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what is the marginal rate of substitution mrs | in economics the marginal rate of substitution mrs is the amount of one good that a consumer is willing to give up in exchange for a new good while maintaining the same level of utility mrs is used in indifference theory to analyze consumer behavior when someone is indifferent to substituting one item for another their marginal utility for substitution is zero since they neither gain nor lose any satisfaction from the trade investopedia madelyn goodnightformula and calculation of the marginal rate of substitution mrs the mrs formula is m r s x y d y d x m u x m u y where x y two different goods d y d x derivative of y with respect to x m u marginal utility of good x y begin aligned mrs xy frac dy dx frac mu x mu y textbf where x y text two different goods frac dy dx text derivative of y with respect to x mu text marginal utility of good x y end aligned mrsxy dxdy muy mux where x y two different goodsdxdy derivative of y with respect to xmu marginal utility of good x y | |
what the mrs can tell you | the mrs is a term used in economics that refers to the amount of one good that is substitutable for another and is used to analyze consumer behaviors for a variety of purposes mrs is calculated between two goods placed on an indifference curve displaying a frontier of utility for each combination of good x and good y the slope of this curve represents quantities of good x and good y that a consumer would be happy substituting for one another mrs is a critical component for businesses to understand when analyzing consumption trends or for government entities to understand when setting public policy consider an example of a government wanting to analyze how offering electric vehicle incentives may spur more environmentally friendly purchases understanding how mrs is impacted before and after a tax incentive can allow for the government to analyze the financial implications of the plan mrs and the indifference curvethe slope of the indifference curve is critical to the mrs analysis mrs is the slope of the indifference curve at any single point along the curve the slope will often be different as one moves along an indifference curve most indifference curves are usually convex because as you consume more of one good you will consume less of the other indifference curves can be straight lines if a slope is constant resulting in an indifference curve represented by a downward sloping straight line if the mrs is increasing the indifference curve will be concave to the origin this is typically not common since it means a consumer would consume more of x for the increased consumption of y and vice versa usually marginal substitution is diminishing meaning a consumer chooses the substitute in place of another good rather than simultaneously consuming more the law of diminishing marginal rates of substitution states that mrs decreases as one moves down a standard convex shaped curve which is the indifference curve example of mrsfor example a consumer must choose between hamburgers and hot dogs to determine the mrs the consumer is asked what combinations of hamburgers and hot dogs provide the same level of satisfaction | |
when these combinations are graphed the slope of the resulting line is negative this means that the consumer faces a diminishing mrs the more hamburgers they have relative to hot dogs the fewer hot dogs they are willing to consume if the mrs of hamburgers for hot dogs is 2 then the individual would be willing to give up 2 hot dogs for every additional hamburger consumption | limitations of the mrsthe mrs has a few limitations the main drawback is that it does not examine a combination of goods that a consumer would prefer more or less than another combination this generally limits the analysis of mrs to two variables as this is most often graphically depicted using only x and y variables other variables that may still factor consumption may not be appropriately considered mrs does not necessarily examine marginal utility since it treats the utility of both comparable goods equally though in actuality they may have varying utility in the example above consider how the utility of a hamburger with it s potential lettuce onion or other vegetable dressings may vary from that of a plain hot dog mrs vs mrtmrs is tied to the marginal rate of transformation mrt whereas mrs focuses on the consumer demand side mrt focuses on the manufacturing production side often the two concepts are intertwined and drive the other for example consider a global shortage of flour a manufacturer may be more inclined to bake less cakes and more bread as bread is a more efficient product to make based on material constraints as a result consumers may find cake shortages result in much higher prices this may in turn result in a stronger mrs between cake and bread as consumers may be enticed by lower costs of the over produced item on the other hand if consumers don t prove to have any reason to substitute bread for cake a manufacturer may be handcuffed into producing a less efficient good to meet market demand | |
what is the relationship between indifference curve and mrs | essentially mrs is the slope of the indifference curve at any single point along the curve most indifference curves are usually convex because as you consume more of one good you will consume less of the other so mrs will decrease as one moves down the indifference curve this is known as the law of diminishing marginal rate of substitution if the mrs is increasing the indifference curve will be concave which means that a consumer would consume more of x for the increased consumption of y and vice versa but this is not common | |
what are the drawbacks of marginal rate of substitution | the mrs has a few limitations the main drawback is that it does not examine a combination of goods that a consumer would prefer more or less than another combination this generally limits the analysis of mrs to two variables also mrs does not necessarily examine marginal utility because it treats the utility of both comparable goods equally though in actuality they may have varying utility | |
what is indifference curve analysis | indifference curve analysis operates on a simple two dimensional graph each axis represents one type of economic good the consumer is indifferent between any of the combinations of goods represented by points on the indifference curve because these combinations provide the same level of utility to the consumer indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget the bottom linefor economic and financial planning reasons it s critical that various entities understand how consumers may substitute one good for other this concept called marginal rate of substitution measures the relationship between two products and how likely a consumer is to buy one in the place of the other this information is useful in setting manufacturing levels or gauging public policy | |
what is the marginal rate of technical substitution mrts | the marginal rate of technical substitution mrts is an economic theory that illustrates the rate at which one factor must decrease so that the same level of productivity can be maintained when another factor is increased the mrts reflects the give and take between factors such as capital and labor that allow a firm to maintain a constant output mrts differs from the marginal rate of substitution mrs because mrts is focused on producer equilibrium and mrs is focused on consumer equilibrium the formula for the mrts is mrts l k k l mp l mp k where k capital l labor mp marginal products of each input k l amount of capital that can be reduced when labor is increased typically by one unit begin aligned text mrts textit l textit k frac delta k delta l frac text mp l text mp k textbf where k text capital l text labor text mp text marginal products of each input frac delta k delta l text amount of capital that can be reduced text when labor is increased typically by one unit end aligned mrts l k l k mpk mpl where k capitall labormp marginal products of each input l k amount of capital that can be reducedwhen labor is increased typically by one unit | |
how to calculate the marginal rate of technical substitution mrts | an isoquant is a graph showing combinations of capital and labor that will yield the same output the slope of the isoquant indicates the mrts or at any point along the isoquant how much capital would be required to replace a unit of labor at that production point for example in the graph of an isoquant where capital represented with k on its y axis and labor represented with l on its x axis the slope of the isoquant or the mrts at any one point is calculated as dl dk | |
what does the mrts tell you | the slope of the isoquant or the mrts on the graph shows the rate at which a given input either labor or capital can be substituted for the other while keeping the same output level the mrts is represented by the absolute value of an isoquant s slope at a chosen point a decline in mrts along an isoquant for producing the same level of output is called the diminishing marginal rate of substitution the figure below shows that when a firm moves down from point a to point b and it uses one additional unit of labor the firm can give up 4 units of capital k and yet remains on the same isoquant at point b so the mrts is 4 if the firm hires another unit of labor and moves from point b to c the firm can reduce its use of capital k by 3 units but remains on the same isoquant and the mrts is 3 | |
what is the marginal rate of transformation mrt | the marginal rate of transformation mrt is the number of units or amount of a good that must be forgone to create or attain one unit of another good it is the number of units of good y that will be foregone to produce an extra unit of good x while keeping the factors of production and technology constant formula and calculation of the marginal rate of transformation mrt mrt m c x m c y where m c x money needed to produce another unit of x m c y rate of increase by cutting production of y begin aligned text mrt frac mc x mc y textbf where mc x text money needed to produce another unit of x mc y text rate of increase by cutting production of y end aligned mrt mcy mcx where mcx money needed to produce another unit of xmcy rate of increase by cutting production of y so the ratio tells you how much y you need to give up to produce another x the marginal rate of transformation mrt is calculated as the marginal cost of producing another unit of a good divided by the resources freed up by cutting production of another unit the mrt is the marginal cost of production for good x in the formula above divided by the marginal cost of production for good y | |
what the marginal rate of transformation mrt can tell you | the marginal rate of transformation mrt allows economists to analyze the opportunity costs to produce one extra unit of something in this case the opportunity cost is represented in the lost production of another specific good the marginal rate of transformation is tied to the production possibility frontier ppf which displays the output potential for two goods using the same resources mrt is the absolute value of the slope of the production possibility frontier for each point on the frontier which is displayed as a curved line there is a different marginal rate of transformation this rate is based on the economics of producing the two goods it is possible to calculate the mrt for a variety of different goods but the rates will differ depending on the goods compared it follows that the mrt of x with respect to y will usually be different from the mrt of x with respect to z producing more of one good means making less of the other because the resources are efficiently allocated at points on the production possibility frontier in other words resources used to produce one good are diverted from other goods which means less of the other goods will be created this tradeoff is measured by the marginal rate of transformation mrt generally speaking the opportunity cost rises as does the mrt s absolute value as one moves along down the ppf as more of one good is produced the opportunity cost in units of the other good increases this phenomenon is similar to the law of diminishing returns example of how to use the marginal rate of transformation mrt the mrt is the rate at which a small amount of y can be foregone for a small amount of x the rate is the opportunity cost of a unit of each good in terms of another as the number of units of x relative to y changes the rate of transformation may also change for perfect substitute goods the mrt will equal one and remain constant as an example if baking one less cake frees up enough resources to bake three more loaves of bread the rate of transformation is 3 to 1 at the margin or consider that it costs 3 to make a cake meanwhile 1 can be saved by not making a loaf of bread thus the mrt is 3 or 3 divided by 1 as another example consider a student who faces a tradeoff that involves giving up some free time to get better grades in a particular class by studying more the mrt is the rate at which the student s grade increases as free time is given up for studying which is given by the absolute value of the slope of the production possibility frontier curve the difference between the mrt and the marginal rate of substitution mrs while the marginal rate of transformation mrt is similar to the marginal rate of substitution mrs these two concepts are not the same the marginal rate of substitution focuses on demand while mrt focuses on supply the marginal rate of substitution highlights how many units of y would be considered by a given consumer group to be compensation for one less unit of x for example a consumer who prefers oranges to apples may only find equal satisfaction if she receives three apples instead of one orange limitations of using the marginal rate of transformation mrt the marginal rate of transformation mrt is generally not constant and may need to be recalculated frequently furthermore goods will not be distributed efficiently if mrt doesn t equal mrs | |
what is marginal revenue | marginal revenue is the increase in revenue that results from the sale of one additional unit of output while marginal revenue can remain constant over a certain level of output it follows the law of diminishing returns and will eventually slow down as the output level increases in economic theory perfectly competitive firms continue producing output until marginal revenue equals marginal cost investopedia laura porterunderstanding marginal revenuemarginal revenue is a financial and economic calculation that determines how much revenue a company earns for each additional unit sold as the price of a good is often tied to market supply and demand a company s marginal revenue often varies based on how many units it has already sold marginal revenue is useful in several contexts companies use historical marginal revenue data to analyze customer demand for products in the market they also use the information to set the most effective and efficient prices lastly companies rely on marginal revenue to better understand forecasts this information is used to determine future production schedules such as material requirements planning ideally the change in measurements captures the change from a single quantity to the next available quantity i e the difference between the one hundredth and one hundred first units sold however you can still use it to capture the average marginal revenue across a series of units i e the difference between the hundredth and one hundred fifteenth units sold | |
