to give product which is agreed on today. The
forward market is for many products like sugar, wheat, tea, gold, silver, foreign currency etc.
Think about a forward market of gold. Its current price (means today’s) is 5,000 per 10 gram. This is
called Spot Price for urgent delivery. People expect the similar 5,500 price on next year, which is its
future spot price. So, gold a person can hedging with a trader against this risk. Suppose that he agrees
to sell a kilo gold to a trader on 5,300 per 10 gm on future price. Therefore, seller reduces his future
price to sale at 5,300. So 200 ( 5,500 – 5,300) is like a premium which paid for come out risk of future
price. If expected future price is 5,500 then hedging risk gets profit of 200 ( 5,500 – 5,300) per 10 gm
which is his risk premium.

5. Complete Information

Due to incomplete information people get risk and unstability. He cannot take decision for maximizing.
If they do not get complete information, which he wants to sell or buy. In order to minimize the risk of
selling or buying full information is necessary. It can be got by different advertisements. Economists
called information is a object which can be bought or sold. It has price of information and price of
complete information is expected as price of a alternative. It is the difference when information
receives completely an expected price when information is incomplete. Take a firm which expends on
advertisement and research by which people got information complete its object. So it has probability
to increase in selling. Suppose expected profit is 25,00,000 with complete information but 13,00,000 is
the expected price with incomplete. Difference between expected profit with complete information and
incomplete information is 25,00,000 – 13,00,000 = 20000 which is price of complete information. So,
firms earn 12,00,000 additional profit which is the complete information.

28.3 Gambling

Each person has a simple tendency to earn money without much labour. So, he takes risk and plays
gambling in Ramp, Casino etc. We discuss below about coin and its individual behaviour—
Let us discuss about gambling when a coin jumps and a gambler has paid for it. If head has come in first
toss then gambler gets 100/- but he would paid 100/- if tail is come. Two equal probability is got.
Its mean that each has 50% probability. The expected value for this gamble is the sum of the outcomes
weighted by their probability.

So expected price = 0.50 ( 100) + 050 (– 100)

= 50 – 50 = 0

It shows probability to win that 100 is 50% and 50% probability in gambling of 100. It has said fair
odds. A fair odd is that whose expected price is 200 or average economic profit is 200. It is also called
zero sum game. If 20% probability is to win 100 and 80% probability is to loss 100 then it is called
unfair gamble. In spite of it, if 20% probability is to loss 100 and 80% is to coin 100 then it is called
formally gamble.
Now we compare two coin tossing games, in first game, 50% probability to win or loss 100 and
in the game 50% is same probability to win 200 both are zero Sum gamble but it is more risk in
other games . If game has stopped after first toss. The gamble gets 100 is respect of win loss 50.

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