Price Elasticity of Demand and Supply in Sharemarket

In summary, the question is whether the price elasticity of demand and supply can be measured in the stock market and what theory is being tested. It is possible to calculate this using regression or similar methods, but the practical value of this information may be limited. There is also an identification problem due to the market being in disequilibrium and the assumption of competitive behavior on both sides. Oligopolistic or collusive behavior on one side could simplify the measurement, but the issue of the market being in a net short position would still need to be addressed.
  • #1
aricho
71
0
Hey everyone,

just wondering if there is any way that price elasticity of demand and supply can be measured in the sharemarket?

thanks for your help
 
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  • #2
Hi

do you mean to calculate how much the demand for a share on the stock market varies when the price of the stock varies by one percent?

If so, you can do this the same way you would for anything else (dX/dP)*(P/X), by either doing a regression or something, but I don't think this information would have much practical value...

What theory do you want to test?
 
  • #3
Isn't a stock market chart a visual representation of this phenomena?
 
  • #4
At least superficially, there is an identification problem. The price & volume observations all correspond to some kind of market equilibrium -- the intersection of the demand and the supply; so there is no way to identify D&S separately. Assuming that suitable instruments can be found, you can estimate volume & price separately as reduced form equations, than back out the structural parameters, or run a 2-stage or 3-stage least squares to estimate the structural model directly.

In fact, the market is normally in disequilibrium -- typically the net position is short, i.e. the market is short on a typical day (which is why the market is liable to a sudden crash [but relatively well protected against a sudden surge?], according to Greenspan). This further complicates the matter, because it means that there is some slack that is not immediately observable from price & volume data.

Finally, you are assuming competitive behavior on both sides of the market. Oligopolistic or collusive behavior on one side (e.g. the supply side) would in fact simplify the matter: then, price & volume observations can be used to track the elasticity of the other side (e.g. the demand side). But you'd still have to tackle the "net short" problem.
 
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What is price elasticity of demand and supply in sharemarket?

Price elasticity of demand and supply in sharemarket is a measure of the responsiveness of the quantity demanded and supplied of a particular stock or security to changes in its price. It helps determine how much the demand or supply of a stock will change in response to a change in its price.

How is price elasticity of demand and supply calculated?

Price elasticity of demand and supply is calculated by dividing the percentage change in the quantity demanded or supplied by the percentage change in price. The formula for price elasticity of demand is (% Change in Quantity Demanded / % Change in Price), while the formula for price elasticity of supply is (% Change in Quantity Supplied / % Change in Price).

What factors affect price elasticity of demand and supply in sharemarket?

Several factors can affect price elasticity of demand and supply in sharemarket, including the availability of substitutes, the necessity of the product, the time period being considered, and the proportion of income spent on the product. Generally, goods or securities that have many substitutes, are considered non-essential, have a longer time period for adjustment, or represent a small portion of a person's income, tend to have a higher price elasticity of demand and supply.

What are the implications of price elasticity of demand and supply for investors?

Price elasticity of demand and supply can greatly impact the investment decisions of individuals. Stocks or securities with a high price elasticity of demand and supply are more sensitive to changes in price, meaning that small changes in price can lead to significant changes in demand or supply. This can make these investments riskier, as they are more volatile and can result in larger losses or gains.

How can price elasticity of demand and supply be used in sharemarket analysis?

Price elasticity of demand and supply can be a valuable tool in sharemarket analysis as it can help investors predict the potential impact of price changes on the demand and supply of a particular stock or security. It can also be used to compare the price elasticity of different investments and inform investment decisions based on the level of risk and potential returns.

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