Price Elasticity of Demand and Supply in Sharemarket

  1. 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
     
  2. jcsd
  3. 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?
     
  4. Isn't a stock market chart a visual representation of this phenomena?
     
  5. EnumaElish

    EnumaElish 2,481
    Science Advisor
    Homework Helper

    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.
     
    Last edited: Dec 24, 2006
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