Price elasticity of Demand and Supply (1 Viewer)

[aricho]

Hey everyone,

Just wondering if any of you know and places that i can get some info in price elasticy of demand/supply of the sharemarket??

just been doing a bit of thinking and i think that:
a rise in demand results in a rise in price, so therefore a demand curve for a share or index sould look like a supply curve??

what do u reckon??

also, just wondering how price elasticity of demand and supply can be calculated in the sharemarket??

Thanks.....

 

[Rafy]

No the sharemarket has normal supply/demand curves.

If i understand what youre saying correctly, i think you are getting confused with 'movements along' and ''shifts in' the demand and supply curves.
A movement ALONG the curve occurs when price is the only variable. A shift of the curve occurs when there is a change in demand/supply due to factors other than price.

Yes a rise in demand in a sharemarket will result in an increase in price. The entire demand curve shifts to the right, resulting in a price rise, as normally occurs in any shift in demand. The graph may show it better:

Note also that Price elasticity refers to the sensitivity of supply and demand to changes in PRICE.

 

[aricho]

Sweet got it.........

now how can price elasticity of demand and supply be measured in the sharemarket? through volumes and changes in price?

 

[goan_crazy]

Sweet got it.........

now how can price elasticity of demand and supply be measured in the sharemarket? through volumes and changes in price?

The price elasticity of supply measures the responsiveness of the quantity supplied of a good to its price.

It is measured as the percentage change in supply that occurs in response to a percentage change in price.

The price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price.

When the price elasticity of demand for a good is elastic (Ed > 1), the percentage change in quantity is greater than that in price. Hence, when the price is raised, the total revenue of producers falls, and vice versa.

When the price elasticity of demand for a good is inelastic (Ed < 1), the percentage change in quantity is smaller than that in price. Hence, when the price is raised, the total revenue of producers rises, and vice versa.

When the price elasticity of demand for a good is unit elastic (or unitary elastic) (Ed = 1), the percentage change in quantity is equal to that in price. Hence, when the price is raised, the total revenue remains unchanged.

When the price elasticity of demand for a good is perfectly elastic (Ed = ∞), any increase in the price, no matter how small, will cause demand for the good to drop to zero. Hence, when the price is raised, the total revenue of producers falls to zero. The demand curve is a horizontal straght line.

When the price elasticity of demand for a good is perfectly inelastic (Ed = 0), changes in the price do not affect the quantity demanded for the good. The demand curve is a vertical straight line.

 

[gnrlies]

Sweet got it.........

now how can price elasticity of demand and supply be measured in the sharemarket? through volumes and changes in price?

Can I ask why you are so interested in the stock market?

Price elasticity is a cimple calculation involving:

(change in Q / change in P) x (Price / Quantity)

Where this gets complicated is that the share market is not a market for homogenous goods. It is a heterogenous market - i.e. there are many different shares available, AND the supply of shares is limited to the capital requirements of the business (i.e. how many shares, and at what price they are issued are aimed to reach some sort of capital accumulation). Businesses cannot keep issuing shares, and at any moment in time the amount of shares available is a fixed amount.

The implications of the first problem is quite simply that you cannot really calculate a valid elasticity for the entire market. You could roughly work out the elasticity of asx200 vs market capitalisation, but you certainly couldn't do it based on share quantities and asx 200 as each share is valued differently. You can only really do it for an individual share, i.e. commonwealth bank shares.

The second implication is even more profound. In a regular supply and demand function we assume that businesses can produce varying quantities as the equilibrium price changes. This is not true of the sharemarket. There are only a fixed amount of shares. Share trades are of second hand shares, not freshly issued shares. Where there is an IPO or additional floatation to raise revenue, this is a one off measure to raise a specific amount of capital, not to respond to market demand.

So essentially what you have is a sort of vertical supply function which means that there will be no change in quantity demanded for a change in price. I.e. people will always own the entire quantity of shares available within the market. Even a company like Enron still technically had owners of all its shares (until it was declared bankrupt), the only difference was that those shares were worthless.

So in effect you have an elasticity of 0. I.e. there is no change in quantity demanded for a change in price, as supply is limited.

Where you can fix this up is to look at an individuals decision to purchase shares. I.e. dont look at the market, look at an individuals decisions. In this case an individual would have a certain price elasticity of demand as with changes in price they might decide to purchase more or less of that share.

 

[Conspirocy]

Please note I’m not limiting my discussion to price elasticity, but rather to elasticity in general, which I will define as the responsiveness of the quantity demanded/supplied, to a change in a demand/supply determinate.

I’m just trying to understand what was said above by grnilles.

- Supply is vertically inelastic for the shares because there is a fixed amount of shares issued.
What you said about a vertical supply function would be true for the initial float of the shares; however exchange in the share market would change the elasticity of this supply.

I’m not sure if that is entirely true for all scenarios. The reason I say this is because you are selling shares in a secondary market as well. So a person’s willingness to supply a share for sale would be affected by the price of the share, and a person’s willingness to buy a share would also be affected by the price. Based on this alone there would be elasticity (price, cross, and income) for shares in the secondary market.

Back to the elasticity of demand * I agree with working out the elasticity of demand for individual shares, however I’m sure that you could group shares that are in the same sectors of industry together.

The individual decision would be based on their responsiveness to that particular price, and I assume you could have a standard downward sloping demand curve.