how to calculate marginal revenue | a company calculates marginal revenue by dividing the change in total revenue by the change in total output quantity ideally the change in measurements captures the change from a single quantity to the next available quantity i e the difference between the one hundredth and one hundred first unit sold however the formula can still be used to capture the average marginal revenue across a series of units i e the difference between the 100th and 115th unit sold the formula for marginal revenue can be expressed as marginal revenue change in revenuechange in quantitymr tr q begin aligned text marginal revenue frac text change in revenue text change in quantity 9pt mr frac delta tr delta q end aligned marginal revenuemr change in quantitychange in revenue q tr for example imagine a company sold its first 100 items in one week for a total of 1 000 marginal revenue disregards the previous average price of 10 as it only analyzes the incremental change so if it sold a total of 115 units for 1 100 the next week the marginal revenue for units 101 through 115 is 100 or 6 67 per unit 100 15 positive marginal revenue is informative but does not convey enough information to a company for smarter decision making marginal transaction information should include expenses to garner the most insight marginal revenue curvelike other related concepts marginal revenue can be graphically depicted it is most often represented as a downward sloping straight line on a chart capturing price on the y axis and quantity on the x axis the marginal revenue curve is often downward sloping because there is often an economically inverse relationship between price and quantity as a company decreases the price of its product more units will likely be demanded as the price increases demand often decreases for this reason a company must often decrease its price to increase its market share by decreasing its price the company will receive less marginal revenue for each additional unit sold at some point the market demand for additional units will drive the product price so low that it becomes unprofitable to manufacture additional units in the graph below marginal revenue is depicted by one of the blue lines the quantity in which marginal revenue and marginal cost intersect is the optimal quantity to sell the associated price point is noted as bullet e where quantity per period and demand intersect university of minnesotaaverage revenue curvemarginal revenue can be analyzed by comparing marginal revenue at varying units against average revenue average revenue is simply the total amount of revenue received divided by the total quantity of goods sold in a perfect competition marginal revenue is most often equal to average revenue this is because collective market forces make each participant a price taker for example the market may dictate that it is not profitable to sell a good below 10 however charging more than 10 per unit puts a company at a disadvantage to other companies selling at that price in an imperfect competition marginal revenue and average revenue will vary this is because a firm must eventually lower its price to sell additional units both marginal and average revenue tend to be downward sloping with marginal revenue often being the steeper of the two lines consider an example where a company sells one good for 100 if it prices its second good at 90 its marginal revenue will be 90 however its average revenue will be 100 90 2 units sold 95 the following graph is the theoretical average revenue and marginal revenue curve for an agricultural chemical producer in a monopolistic industry both marginal revenue and average revenue decrease as the firm lowers prices to sell more quantities though marginal revenue decreases faster than average revenue the economics of food and agriculture marketsexample of marginal revenueto assist with calculating marginal revenue a revenue schedule outlines the total revenue earned as well as the incremental revenue for each unit the first column of a revenue schedule lists the projected quantities demanded in increasing order and the second column lists the corresponding market price the product of these two columns results in projected total revenues in column three the difference between the total projected revenue of one quantity demanded and the total projected revenue from the line below it is the marginal revenue of producing at the quantity demanded on the second line for example 10 units sold at 9 each resulting in total revenues of 90 11 units sold at 8 50 resulting in total revenues of 93 50 this indicates the marginal revenue of the 11th unit is 3 50 93 50 90 marginal revenue vs marginal costany benefits gained from adding the additional unit of activity are marginal benefits one such benefit occurs when marginal revenue exceeds marginal cost resulting in a profit from new items sold if the sale of one additional unit yields marginal revenue of 100 and marginal expenses of 80 the company will receive a marginal profit of 20 for the additional item sold a company experiences the best results when production and sales continue until marginal revenue equals marginal cost beyond that point the cost of producing an additional unit will exceed the revenue generated if the company sells one additional unit for 100 but incurs a marginal cost of 105 the company will lose 5 in the process of selling that extra unit | |
when marginal revenue falls below marginal cost firms typically adopt the cost benefit principle and halt production as no further benefits are gathered from additional production | a perfectly competitive firm can sell as many units as it wants at the market price whereas the monopolist can do so only if it cuts prices for its current and subsequent units competitive firms vs monopoliesmarginal revenue for competitive firms is typically constant this is because the market dictates the optimal price level and companies do not have much if any discretion over the price as a result perfectly competitive firms maximize profits when marginal costs equal market price and marginal revenue marginal revenue works differently for monopolies for a monopolist the marginal benefit of selling an additional unit is less than the market price a monopolistic firm s average revenue is its total revenue earned divided by the total units sold a competitive firm s marginal revenue always equals its average revenue and price this is because the price remains constant over varying levels of output in a monopoly because the price changes as the quantity sold changes marginal revenue diminishes with each additional unit and will always be equal to or less than average revenue | |
is marginal revenue the same as profit | marginal revenue only considers income received and does not reflect any marginal expenses required to manufacture or sell the goods therefore marginal revenue is different from profit | |
what is marginal revenue and marginal cost | marginal revenue is the income gained by selling one additional unit while marginal cost is the expense incurred for selling that one unit each measures the incremental change in dollars between varying levels of sales to determine at what level a company is most efficiently producing and selling goods | |
why is marginal revenue important | marginal revenue is important because it is a crucial indicator regarding the most ideal level of activity a company should undertake it is mathematically most ideal for a company to produce goods until marginal revenue is equal to marginal expenses selling goods beyond this level usually means more expenses are incurred than revenue received for each good | |
what does it mean if marginal revenue is negative | if marginal revenue is negative this means total revenue falls as additional units are sold this may be the result of a company needing to cut prices to sell those additional units in this case strictly looking at just marginal revenue it is ideal for a company to have sold fewer goods for a higher average price as more revenue would have been received | |
what is marginal revenue product mrp | marginal revenue product mrp also known as the marginal value product is the marginal revenue created due to an addition of one unit of resource the marginal revenue product is calculated by multiplying the marginal physical product mpp of the resource by the marginal revenue mr generated the mrp assumes that the expenditures on other factors remain unchanged and helps determine the optimal level of a resource understanding marginal revenue product mrp american economist john bates clark 1847 1938 and swedish economist knut wicksell 1851 1926 first showed that revenue depends on the marginal productivity of additional factors of production business owners frequently use mrp analysis to make critical production decisions for example a farmer wants to know whether to purchase another specialized tractor to seed and harvest wheat if the extra tractor can eventually produce 3 000 additional bushels of wheat the mpp and each additional bushel sells at the market for 5 the price of the product or marginal revenue the mrp of the tractor is 15 000 holding other considerations constant the farmer is only willing to pay less than or equal to 15 000 for the tractor otherwise he will take a loss estimating costs and revenues is difficult but businesses that can estimate mrp accurately tend to survive and profit more than their competitors special considerationsmrp is predicated on marginal analysis or how individuals make decisions on the margin if a consumer purchases a bottle of water for 1 50 that does not mean the consumer values all bottles of water at 1 50 instead it means the consumer subjectively values one additional bottle of water more than 1 50 at the time of the sale only the marginal analysis looks at costs and benefits incrementally not as an objective whole marginalism or marginality is a very important concept in economics several critical economic insights grew out of marginalism including marginal productivity marginal costs marginal utility and the law of diminishing marginal returns mrp is crucial for understanding wage rates in the market it only makes sense to employ an additional worker at 15 per hour if the worker s mrp is greater than 15 per hour if the additional worker cannot generate an extra 15 per hour in revenue the company loses money strictly speaking workers are not paid in accordance with their mrp even in equilibrium rather the tendency is for wages to equal discounted marginal revenue product dmrp much like the discounted cash flow dcf valuation for stocks this is due to the different time preferences between employers and workers employers must wait until the product is sold before recouping revenue but workers are generally paid much sooner a discount is applied to the wage and the employer receives a premium for waiting the dmrp directly affects bargaining power between workers and employers except the rare theoretical case of monopsony whenever a proposed wage is below dmrp a worker may gain bargaining power by shopping his labor to different employers if the wage exceeds dmrp the employer may reduce wages or replace an employee this is the process by which the supply and demand for labor inch closer to equilibrium | |
what does marginal social cost mean | marginal social cost msc is the total cost society pays for the production of another unit or for taking further action in the economy the total cost of the production of an additional unit of something is not merely the direct cost undertaken by the producer but also includes costs to other stakeholders and the environment as a whole msc is calculated as marginal social cost mpc mec where mpc marginal private cost mec marginal external cost positive or negative begin aligned text marginal social cost text mpc text mec textbf where text mpc text marginal private cost text mec text marginal external cost positive or negative end aligned marginal social cost mpc mecwhere mpc marginal private costmec marginal external cost positive or negative understanding marginal social cost mscmarginal social cost reflects the impact that an economy feels from the production of one more unit of a good or service marginal social cost exampleconsider for example the pollution of a town s river by a nearby coal plant if the plant s marginal social costs are higher than the plant s marginal private costs the marginal external cost is positive and results in a negative externality meaning it produces a negative effect on the environment the cost of the energy that is produced by the plant involves more than the rate that the company charges because the surrounding environment the town must bear the cost of the polluted river this negative aspect must be factored in if a company strives to maintain the integrity of social responsibility or its responsibility to benefit the environment around it and society in general costs of marginal social cost | |
when determining the marginal social cost both fixed and variable costs must be accounted for fixed costs are those that don t fluctuate such as salaries or startup costs variable costs on the other hand change for example a variable cost could be a cost that changes based on production volume 1 | the issue with quantificationmarginal social cost is an economic principle that packs a major global punch though it is incredibly difficult to quantify in tangible dollars costs incurred by acts of production such as operational costs and money used for startup capital are fairly simple to calculate in tangible dollars the issue comes when the far reaching effects of production must also be factored in such costs are difficult if not impossible to pin down with an exact dollar amount and in many instances no price tag can be affixed to the effect the importance with marginal social cost then is that the principle can be used to aid economists and legislators to develop an operating and production structure that invites corporations to cut down on the costs of their actions related conceptsmarginal social cost is related to marginalism a concept that works to determine the amount of extra use derived from the production of one additional unit the effects of the extra units on supply and demand are also studied marginal social cost can also be compared to the marginal benefit the principle that determines the amount that consumers will give up to gain one extra unit | |
