Concise Notes on Microeconomics: Search and Money Theory

Learning Outcomes

  • Understand the model of search costs and information gathering.
  • Grasp the concept of money and its value.
  • Recognize that currency usage among people grants it value.
  • Relate network effects to cryptocurrency valuation.
  • Contextualize empirical evidence regarding crypto returns.

Search and Information in Markets

  • Consumers search for the best prices, costing them time and resources.
  • Optimal search amount is determined by individual consumer preferences.
  • Marginal cost of search is given by: q∂p∂nq\frac{\partial p}{\partial n}.

Determinants of Search

  • Higher expenditures increase savings from searching, prompting more extensive searches.
  • Frequent buyers/sellers increase the effectiveness of the search via price correlations.
  • Larger geographical markets increase search costs.

Efficient Market Hypothesis (EMH)

  • Assets trade at fundamental value if traders utilize available information.
  • Overvalued assets lead to arbitrage, reducing prices.
  • Deviations from fundamentals highlight incomplete information availability.
  • Present value equations: P<em>t∗=P</em>t+UtP<em>t^* = P</em>t + U_t, indicating market valuation fluctuations.

Understanding Money

  • Money as a store of value, means of payment, and unit of measurement.
  • Money's value arises from its societal role in facilitating exchanges.

Search Theory and Money

  • Money's societal value requires it to produce favorable outcomes.
  • Agents trade based on their goods, with varying consumption probabilities.

Dynamic Programming in Trade

  • Models returns for producing, trading commodities, and utilizing money:
    • rV<em>0=α(V</em>1−V0)rV<em>0 = \alpha(V</em>1 - V_0) (production return)
    • rV<em>1=β(1−μ)x2U+V</em>0−V<em>1+βμxπ(V</em>m−V1)rV<em>1 = \beta(1 - \mu)x^2U + V</em>0 - V<em>1 + \beta\mu x\pi(V</em>m - V_1)
    • rV<em>m=β(1−μ)ΠxU+V</em>0−VmrV<em>m = \beta(1 - \mu)\Pi xU + V</em>0 - V_m
  • Focus on steady state determines the flow in production.

Symmetric Equilibrium

  • Characterized by all agents employing identical strategies.
  • Identifies the proportion of money holders under various equilibria types.

Welfare Analysis

  • Examines impacts of pure barter, pure monetary, and mixed monetary equilibria on welfare.
  • Universal acceptance of money increases societal welfare.

Cryptocurrency Dynamics

  • Cryptocurrencies function without central authority, value derived from user adoption.
  • Arbitrage influences user returns based on predicted currency evolution.
  • Returns consist of convenience yield, capital gain, and discount for participation costs.

Time-Series Momentum and Google Searches

  • Empirical results demonstrate varying significance in returns based on investor behavior and search trends:
    • Regression analysis indicates improved returns through increased Google searches, suggesting investor sentiment influences crypto prices.