Economics And Its Most Influential Equations

Economics to the uninitiated isn’t just theories and mass speculation. No, it in fact is a careful collection of equations working in tandem to justify the mass speculations and theories. But, don’t tell that to an economist ever unless you can back up your claims with a few equations such as these.

The Normal Distribution

The famous bell curve is what you get when you use this equation. Also known as the standard normal distribution curve, it basically says in mathematical terms that the probability of a point being near the average is much greater than away from it. The original work is accredited to Blaise Pascal but it was Bernoulli who is given the credit for its current form. As for the bell curve it came from Adolphe Quetelet.

This equation is what modern statistics is based on. Other than economics obviously the fields of social science and general science too have benefited from it. Take for instance, its use to figure out the effectiveness of drugs in clinical trials.

The Black-Scholes Model

In its simplest terms, this equation helps price derivatives using assumptions that there is no risk and no arbitrage opportunity when priced correctly. The equation is the brainchild of two economists namely, Myron Scholes and Fischer Black. Later it was expanded by Robert Merton but the two creators managed to bag the Economics Nobel Prize in 1997 for their discovery.

With this formula, derivatives market today has managed to become a trillion-dollar business. However, when this equation is used improperly, it can lead to sever financial crisis. Today, even after financial crisis due to the improper use of the equation, it still is the de facto method to calculate derivative prices.

Shannon’s Information Theory

This piece of equation is not exactly directly related to economics but rather related to coding for computers as it helps streamline codes and improve efficiency. This is something that modern day computers engaged in market predictions and banking practices require on a daily basis.

Developed by Bell Labs engineer, Claude Shannon, it basically calculates an estimation of data in a specific piece of code. This equation is accredited for ushering the world into the information age. Any kind of error detection, especially in coding relies on Shannon’s Information Theory. More importantly, the internet is based greatly on this piece of equation.

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