what is the marginal tax rate | your marginal tax rate is the tax rate that you pay on your highest dollar of taxable income the federal marginal tax rate for individuals in the united states increases as their income rises as income grows the highest dollar earned will fall into a higher tax bracket this means that your marginal tax rate will likely be higher than your effective tax rate which is the average rate you pay on all your income this method of taxation is known as progressive taxation it aims to tax individuals based on their earnings so that low income earners are taxed at a lower rate than higher income earners understanding the marginal tax ratetaxpayers are divided into tax brackets or ranges under a marginal tax rate the brackets determine the rate applied to increments of the filer s taxable income as income increases the last dollar of taxable income will be taxed at a higher rate than the first dollar earned which is taxed at the rate for the lowest tax bracket the last dollar earned will be taxed at the rate of the highest bracket that a taxpayer reaches and all the money in between is taxed at the rate for the range into which it falls laws can change and affect marginal tax rates the existing marginal tax rates went into effect in the u s on jan 1 2018 due to the passage of the tax cuts and jobs act tcja the tcja kept the seven bracket structure but adjustments were made to the tax rate percentages and the income levels the rates under the tcja are 10 12 22 24 32 35 and 37 1 prior to the change the rates were 10 15 25 28 33 35 and 39 6 2marginal vs flat taxanother type of tax rate is the flat tax rate which several states implement for state income tax 3 under this system of taxation people aren t taxed on a scale as they are with the marginal tax rate they re taxed at a flat rate across the board everyone is charged the same rate regardless of their income level most systems that use a flat tax rate don t allow for deductions flat tax systems are seen in countries with a rising economy those who support this system of taxation describe it as fair because it taxes all people and businesses at the same rate those who oppose it believe that it results in high income taxpayers paying less than they should for an equitable society marginal tax rate examplethe table below shows the rates and income levels for three types of taxpayers filing for tax year 2024 single married filing jointly and heads of household 4individuals who make smaller amounts of income fall into the lower marginal tax rate brackets while higher earning individuals reach higher marginal tax brackets but the tax rate for the marginal tax bracket into which an individual falls isn t the sole rate that determines the tax on their entire income for instance if you fall into the 24 tax bracket based on your total taxable income that total income isn t taxed at 24 the portion of it that falls in the 10 12 and 22 brackets is taxed at those rates only the portion above those brackets would be taxed at 24 that s because as mentioned income taxes are assessed progressively with each bracket having a range of income values that are taxed at that particular rate let s work through an example a single taxpayer who earned 150 000 in taxable income would owe the following income tax for tax year 2024 4the entire tax liability for this individual would be 29 042 1 160 4 266 11 742 11 874 this would work out to an average or effective tax rate of 19 36 29 042 divided by total income of 150 000 the tax rates of the brackets remain constant regardless of a person s filing status however the dollar range to which each bracket applies changes depending on whether the filer is a single person a married joint filer or a head of household filer in addition the dollar range of each marginal tax bracket typically increases annually to account for inflation as well due to a provision in the tax code referred to as indexing | |
what is the effective tax rate | the effective tax rate is the overall percentage of income that an individual or a corporation pays in taxes the effective tax rate for individuals is the average rate at which their earned income such as wages and unearned income such as stock dividends is taxed the effective tax rate for a corporation is the average rate at which its pre tax profits are taxed | |
what is the difference between effective and marginal tax rates | the effective tax rate is a more accurate representation of a person s or corporation s overall tax liability than their marginal tax rate and it s typically lower the marginal tax rate refers to the highest tax bracket into which their income falls in a progressive income tax system like the one in the united states income is taxed at differing rates that rise as income increases to certain thresholds two individuals or companies with income in the same upper marginal tax bracket may end up with very different effective tax rates depending on how much of their income was in the top bracket | |
what is a flat tax | a flat tax also known as a regressive tax applies the same tax rate to every taxpayer regardless of income bracket no deductions or exemptions are allowed most flat tax systems or proposals do not tax income from dividends distributions capital gains or other investments the bottom linethe u s has a marginal tax rate system with different tax brackets with ever increasing tax rates kicking in at different levels of income you re taxed at a certain rate for certain amounts of income that progressively get larger that is you won t pay 37 the top tax rate on all of 1 000 000 if you make that amount you would instead pay the marginal rates on income within each tax bracket up to 609 350 of income for single filers only the last 390 650 would be subject to the 37 rate correction nov 8 2023 this article has been corrected to reflect that the marginal tax rate is higher than the effective or average tax rate and to update federal tax brackets | |
what is marginal utility | marginal utility is the added satisfaction that a consumer gets from having one more unit of a good or service the concept of marginal utility is used by economists to determine how much of an item consumers are willing to purchase positive marginal utility occurs when the consumption of an additional item increases the total utility on the other hand negative marginal utility occurs when the consumption of one more unit decreases the overall utility investopedia dennis madambaunderstanding marginal utilityeconomists use the idea of marginal utility to gauge how satisfaction levels affect consumer decisions economists have also identified a concept known as the law of diminishing marginal utility it describes how the first unit of consumption of a good or service carries more utility than later units although marginal utility tends to decrease with consumption it may or may not ever reach zero depending on the good consumed marginal utility is useful in explaining how consumers make choices to get the most benefit from their limited budgets in general people will continue consuming more of a good as long as the marginal utility is greater than the marginal cost in an efficient market the price equals the marginal cost that is why people keep buying more until the marginal utility of consumption falls to the price of the good types of marginal utilitythere are multiple kinds of marginal utility three of the most common ones are as follows positive marginal utility occurs when having more of an item brings additional happiness suppose you like eating a slice of cake but a second slice would bring you some extra joy then your marginal utility from consuming cake is positive zero marginal utility is what happens when consuming more of an item brings no extra measure of satisfaction for example you might feel fairly full after two slices of cake and wouldn t really feel any better after having a third slice in this case your marginal utility from eating cake is zero negative marginal utility is where you have too much of an item so consuming more is actually harmful for instance the fourth slice of cake might even make you sick after eating three pieces of cake history of marginal utilitythe concept of marginal utility was developed by economists who were attempting to explain the economic reality of price which they believed was driven by a product s utility in the 18th century economist adam smith discussed what is known as the paradox of water and diamonds this paradox states that water has far less value than diamonds even though water is vital to human life this disparity intrigued economists and philosophers around the world in the 1870s three economists william stanley jevons carl menger and leon walras each independently came to the conclusion that marginal utility was the answer to the water and diamonds paradox in his book the theory of political economy jevons explained that economic decisions are made based on final marginal utility rather than total utility example of marginal utilitydavid has four gallons of milk then decides to purchase a fifth gallon meanwhile kevin has six gallons of milk and likewise chooses to buy an additional gallon david benefits from not having to go to the store again for a few days so his marginal utility is still positive on the other hand kevin may have purchased more milk than he can reasonably consume meaning his marginal utility might be zero the chief takeaway from this scenario is that the marginal utility of a buyer who acquires more and more of a product steadily declines eventually there is no additional consumer need for the product in many cases at that point the marginal utility of the next unit equals zero and consumption ends marginal utility vs total utilitymarginal utility measures the change in satisfaction from consuming one additional unit total utility instead measures the total amount of satisfaction of you get from all the units you consume of a good or service marginal utility affects total utility positive marginal utility causes total utility to increase while negative marginal utility decreases total utility for example if you go to five sessions with a personal trainer you might get the highest level of satisfaction from the novelty and excitement of the first session with each additional session the marginal utility decreases because you are less excited and doing more strenuous work but the marginal utility of each is positive so your total utility is still increasing | |
how to calculate marginal utility | you can calculate marginal utility by dividing the change in total utility tu by the change in number of units q change in total utility is found by subtracting the previous total utility from the current total utility tu2 tu1 change in number of units is found by subtracting the previous number of units from the current number of units q2 q1 applications of marginal utilitymarginal utility is used to make a variety of economic decisions by governments businesses and consumers consumers seek out products with higher marginal utility because their satisfaction stays high with each additional unit purchased they are more likely to purchase more they are also more likely to buy similar products from the same company expecting them to have a similarly high level of marginal utility higher marginal utility often leads to greater customer satisfaction because consumers feel they are getting their money s worth this can lead to brand loyalty over time as well as word of mouth recommendations products that offer a higher level of satisfaction over time and after the first time they are used offer a higher level of marginal utility this makes them more valuable to customers so they can be priced higher for greater profits this can also serve as a guide for businesses to create better products and increase customer satisfaction by focusing on products that offer higher marginal utility marginal utility can also guide businesses when deciding which products to innovate or upgrade a product or service that already has a high level of marginal utility becomes even more valuable when it is improved allowing businesses to continue increasing the price over time or for newer models for example if a car manufacturer has an suv that is already a top seller they can create trim levels with additional features or upgrades because the original version is already popular with a high marginal utility customers are more likely to pay the increased price for an even more premium version the law of diminishing marginal utility is often used to justify progressive taxes the idea is that higher taxes cause less loss of utility for someone with a higher income in this case everyone gets diminishing marginal utility from money suppose that the government must raise 10 000 from each person to pay for its expenses if the average income is 60 000 before taxes then the average person would make 50 000 after taxes and have a reasonable standard of living however asking people making only 10 000 to give it all up to the government would be unfair and demand a far greater sacrifice that is why poll taxes which require everyone to pay an equal amount tend to be unpopular also a flat tax without individual exemptions that required everyone to pay the same percentage would impact those with less income more because of marginal utility someone making 15 000 per year would be taxed into poverty by a 33 tax while someone making 60 000 would still have about 40 000 | |
what is the formula for marginal utility | the formula for marginal utility is change in total utility tu divided by change in number of units q mu tu q | |
what is the law of diminishing marginal utility | the law of diminishing marginal utility is a law of economics that states that as your consumption increases the satisfaction you derive from each individual unit decreases this is why consumers are willing to pay the most for the first unit of something they buy but after a point they often will not buy additional units without a decrease in price | |
what is marginal cost | marginal cost is the change in production cost from producing or making one additional unit you can find it by dividing the change in production costs by the change in quantity produced if the price per unit is higher than the marginal cost a business can make a profit tracking marginal costs allows businesses to achieve economies of scale the bottom linemarginal utility is the amount of additional satisfaction that a consumer gets from having one more unit of a good or service this amount can be positive negative or zero when marginal utility equals zero or becomes negative the consumer will stop buying because the value of what they are buying has stopped increasing as an economic concept marginal utility can be used by businesses to understand customer behavior set prices for goods and services and decide which products to innovate or upgrade marginal utility is also used in economics to justify progressive taxes according to marginal utility each additional dollar is more valuable to those with lower incomes because they have fewer dollars in total for those with higher incomes the marginal utility of each additional dollar of income is lower this is an application known as the law of diminishing marginal utility | |
what is marital property | marital property is a u s state level legal term that refers to property acquired during the course of a marriage property that an individual owns before a marriage is considered separate property as are inheritances or third party gifts given to an individual during a marriage marriage partners may choose to exclude certain property from marital property by signing a prenuptial or a postnuptial agreement some of the details described below won t affect a couple unless they divorce or until one of them dies but it s important for couples to learn about the different types of marital property so that when they acquire real estate or other property they know how ownership can be arranged and choose the structure that represents their true intentions understanding marital propertymarital property includes real estate and other property a couple buys together during their marriage such as a home or investment property cars boats furniture or artwork when not acquired by either as separate property bank accounts pensions securities and retirement accounts are also included even an individual retirement account which is individually owned by law is marital property if earned income is contributed to it during the course of a marriage this legal definition of marital property primarily exists to protect spousal rights a couple s permanent legal residence in either a common law property state or a community property state determines which laws govern their marital property and how it can be divided if their marriage ends in divorce 1common law property states vs community property states | |
which type of state you live in generally determines what is considered to be marital property | most states are common law property states the common law system provides that property acquired by one member of a married couple is owned completely and solely by that person under this legal framework if the title or deed to a piece of property is put in the names of both spouses the property belongs to both spouses if both spouses names are on the title each owns a one half interest if a wife buys a car and puts it only in her name for example the car belongs to her only if she buys the car and puts it in both her and her husband s names however the car belongs to both of them 2under common law when one spouse passes away their separate property is distributed according to their will or according to probate if there is no will in effect 3 how this distribution pans out depends on which type of legal ownership the spouse has in any marital property if they own property in joint tenancy with the right of survivorship or tenancy by the entirety the property goes to the surviving spouse this right is independent of what the deceased spouse s will says however if the property was owned as tenancy in common then the property can go to someone other than the surviving spouse per the deceased spouse s will not all property has a title or deed in this case generally whoever paid for the property or received it as a gift owns it in a legal separation or divorce in a common law state the court can decide how marital property is divided according to its laws 1arizona california idaho louisiana nevada new mexico texas washington and wisconsin are all community property states these nine states follow the rule that all assets acquired during a marriage are considered community property that is property of both spouses according to the internal revenue service the states of tennessee and south dakota also have passed elective community property laws along with alaska and the commonwealth of puerto rico 45alaska has an opt in community property law that allows such a division of property providing both parties agree tennessee south dakota and the commonwealth of puerto rico have passed similar laws 65marital property in community property states is owned by both spouses equally this marital property includes earnings all property bought with those earnings as well as all debts accrued during the marriage earnings and debts acquired before the marriage are separate property as is an inheritance of only one spouse although the couple may co mingle property if they choose 1 couples residing in community property states have to account for their community income as well as their separate income if they file separate federal tax returns when one spouse dies title of joint assets goes to the surviving spouse community property begins at the marriage and ends when the couple physically separates with the intention of not continuing the marriage therefore any earnings or debts originating after separation are considered separate property marital property and divorceif the couple divorces or obtains a legal separation and the former spouses can t decide how to divide their marital property a court will decide for them in non community property states assets are divided according to equitable distribution in community property states there are some exceptions to the equal division rule including where a spouse misappropriates marital property before or during a divorce 1of course the couple can enter into a prenuptial agreement before the marriage explaining how to distribute the marital property upon divorce usually if the prenup is valid and doesn t violate federal or state laws it will be followed even in community property states | |
what is marital property | marital property is a u s state level legal term that refers to property acquired during the course of a marriage property that an individual owns before a marriage is considered separate property as are inheritances or third party gifts given to an individual during a marriage marriage partners may choose to exclude certain property from marital property by signing a prenuptial or a postnuptial agreement some of the details described below won t affect a couple unless they divorce or until one of them dies but it s important for couples to learn about the different types of marital property so that when they acquire real estate or other property they know how ownership can be arranged and choose the structure that represents their true intentions understanding marital propertymarital property includes real estate and other property a couple buys together during their marriage such as a home or investment property cars boats furniture or artwork when not acquired by either as separate property bank accounts pensions securities and retirement accounts are also included even an individual retirement account which is individually owned by law is marital property if earned income is contributed to it during the course of a marriage this legal definition of marital property primarily exists to protect spousal rights a couple s permanent legal residence in either a common law property state or a community property state determines which laws govern their marital property and how it can be divided if their marriage ends in divorce 1common law property states vs community property states | |
which type of state you live in generally determines what is considered to be marital property | most states are common law property states the common law system provides that property acquired by one member of a married couple is owned completely and solely by that person under this legal framework if the title or deed to a piece of property is put in the names of both spouses the property belongs to both spouses if both spouses names are on the title each owns a one half interest if a wife buys a car and puts it only in her name for example the car belongs to her only if she buys the car and puts it in both her and her husband s names however the car belongs to both of them 2under common law when one spouse passes away their separate property is distributed according to their will or according to probate if there is no will in effect 3 how this distribution pans out depends on which type of legal ownership the spouse has in any marital property if they own property in joint tenancy with the right of survivorship or tenancy by the entirety the property goes to the surviving spouse this right is independent of what the deceased spouse s will says however if the property was owned as tenancy in common then the property can go to someone other than the surviving spouse per the deceased spouse s will not all property has a title or deed in this case generally whoever paid for the property or received it as a gift owns it in a legal separation or divorce in a common law state the court can decide how marital property is divided according to its laws 1arizona california idaho louisiana nevada new mexico texas washington and wisconsin are all community property states these nine states follow the rule that all assets acquired during a marriage are considered community property that is property of both spouses according to the internal revenue service the states of tennessee and south dakota also have passed elective community property laws along with alaska and the commonwealth of puerto rico 45alaska has an opt in community property law that allows such a division of property providing both parties agree tennessee south dakota and the commonwealth of puerto rico have passed similar laws 65marital property in community property states is owned by both spouses equally this marital property includes earnings all property bought with those earnings as well as all debts accrued during the marriage earnings and debts acquired before the marriage are separate property as is an inheritance of only one spouse although the couple may co mingle property if they choose 1 couples residing in community property states have to account for their community income as well as their separate income if they file separate federal tax returns when one spouse dies title of joint assets goes to the surviving spouse community property begins at the marriage and ends when the couple physically separates with the intention of not continuing the marriage therefore any earnings or debts originating after separation are considered separate property marital property and divorceif the couple divorces or obtains a legal separation and the former spouses can t decide how to divide their marital property a court will decide for them in non community property states assets are divided according to equitable distribution in community property states there are some exceptions to the equal division rule including where a spouse misappropriates marital property before or during a divorce 1of course the couple can enter into a prenuptial agreement before the marriage explaining how to distribute the marital property upon divorce usually if the prenup is valid and doesn t violate federal or state laws it will be followed even in community property states | |
mark zuckerberg is a self taught computer programmer and co founder chair and chief executive officer of meta meta formerly known as facebook originally named facemash zuckerberg founded the social networking site in his harvard university dorm room in 2004 along with andrew mccollum dustin moskovitz chris hughes and eduardo saverin | according to bloomberg zuckerberg s net worth as of june 10 2022 was about 68 2 billion 1investopedia alison czinkotaearly life and educationon may 14 1984 mark zuckerberg was born in white plains new york as a child he showed an affinity for computers he learned the basic programming language at a nearby college and at the age of 12 he developed an instant messaging application that his father used in his office 3zuckerberg attended harvard university but dropped out after his sophomore year to focus on developing facebook the site grew out of two earlier ventures facemash a website for ranking the attractiveness of other harvard students and harvardconnection com an online social networking platform in 2004 cameron and tyler winklevoss and divya narendra the three credited founders of harvardconnection com sued zuckerberg for allegedly stealing intellectual property from the website they reached a multi million dollar settlement of cash and stock options in 2008 the winklevoss twins tried to reopen the lawsuit in 2011 but the court denied their request 4notable accomplishmentsin mid 2005 facebook raised 12 7 million in venture capital and expanded access to hundreds of universities and high schools one year later the social network opened to the general public and yahoo offered 1 billion to buy the company a bid that was swiftly rejected by zuckerberg 56in 2012 facebook went public and became the most successful internet initial public offering ipo in history when it raised 16 billion that same year facebook bought the photo sharing application instagram and zuckerberg married priscilla chan in a surprise wedding the day after the ipo 7meta has acquired dozens of companies over the years including instagram for 1 billion in 2012 whatsapp for 22 billion in cash and shares in 2014 oculus vr for 2 billion in 2014 and several other companies ranging from artificial intelligence ai to identification platforms 8910zuckerberg has made headlines for his philanthropy including his 2010 donation of 100 million to help schools in newark n j in 2014 the publication philanthropy ranked zuckerberg and chan the most generous american donors of the previous year after they donated 18 million shares of facebook stock to the silicon valley community foundation in mountain view calif 11on dec 1 2015 zuckerberg and chan published a letter to their daughter max in which they announced the creation of the chan zuckerberg initiative to join people across the world to advance human potential and promote equality for all children in the next generation 12in the post zuckerberg and chan said the initial areas of focus will be personalized learning curing disease connecting people and building strong communities and that we will give 99 of our facebook shares currently about 45 billion during our lives to advance this mission 12meta has been accused nearly since its inception of collecting and selling the personal data posts and instant messages of its users these accusations mounted shortly after the 2016 u s presidential elections with some alleging that u s voters had been under the influence of targeted ads financed by russia in march 2018 media outlets including the new york times and the observer reported that u k based political consulting firm cambridge analytica had paid an outside researcher to collect data on 50 million facebook users without their permission the new york times reported that cambridge analytica s goal was to use the data for its trademark psychographic modeling with the aim of reading voters minds and potentially influencing the outcome of elections the estimated ad revenue of instagram in 2021 13in april 2018 facebook disclosed that the information of 87 million users had been improperly shared with cambridge analytica and not the 50 million as earlier reported 14later that month zuckerberg appeared on capitol hill to testify before house and senate committees about facebook s use of consumer data in prepared remarks before the senate zuckerberg noted that facebook had been beneficial in connecting people during the metoo movement and various disasters the statement went on to say that zuckerberg and facebook heard about cambridge analytica s involvement from the media just like everyone else zuckerberg also outlined actions that facebook intended to undertake to prevent future incidents of this nature including safeguarding our platform investigating other apps and building better controls 15 | |
how does facebook make money | facebook makes the bulk of its money through ads the company sells ad space on its many platforms these platforms include facebook instagram and whatsapp facebook meta also makes money by allowing users to pay to promote their pages posts on the various platforms which is also a form of advertising | |
what is mark zuckerberg s net worth | as of june 10 2022 mark zuckerberg s net worth is 68 2 billion he earned his wealth as the founder and largest shareholder of meta formerly facebook 1 | |
does mark zuckerberg make 1 a year | technically mark zuckerberg makes a salary of 1 a year at facebook his wealth however is tied up in the shares of meta formerly facebook of which he is the largest shareholder making him one of the richest men in the world 16the bottom linezuckerberg started facebook from his dorm room turning it into one of the largest companies in the world through facebook and its many acquisitions such as instagram and whatsapp zuckerberg controls the majority of the way consumers consume content and interact with one another | |
what is a market | a market is a place where parties can gather to facilitate the exchange of goods and services the parties involved are usually buyers and sellers the market may be physical like a retail outlet where people meet face to face or virtual like an online market where there is no physical presence or contact between buyers and sellers some key characteristics help define a market including the availability of an arena buyers and sellers and a commodity that can be purchased and sold investopedia candra huff | |
how markets work | a market is any place where two or more parties can meet to engage in an economic transaction even those that don t involve legal tender a market transaction may include goods services information currency or any combination that passes from one party to another in short markets are arenas in which buyers and sellers can gather and interact two parties are generally needed to make a trade however a third party is required to introduce competition and balance the market as such a market in a state of perfect competition among other things is characterized by a high number of active buyers and sellers beyond this broad definition the term market encompasses various things depending on the context for instance it may refer to the stock market which is the place where securities are traded it may also describe a collection of people who wish to buy a specific product or service in a particular place such as the brooklyn housing market it could also refer to an industry or business sector such as the global diamond market certain decisions that help shape the market are determined by an economic system known as the market economy in this system factors like investments and the production distribution and pricing of goods and services are led by supply and demand from businesses and individuals as such a market economy is unplanned and is not part of a planned or command economy where the government dictates all of these factors examples of market economies include the united states canada the united kingdom and japan the securities and exchange commission sec regulates the stock bond and currency markets in the united states it puts provisions in place to prevent fraud while ensuring traders and investors have the right information to make the most informed decisions possible whatever the context a market establishes the prices for goods and other services these rates are determined by supply and demand the idea of supply and demand is one of the very basics of economics the sellers create supply while buyers generate demand markets try to find some balance in price when supply and demand are in balance but that balance can be disrupted by factors other than price including incomes expectations technology the cost of production and the number of buyers and sellers participating simply put the number of goods and services available is determined by what people want and how eager they are to buy sellers increase production when buyers demand more goods and services producers tend to raise their prices when demand increases when buyer demand decreases they drop their prices and therefore the number of goods and services they bring to market markets may be represented by physical locations where transactions are made these include retail stores and similar businesses that sell individual items to wholesale markets selling goods to distributors or they may be virtual internet based stores and auction sites such as amazon and ebay are examples of markets where transactions can occur entirely online and the parties involved never physically connect markets may emerge organically or as a means of enabling ownership rights over goods services and information when on a national or more specific regional level markets may often be categorized as developed or developing this distinction depends on many factors including income levels and the nation or region s openness to foreign trade the size of a market is determined by the number of buyers and sellers and the amount of money that changes hands each year certain features help define a market and are necessary for it to function the following are the most basic characteristics that shape a market other features include competition pricing and the freedom to buy and sell goods and services types of marketsmarkets vary widely for several reasons including the kinds of products sold location duration and size the constituency of the customer base size legality and other factors are equally influential aside from the two most common markets physical and virtual there are other kinds of markets where parties can gather to execute their transactions an underground or black market refers to an illegal market where transactions occur without the knowledge of the government or other regulatory agencies many illegal markets exist to circumvent existing tax laws this is why many involve cash only transactions or non traceable forms of currency making them harder to track many illegal markets exist in economically developing countries with planned or command economies where the government controls the production and distribution of goods and services when there is a shortage of specific goods and services in the economy members of the illegal market step in and fill the void illegal markets can also exist in developed economies these shadow markets as they re also known become prevalent when prices control the sale of specific products or services especially when demand is high ticket scalping is one example of an illegal or shadow market when demand for concert or theater tickets is high scalpers will step in buy a bunch and sell them at inflated prices on the underground market an auction market brings many people together for the sale and purchase of specific lots of goods the buyers or bidders try to top each other for the purchase price the items for sale go to the highest bidder the most common auction markets involve livestock foreclosed homes and art and antiques many operate online now for example the u s treasury sells its bonds notes and bills via regular auctions 1the blanket term financial market refers to any place where securities currencies and bonds are traded between two parties these markets are the basis of capitalist societies providing capital formation and liquidity for businesses they can be physical or virtual the financial market includes the stock exchanges such as the new york stock exchange nyse nasdaq the london stock exchange lse and the tmx group other financial markets include the bond and foreign exchange markets where people trade currencies regulating marketsother than underground markets most markets are subject to rules and regulations set by governing body that determines the market s nature this may be the case when the regulation is as wide reaching and as widely recognized as an international trade agreement or as local and temporary as a pop up street market where vendors maintain order and rules among themselves | |
how do markets work | markets are arenas in which buyers and sellers can gather and interact a high number of active buyers and sellers characterizes a market in a state of perfect competition the market establishes the prices for goods and other services these rates are determined by supply and demand the sellers create supply while buyers generate demand markets try to find some balance in price when supply and demand are in balance | |
what is a black market | a black market refers to an illegal exchange or marketplace where transactions occur without the knowledge or oversight of officials or regulatory agencies they tend to spring up when there is a shortage of specific goods and services in an economy or when supply and prices are state controlled transactions tend to be undocumented and cash only all the better to be untraceable | |
how are markets regulated | most markets are subject to rules and regulations set by a regional or governing body that determines the market s nature they can be international national or local authorities the bottom linemarkets are an important part of the economy they allow a space where governments businesses and individuals can buy and sell their goods and services but that s not all they help determine the pricing of goods and services and inject much needed liquidity into the economy by offering a place to conduct transactions markets allow entities access to the capital to further their interests whether to fund infrastructure fulfill growth plans make purchases or invest their money this helps fuel innovation to secure a competitive edge in the marketplace | |
what is the market approach | the market approach is a method of determining the value of an asset based on the selling price of similar assets it is one of three popular valuation methods along with the cost approach and discounted cash flow analysis dcf regardless of the type of asset being valued the market approach studies recent sales of similar assets making adjustments for the differences between them for example when appraising real estate adjustments might be made for factors such as the square footage of the unit the age and location of the building and its amenities because the market approach relies on comparisons to similar assets it is most useful when there is substantial data available regarding recent sales of comparable assets | |
how the market approach works | as its name suggests the market approach seeks to answer the question what is the fair market value of this asset to answer this question the valuator needs to survey recent transactions involving similar assets because these assets are unlikely to be identical to the one being valued various adjustments will need to be made in some markets such as residential real estate or publicly traded shares there is often ample data available making the market approach relatively easy to employ in other markets such as shares in private businesses or alternative investments such as fine art or wine it can become quite difficult to find comparable transactions in situations where limited data is available the valuator may need to rely on alternative methods such as the cost approach or discounted cash flow analysis dcf the primary advantages of the market approach are that it is based on publicly available data on comparable transactions as such it can require fewer subjective assumptions than alternative approaches the primary disadvantage of the market approach is that it can be impractical in situations where few if any comparable transactions exist such as in the case of a private company operating in a niche market with few competitors example of the market approachto illustrate suppose you are in the market to purchase a new apartment you find a listing for an apartment in your preferred neighborhood being offered for 200 000 the unit is a 1 bedroom 1 000 square foot apartment with 1 bathroom it is in good structural condition but requires some minor renovations although it is in a desirable neighborhood its view is obscured and it does not have an in suite washing or drying machine although you like the apartment you feel that the asking price is too high since the apartment has been listed for over a month you begin to suspect that if you make a fair offer the seller might accept it even if it is below their asking price to that end you set about determining the apartment s fair market value by looking up examples of similar apartments in the same neighborhood that sold in the last year you assemble your findings in a table as follows looking at these results you begin to draw some general conclusions to start with you see that the apartments price per sf ranges between 140 and 275 with the higher prices belonging to those with more bedrooms and bathrooms better views in suite appliances and no need for renovations by contrast the apartment you are seeking to purchase is priced at 200 per sf and has fewer of these features than even the cheapest priced apartment in your table this seems to justify your intuition that the apartment is overpriced based on this information you decide to make an offer for 150 000 the seller accepts your offer | |
what is a market basket | a market basket is a selected group of products or assets designed to track the general performance of a specific market segment this is sometimes known as a basket of goods market basket economics focuses on the consumer price index cpi which tracks various consumer goods and uses their price levels to provide an estimate of inflation however for investors a market basket relates to financial securities and is the principle idea behind index funds baskets can also be found in securities markets where program traders may enter into a series of positions in several stocks or currencies at the same time | |
how a market basket works | a market basket refers to a selection of goods and services that are consistently purchased and sold throughout an economic system economists politicians and financial analysts use market baskets to track price changes over time and determine inflation levels the most well known and widely used market basket is the cpi which helps economists predict consumer purchase trends this basket is used to track inflation in a specific market or country the financial system uses market baskets like the s p 500 and index funds which are essentially a broad sample of stocks bonds or other securities in the market this provides investors with a benchmark against which to compare their investment returns special considerationsa market basket analysis is generally used in retail it is based on the idea that most purchases are impulse buys and the analysis attempts to predict what a customer might have purchased had the idea occurred to them market basket analysts look at a group of items purchased by a customer and then try to determine what else that customer might buy if it was presented to them analysts use this information to decide where to locate items in a store which demographics make certain purchases what days of the week these purchases may be made and what times of the year these customers spend the most money among other considerations market basket analysis can be used to predict credit card purchases phone calling patterns insurance fraud and more types of market basketsthe cpi is an economic measure that looks at the average change in the price paid for a specific basket of goods and services over time the cpi is used as a macroeconomic indicator a deflating tool and a way of adjusting monetary values over time the cpi is not a cost of living index instead it is a measure of spending patterns and price levels for urban consumers and urban wage earners the index unlike various employment measures takes into account the unemployed and the retired the market basket that the cpi uses is derived from information people provide regarding their spending habits over 200 categories of consumption within the cpi structure are analyzed to produce a mix of goods and services most representative of average purchases each category selected is given a weight regarding its proportion to the basket of goods some of the categories in the cpi s market basket include housing transportation recreation apparel and education 1the market basket used for the cpi also includes components outside the scope of consumer goods and services government fees of public goods for example like water and sewage are included in the market basket taxes levied on the products and services already included in the market basket are also included however financial products like stocks and bonds are not included in the market basket essentially the market basket represents all goods and services bought and sold by the population represented by the cpi 1real world example of a market basketfrom 2020 to 2021 the cpi in the united states increased from 1 2 to 4 7 which was the fastest rate of increase since 2017 the government credited this increase to the rising cost of gas medical care housing and rent prices this increase in the cpi implied inflation when prices in the basket of goods rose 2it is an indicator that people have confidence in the economy and are willing to spend by monitoring the cpi and inflation governments and central banks set monetary policies central banks of developed economies including the federal reserve in the united states generally aim to keep the inflation rate around 2 after a long period of low interest rates the federal reserve raised interest rates four times in 2018 to combat a strong economy and inflation 3 in june 2022 with the u s facing the highest inflation in 40 years the fed raised the rate by 75 basis points to 1 50 1 75 4 | |
what is market breadth | market breadth indicators analyze the number of stocks advancing relative to those that are declining in a given index or on a stock exchange such as the new york stock exchange nyse or nasdaq positive market breadth occurs when more stocks are advancing than are declining this suggests that the bulls are in control of the market s momentum and helps confirm a price rise in the index conversely a disproportional number of declining securities is used to confirm bearish momentum and a downside move in the stock index certain breadth indicators also incorporate volume they will not only look at whether a stock is advancing or declining in price but also at the volume of those moves this is because price moves on larger volume are considered to be more significant than price moves on lower volume understanding market breadthmarket breadth refers to how many stocks are participating in a given move in an index or on a stock exchange an index may be rising yet more than half the stocks in the index are falling because a small number of stocks have such large gains that they drag the whole index higher market breadth indicators can reveal this and warn traders that most stocks are not actually performing well even though the rising index makes it look like most stocks are doing well an index is an average of the stocks in it volume may also be added into these indicator calculations to provide additional insight into how stocks within an index are acting overall market breadth attempts to find how much underlying strength or weakness there is in a given stock index by assessing the strength or weakness which isn t plainly visible by looking at a chart of the index technical traders gain insight into what the index may do next a large number of advancing stocks is a sign of bullish market sentiment and is used to confirm a broad market uptrend a large number of declining stocks shows sentiment is bearish which would align with an index downtrend when measuring market breadth many indicators look at the number of advancing and declining stocks or the number of stocks that have created a recent 52 week high or low this data can provide information about whether an index uptrend or downtrend is likely to continue traders use market breadth indicators to assess the overall health of a market index market breadth indicators can sometimes provide early warning signs of a drop in the index or forecast a coming rise in the index market breadth indicators and usesthere are a number of market breadth indicators each is calculated differently and therefore may provide slightly different information some indicators look at the number of advancing or declining stocks others compare stock prices to another benchmark and a few incorporate volume the tactic for most market breadth indicators is to monitor for confirmation and divergence confirmation is when the indicator is moving favorably and the index is rising divergence is when the index and indicator move in opposite directions this warns that the index may see a reversal soon market breadth indicators are poor timing signals they may provide signals way too early or may not forecast an index reversal that does occur here is a sampling of the market breadth indicators available example of market breadth analysis in actionthe following chart shows the spdr s p 500 spy etf along with the on balance volume indicator and the cumulative volume index for all us stocks image by sabrina jiang investopedia 2021during the rise in the s p 500 on the left the cumulative volume index confirmed the rise as the indicator continued to make higher highs along with the s p 500 on balance volume told a different story as the indicator was mostly flat issuing a warning sign that there was some underlying weakness in the rise this was followed by a steep price decline | |
what is meant by market breadth | market breadth looks at the breadth of the market it seeks to determine the strength of moves in an index generally by examining the number of stocks that are rising relative to those that are declining | |
what is market breadth and depth | market breadth studies the strength or weakness of moves in a major index market depth on the other hand is a market s ability to handle relatively large orders without significantly impacting the price of a security | |
is market breadth a good indicator | market breadth indicators derive their information from price and volume they judge market sentiment but like all indicators it is always best to confirm information with price a good rule of thumb is to never base trading decisions on what the indicator is saying always confirm with price the bottom line | |
when investors use the phrase market breadth they are talking about a set of technical indicators that evaluate price movements in a given stock index sometimes an index may rise even though more than half of its constituents are falling market breadth indicators will let us know if this is the case | the goal of market breadth is to determine the strength or weakness of moves in a major index this information should be used to confirm what price action is doing when more stocks are advancing than declining it suggests the bulls are in control conversely when more securities in the index are falling it suggests the opposite because markets trend rising or falling momentum may indicate rising or falling price trends correction april 3 2024 this article has been corrected to state that when the on balance volume indicator rises the total volume is positive | |
what is market cannibalization | market cannibalization refers to a drop in sales and demand for a product when the company replaces it with a new one market cannibalization can occur when a new product is similar to an existing product and both share the same customer base it leads to no increase in the company s market share despite sales growth for the new product cannibalization can also occur when a chain store or fast food outlet loses customers due to another store of the same brand opening nearby | |
how market cannibalization works | market cannibalization occurs when a new product intrudes on the existing market for an older product from the same company by appealing to its current customers instead of capturing new customers the company fails to increase its market share while almost certainly increasing its costs of production marketing cannibalization is often unintentional when the marketing or advertising campaign for new products draws customers away from an established product as a result market cannibalization can hurt a company s bottom line this phenomenon can be a deliberate growth strategy for example a supermarket chain might open a new store near one of its older stores knowing that they will inevitably cannibalize each other s sales however the new store will also steal market share from nearby competitors with the possibility of eventually driving them out of business stock analysts and investors generally look down upon cannibalization as a marketing strategy that s because they see it as a potential drag on short term profits as companies design their marketing strategies marketing cannibalization should be avoided this means companies should closely monitor individual product sales to determine if cannibalization is occurring for instance companies like starbucks and shake shack constantly weigh sales growth opportunities with the risks of local market cannibalization special considerationsthere may be times when market cannibalism cannot be avoided every major department store operates an online store knowing full well that its sales can only cannibalize its brick and mortar locations their only other choice is to allow internet retailers to continue taking market share away from them consider how online sales are hurting major retailers like macy s which continues to close down some of its stores across the country 1market cannibalization is also commonly referred to as corporate cannibalism types of market cannibalizationthere are several types of market cannibalization they include planned cannibalization discount related cannibalization and cannibalization through e commerce market cannibalization is measured by the cannibalization rate the formula for the cannibalization rate is 100 x lost sales on old product sales of new product | |
how to prevent market cannibalization | it is important to consider how the two products are branded to prevent new products from cannibalizing older ones products with similar pricing and placement such as new flavors or added features pose a high risk of market cannibalization according to the nuremberg institute for marketing decisions 2this risk can be reduced through more distinctive branding for example creating inexpensive fighting brands to compete with low cost competitors without cannibalizing from the premium brands new offerings can also be carefully timed to avoid disrupting older offerings 2advantages and disadvantages of market cannibalizationmarket cannibalism is not always to be feared especially if it can protect or expand a company s market share apple founder steve jobs is reported to have embraced the practice saying if we don t cannibalize ourselves someone else will 3 although newly released iphones do cannibalize buyers from older models and other devices like ipods they make a bigger dent in apple s competitors it may also be an appropriate defensive measure against competitors as when airbnb started cutting into the margins of the hotel business marriott then started its own home rental business which cannibalized from its hotel revenue but ultimately denied market share to airbnb 4there are also major risks to market cannibalism high end retailers should be cautious about introducing low priced versions which could dilute the value of their premium brands there is also a danger of market saturation as might occur when two identical fast food restaurants appear on the same block depending on local market dynamics the brand might end up competing against itself as with other marketing decisions thorough market research and careful timing can make all the difference between positive and negative market cannibalization 5new offerings can revive interest in older product linesbargain alternatives can prevent competitors from undercutting core brandbargain alternatives may dilute the value of premium brandsmarket saturation may occur when multiple venues compete for customersexamples of market cannibalizationapple is an example of a company that ignores the risk of market cannibalization in pursuit of larger objectives when the company announces a new iphone the sales of its older models immediately drop however apple counts on its new phone to capture customers from its competitors so it can increase its market share companies often risk market cannibalization to see a boost in their market share for example a company that makes crackers may introduce a low fat or lower salt version of its brand it knows some of its sales will be cannibalized from the original brand but it hopes to expand its market share by appealing to health conscious consumers who otherwise would buy a different brand or skip the crackers altogether | |
is product cannibalization good or bad | product cannibalization is an expected consequence of launching a new product line it may also be necessary so companies can innovate and grow their businesses but there are risks associated with market cannibalization which means businesses should take precautions when executing this strategy while a poorly planned entry may harm sales of existing products a well planned market launch can help a company gain more overall market share | |
how can you measure product cannibalization | product cannibalization is represented by the cannibalization rate which is the percentage of new sales that occurred at the expense of old product lines the cannibalization rate is calculated by dividing the lost sales for older products by the total sales of the new product 5 | |
why is product cannibalization important | product cannibalization is an important factor in brand marketing since any new launch runs the risk of poaching customers from other product lines it is essential to carefully research the market and conduct thorough testing to determine if the risks outweigh the benefits the bottom linecompanies have different growth strategies they can explore to help them gain market share and increase their sales at times it may come at the expense of their existing product lines when a company loses sales for an existing product to a newer one it s called market cannibalization while it can help businesses innovate increase their customer base and release new product lines there are risks with this strategy low priced goods and market saturation can be hard to avoid this is why companies should do their research first | |
what is market capitalization | market capitalization or market cap represents the total dollar market value of a company s outstanding shares of stock investors use this figure to determine a company s size instead of sales or total asset value in an acquisition the market cap helps determine whether a takeover candidate represents a good value for the acquirer investopedia xiaojie liu | |
how to calculate market cap | market capitalization estimates a company s value by extrapolating what the market thinks it is worth for publicly traded companies and multiplying the share price by the number of available shares after a company goes public and begins trading on an exchange its share price is determined by supply and demand as market prices move the market cap becomes a real time estimate of the company s value the formula for market capitalization is a company with 20 million shares selling at 100 a share has a market cap of 2 billion a second company with a share price of 1 000 but only 10 000 shares outstanding has a market cap of 10 million an initial public offering ipo helps determine a company s first market capitalization an investment bank employs valuation techniques to derive a company s value and determine how many shares will be offered to the public and at what price market cap and company sizelarge cap companies typically have a market capitalization of 10 billion or more and represent major players in well established industries and sectors 1 these companies generally reward investors with a consistent increase in share value and dividend payments examples of large cap companies include apple inc microsoft corp and alphabet inc mid cap companies generally have a market capitalization between 2 billion and 10 billion 2 mid cap companies operate in an industry expected to experience rapid growth mid cap companies are in the process of expanding and carry an inherently higher risk than large cap companies one example of a mid cap company is eagle materials inc exp 3companies with a market capitalization between 250 million and 2 billion are commonly classified as small cap companies these small companies may serve niche markets and new industries these companies are considered higher risk investments due to their age the markets they serve and their size small cap share prices may be more volatile but provide greater growth opportunities than large caps smaller companies known as micro cap have values below 250 million 2market cap and digital currencybecause new digital currency offerings theoretically thin the value of existing coins tokens or shares a different market cap formula can be used to calculate the market cap for all authorized shares or tokens analysts use diluted market cap to understand potential changes to a security token or coin s price 4 the diluted market cap formula is assume bitcoin trades at 24 000 per coin with 19 1 million bitcoin already issued the total number of potential bitcoin that may be minted is 21 million therefore bitcoin s market cap calculations are market cap 24 000 19 1 million 458 4 billiondiluted market cap 24 000 21 million 504 billionmisconceptions about market capsalthough it is used to describe a company market capitalization does not measure the equity value of a company only a thorough analysis of a company s fundamentals can do that shares are often over or undervalued by the market meaning the market price determines only how much the market is willing to pay for its shares the market cap does not determine the amount the company would cost to acquire in a merger transaction a better method of calculating the price of acquiring a business outright is the enterprise value | |
what factors alter a company s market cap | two factors can alter a company s market cap significant changes in the price of a stock or when a company issues or repurchases shares an investor who exercises a large amount of warrants can also increase the number of shares on the market and negatively affect shareholders in a process known as dilution | |
what does a high market cap tell you | a high market cap signifies that the company has a larger presence in the market larger companies may have less growth potential than start up firms but established companies may be able to secure financing cheaper have a more consistent stream of revenue and capitalize on brand recognition | |
does market cap affect stock price | market cap does not affect stock price rather market cap is calculated by analyzing the stock price and number of shares issued although a blue chip stock may perform better because of organizational efficiency and greater market presence having a higher market cap does not directly impact stock prices | |
what is the importance of market cap | market cap is often used as a baseline for analysis as all other financial metrics must be viewed through this lens for example a company could have had twice as much revenue as any other company in the industry however if the company s market cap is four times as large the argument could be made that the company is underperforming the bottom linemarket cap can be a valuable tool for investors watching stocks and evaluating potential investments market capitalization is a quick and easy method for estimating a company s value by extrapolating what the market thinks it is worth for publicly traded companies in an acquisition the market cap helps determine whether a takeover candidate represents a good value to the acquirer | |
what is the stock market capitalization to gdp ratio | the stock market capitalization to gdp ratio is a ratio used to determine whether an overall market is undervalued or overvalued compared to a historical average the ratio can be used to focus on specific markets such as the u s market or it can be applied to the global market depending on what values are used in the calculation it is calculated by dividing the stock market cap by gross domestic product gdp the stock market capitalization to gdp ratio is also known as the buffett indicator after investor warren buffett who popularized its use formula and calculation of the stock market capitalization to gdp ratiomarket capitalization to gdp smcgdp 100where smc stock market capitalizationgdp gross domestic product begin aligned text market capitalization to gdp frac text smc text gdp times 100 textbf where text smc text stock market capitalization text gdp text gross domestic product end aligned market capitalization to gdp gdpsmc 100where smc stock market capitalizationgdp gross domestic product | |
what the stock market capitalization to gdp ratio can tell you | the use of the stock market capitalization to gdp ratio increased in prominence after warren buffett once commented that it was probably the best single measure of where valuations stand at any given moment 1 it is a measure of the total value of all publicly traded stocks in a market divided by that economy s gross domestic product gdp the ratio compares the value of all stocks at an aggregate level to the value of the country s total output the result of this calculation is the percentage of gdp that represents stock market value to calculate the total value of all publicly traded stocks in the u s most analysts use the wilshire 5000 total market index which is an index that represents the value of all stocks in the u s markets the quarterly gdp is used as the denominator in the ratio calculation typically a result that is greater than 100 is said to show that the market is overvalued while a value of around 50 which is near the historical average for the u s market is said to show undervaluation if the valuation ratio falls between 50 and 75 the market can be said to be modestly undervalued also the market may be fair valued if the ratio falls between 75 and 90 and modestly overvalued if it falls within the range of 90 and 115 in recent years however determining what percentage level is accurate in showing undervaluation and overvaluation has been hotly debated given that the ratio has been trending higher over a long period of time the market cap to the global gdp ratio can also be calculated instead of the ratio for a specific market the world bank releases data on the stock market capitalization to gdp for world which was 92 in 2018 2 this market cap to gdp ratio is impacted by trends in the initial public offering ipo market and the percentage of companies that are publicly traded compared to those that are private all else being equal if there was a large increase in the percentage of companies that are public vs private the market cap to gdp ratio would go up even though nothing has changed from a valuation perspective example of how to use the stock market capitalization to gdp ratioas a historical example let s calculate the market cap to the u s gdp ratio for the quarter ended september 30 2017 the total market value of the stock market as measured by wilshire 5000 was 26 1 trillion 3 u s real gdp for the third quarter was recorded as 17 2 trillion 4 the market cap to gdp ratio is therefore market cap to gdp 26 1 trillion 17 2 trillion 100 151 7 begin aligned text market cap to gdp frac 26 1 text trillion 17 2 text trillion times 100 151 7 end aligned market cap to gdp 17 2 trillion 26 1 trillion 100 151 7 in this case 151 7 of gdp represents the overall stock market value and indicates it is overvalued in 2000 according to statistics at the world bank the market cap to gdp ratio for the u s was 153 again a sign of an overvalued market with the u s market falling sharply after the dotcom bubble burst this ratio may have some predictive value in signaling peaks in the market however in 2003 the ratio was around 130 which was still overvalued but the market went on to produce all time highs over the next few years as of 2020 the ratio stands at roughly 150 | |
what are market cycles | market cycles also known as stock market cycles is a wide term referring to trends or patterns that emerge during different markets or business environments during a cycle some securities or asset classes outperform others because their business models are aligned with conditions for growth market cycles are the period between the two latest highs or lows of a common benchmark such as the s p 500 highlighting a fund s performance through both an up and a down market | |
how market cycles work | new market cycles form when trends within a particular sector or industry develop in response to meaningful innovation new products or regulatory environment these cycles or trends are often called secular during these periods revenue and net profits may exhibit similar growth patterns among many companies within a given industry which is cyclical in nature market cycles are often hard to pinpoint until after the fact and rarely have a specific clearly identifiable beginning or ending point which often leads to confusion or controversy surrounding the assessment of policies and strategies however most market veterans believe they exist and many investors pursue investment strategies that aim to profit from them by trading securities ahead of directional shifts in the cycle there are stock market anomalies that cannot be explained but occur year after year special considerationsa market cycle can range anywhere from a few minutes to many years depending on the market in question as there are many markets to look at and the time horizon which is being analyzed different careers will look at different aspects of the range a day trader may look at five minute bars whereas a real estate investor will look at a cycle ranging up to 20 years types of market cyclesmarket cycles are generally considered to exhibit four distinctive phases at different stages of a full market cycle different securities will respond to market forces differently for example during a market upswing luxury goods tend to outperform as people are comfortable buying powerboats and harley davidson motorcycles in contrast during a market downswing the consumer durables industry tends to outperform as people usually don t cut back their toothpaste and toilet paper consumption during a market pullback the four stages of a market cycle include the accumulation uptrend or mark up distribution and downtrend or markdown phases market cycles take both fundamental and technical indicators charting into account using securities prices and other metrics as a gauge of cyclical behavior some examples include the business cycle semiconductor operating system cycles within technology and the movement of interest rate sensitive financial stocks | |
how long is a market cycle | cycles in the market tend to have cycles lasting 6 12 months on average however fiscal policy in either the united states or world markets can have a widespread effect on the length of a market cycle the average is 6 to 12 but if for example the federal reserve were to drastically cut interest rates it could prolong a market trending upward for a period of years | |
what are the 4 market cycles | there are four phases of market cycles the accumulation phase mark up phase distribution phase and downturn phase the first two phases could be considered mirror images of the others accumulation is when investors and businesses are scaling back into the market and increasing their exposure whereas distribution is the opposite and is a period when investors start shaving exposure from their positions mark up is an increase in price while a downturn is a decrease | |
what is market mid cycle | a market mid cycle occurs when an economy is strong but growth is moderating or slightly slowing corporate profits are delivering as expected and interest rates are low this tends to be the longest part of the market cycle the bottom linemarkets generally follow the same cycle and although there is an average period of time for each cycle political and fiscal policy can either extend or contract certain phases financial markets experience many mini cycles in the short term but large market cycles tend to occur in terms of months or years | |
what is market depth | market depth refers to a market s ability to absorb relatively large market orders without significantly impacting the price of the security market depth considers the overall level and breadth of open orders bids and offers and usually refers to trading within an individual security typically the more buy and sell orders that exist the greater the depth of the market provided that those orders are dispersed fairly evenly around the current market price of that security understanding market depthmarket depth or depth of market dom is closely related to liquidity and volume within a security but does not imply that every stock showing a high trade volume has good market depth market depth can be evaluated by looking at the order book of a security which consists of a list of pending orders to buy or sell at various price levels on any given day there may be an imbalance of orders large enough to create high volatility even for stocks with the highest daily volumes the decimalization of ticks on the major u s exchanges has been said to increase overall market depth as evidenced by the decreased importance of market makers a position needed in the past to prevent order imbalances market depth is a derivative of all the orders that populate a security s order book at any given point in time it is the amount that will be traded for a limit order with a given price if it is not limited by size or the least favorable price that will be obtained by a market order with a given size or a limit order that is limited by size and not price although a change in price may in turn attract subsequent orders this is not included in market depth since it is an unknown for example if the market for a stock is deep there will be a sufficient volume of pending orders on both the bid and ask side preventing a large order from significantly moving the price depth of market also refers to the number of shares of a particular stock which can be bought without causing price appreciation if the stock is extremely liquid and has a large number of buyers and sellers purchasing a bulk of shares typically will not result in noticeable stock price movements | |
how traders use market depth data | market depth data helps traders determine where the price of a particular security could be heading for example a trader may use market depth data to understand the bid ask spread for a security along with the volume accumulating above both figures securities with strong market depth will usually have strong volume and be quite liquid allowing traders to place large orders without significantly affecting the market price meanwhile securities with poor depth could be moved if a buy or sell order is large enough market depth data usually exists in the form of an electronic list of buy and sell orders known as the order book these are organized by price level and updated in real time to reflect current activity 1 in the past this data used to be available for a fee but nowadays most trading platforms offer some form of market depth display for free this allows all parties trading in a security to see a full list of buy and sell orders pending execution along with their sizes instead of simply the best ones real time market depth data allows traders to profit from short term price volatility for example if a company goes public and begins trading for the first time traders can stand by for strong buying demand signaling the price of the newly public firm could continue an upward trajectory example of market depthconsider the order book information in the image below which displays the current bid ask spread on the left along with the market depth on the right this type of quote is also known as level 2 market data the current quote in the security meow shares is 13 62 13 68 with 3 000 shares on the bid and 500 shares on the offer the right panel indicates the depth of bids on the left if all 3 000 shares were sold at 13 62 the next best bid would be 13 45 but only for 16 shares | |
what are market dynamics | market dynamics are forces that will impact prices and the behaviors of producers and consumers in a market these forces create pricing signals that result from the fluctuation of supply and demand for a given product or service market dynamics can impact any industry or government policy understanding supply and demandbefore we look more specifically at market dynamics let s touch on supply and demand supply and demand fundamentals form the cornerstone of market dynamics the relationship between the quantity of a good or service that producers are willing to supply and the quantity that consumers are willing to purchase at various price points creates a market and the forces that change each of those are the market dynamics depicted graphically the supply curve typically slopes upward meaning producers are willing to supply more of a product as its price increases conversely the demand curve slopes downward showing that consumers usually purchase less of a product as its price rises the point where these two curves intersect represents the market equilibrium the price and quantity at which the market clears with supply matching demand this is the price at which a buyer and seller agree and transactions are made understanding market dynamicsmarket dynamics are the factors that change the supply and demand curves they form the basis of many economic models and theories because market dynamics impact the supply and demand curves policymakers aim to determine the best way to use various financial tools to stimulate or cool down an economy is it better to raise or lower taxes increase wages or slow down wage growth do neither or do both how will these adjustments affect supply and demand and the general direction of the economy there are two primary economic approaches when it comes to changing the supply or demand in an economy with the ultimate goal of impacting the economy positively one has a basis in supply side theory and the other has a demand side base we ll look at each aspect next supply side economics also known as reaganomics or trickle down economics is a policy made famous by the 40th u s president ronald reagan based on the theory that more significant tax cuts for investors corporations and entrepreneurs provide incentives for investors to supply more goods to an economy which results in other added benefits that trickle down to the rest of the economy the supply side theory has three pillars which are tax policy regulatory policy and monetary policy however the overall concept is that production or the supply of goods and services is most important in determining economic growth the supply side theory contrasts with keynesian theory which considers that demand for products and services can drop and in that case the government should intervene with fiscal and monetary stimuli the opposite of supply side economics is demand side economics which argues that the creation of effective economic growth comes from the high demand for products and services if there is a high demand for goods and services consumer spending grows and businesses can expand and employ additional workers higher levels of employment further stimulate aggregate demand and economic growth demand side economists believe tax cuts in general can stimulate aggregate demand and move an economy that has significant unemployment back towards a full employment scenario however tax cuts specifically for corporations and the wealthy may not end up stimulating the economy in this case the additional funds may not increase the demand for goods or services instead it could be argued that the incremental income generated may go back into stock buybacks that boost the market value of the stock or to executive benefits but do not end up materially stimulating the economy demand side economists argue that increased government spending will help to grow the economy by spurring additional employment opportunities they use the great depression of the 1930s as evidence that increased government spending stimulates growth at a greater rate than tax cuts market dynamics are not constant but always fluctuating so it is necessary to constantly reevaluate them before making any investment or business decisions market dynamics and price elasticityprice elasticity of demand measures how sensitive consumer demand is to changes in price it helps businesses and policymakers understand and predict market behavior elastic demand means consumers are highly responsive to price changes while inelastic demand indicates that the quantity demanded changes little as the price fluctuates in many ways price elasticity is one way to measure the magnitude of market dynamics for products with elastic demand such as luxury goods or items with many substitutes a price increase often leads to a proportionally larger decrease in the quantity demanded this could potentially reduce overall revenue for goods with inelastic demand like essential medicines price increases may lead to higher revenues as the change in quantity demanded is proportionally smaller than the price change in highly competitive markets with elastic demand firms have less pricing power and must focus on cost efficiency or product differentiation in markets with inelastic demand firms may have more flexibility in pricing but might face greater regulatory scrutiny in either case customers respond to changes in price and companies must often change their prices for various business reasons each of those is central to market dynamics the government has the most impact when it comes to creating demand on a national level due to its ability to affect various factors such as taxes and interest rates market dynamics and competition structurecompetition and market structure also strongly shape the market dynamics of any industry the degree of competition and the resulting market structure significantly influence firm behavior pricing strategies innovation rates and overall market efficiency market structures typically fall into four main categories perfect competition monopolistic competition oligopoly and monopoly each structure is characterized by different levels of competition number of firms barriers to entry and product differentiation the decisions a company makes are directly related to which category it falls into for instance companies facing high degrees of competition will price their goods differently than a monopoly with no competitors might in highly competitive markets firms are typically price takers with little individual market power leading to efficient resource allocation but potentially lower profit margins in contrast less competitive structures like oligopolies or monopolies may result in higher prices and profits for firms think of how the corporate strategy differs between a company like mcdonalds who have a vast number of competitors across a number of regions and the strategy of google which held nearly 91 of the search engine market share worldwide in may 2024 1market dynamics and seasonalityseasonality is the recurring patterns of fluctuation in economic activity and market behavior these patterns can occur over various time frames for instance short term seasonality is like when a pub is probably busier on a friday night than a tuesday night long term economic cycles can also occur like year over year changes in the real estate market or periodic market changes for popular holidays seasonality means that a given market is not stable and the market dynamics may be different depending on timing retailers like amazon strategically prepare for the holiday annual peak seasonality by increasing inventory hiring temporary workers and launching targeted marketing campaigns they may also adjust their pricing strategies to capitalize on increased consumer spending during this period recognizing these seasonal patterns allows businesses to better manage inventory staffing and cash flow throughout the year all of this plays into market dynamics market cycles on the other hand can span longer periods and are influenced by broader economic factors a real world example is the housing market cycle in the united states the housing boom of the early 2000s fueled by low interest rates and relaxed lending standards led to a peak in 2006 this was followed by a severe contraction during the 2008 financial crisis with home prices plummeting and foreclosure rates soaring the market then entered a long recovery phase leading to another boom before the pandemic as the cycle evolved across these years so did the market dynamics that shaped the prices people would pay 2example of market dynamicsone example of market dynamics is the impact of renewable energy on the traditional energy sector this shift demonstrates how technological advancements changing consumer preferences and regulatory policies can dramatically alter an established market initially renewable energy sources like solar and wind power were niche technologies with limited market share high costs and technological limitations restricted their adoption to a small segment of environmentally conscious consumers and businesses however as research and development progressed the cost of renewable technologies began to decrease rapidly this cost reduction coupled with increasing concerns about climate change started to shift market dynamics 3governments worldwide began implementing policies to encourage renewable energy adoption such as tax incentives subsidies and renewable portfolio standards these regulatory changes further accelerated market transformation as the renewable energy sector grew it began to attract significant investment leading to further technological improvements and cost reductions this created a positive feedback loop making renewable energy increasingly competitive with traditional fossil fuel sources 4the rise of renewables has forced traditional energy companies to adapt or risk obsolescence this shift has also impacted related industries such as electric vehicle manufacturing battery storage and smart grid technologies the changing energy landscape demonstrates how multiple items can interact to create profound changes in market dynamics | |
what is the law of supply and demand | the law of supply and demand is a fundamental principle in economics that describes the relationship between the quantity of a good or service available supply and the quantity desired by buyers demand it states that the price of a product will settle at a point where the quantity supplied equals the quantity demanded known as the equilibrium price | |
how do mergers and acquisitions affect market dynamics | m as can lead to increased market share for the combined entity potentially resulting in greater pricing power and economies of scale they can also reduce competition which may lead to higher prices for consumers but could also drive innovation as the merged company has more resources for r d | |
what role does government regulation play in market dynamics | regulations can create barriers to entry affect market structure and influence firm behavior for example antitrust laws aim to prevent monopolies and promote competition while environmental regulations can impact production costs and drive innovation in clean technologies regulations can also protect consumers ensure fair competition and address market failures | |
what is market segmentation and why is it important | market segmentation is the process of dividing a broad target market into subsets of consumers with common needs interests or priorities it s important because it allows companies to tailor their products services and marketing strategies to specific groups potentially increasing effectiveness and efficiency effective segmentation can lead to better customer satisfaction improved product development more efficient use of marketing resources and ultimately increased profitability the bottom linemarket dynamics refer to the forces patterns and behaviors that shape the interactions between producers consumers and other stakeholders in an economic system these include factors such as supply and demand competition pricing strategies technological innovation consumer preferences regulatory environments and economic cycles all of which collectively determine how markets function evolve and respond to changes over time | |
what is a market economy | a market economy is a system in which production of goods and services is determined by supply and demand in a market economy interactions between consumers and businesses determine what is available and at what price this is in contrast to a command economy in which a central government sets production levels and costs investopedia mira norian | |
what is a market economy example | the united states is an example of a market economy it has a central bank the federal reserve that attempts to influence the overall direction of the economy it has a congress that can pass legislation to boost economic activity or protect consumers but the main driver of the economy is the law of supply and demand | |
how market economies work | market economies rely on the forces of supply and demand to determine the appropriate prices and quantities for most goods and services entrepreneurs marshal the factors of production land labor and capital and combine them in cooperation with workers and financial backers to produce goods and services for consumers or other businesses to buy buyers and sellers agree on the terms of these transactions voluntarily by agreeing on a price the allocation of resources by entrepreneurs across different businesses and production processes is determined by the consumer demand that they hope to create successful entrepreneurs are rewarded with profits that can be reinvested in future business unsuccessful entrepreneurs revise their products or go out of business market theorythe theoretical basis for market economies was developed by classical economists such as adam smith david ricardo and jean baptiste say these liberal free market advocates believed that the invisible hand of the profit motive and market incentives generally guided economic decisions down more productive and efficient paths than government planning of the economy 1they argued that government intervention often led to economic inefficiencies that made people in general worse off modern market economiesevery economy in the modern world falls somewhere along a continuum running from pure market to fully planned most developed nations are technically mixed economies because they blend free markets with some government interference they are still labeled market economies because they allow market forces to drive the vast majority of activities typically engaging in government intervention only to the extent it is needed to provide stability market economies may still engage in some government interventions such as price fixing licensing quotas and industrial subsidies most commonly market economies feature government production of public goods often as a government monopoly but overall market economies are characterized by decentralized economic decision making by buyers and sellers transacting everyday business in particular market economies are distinguished by having functional markets for corporate control which allow for the transfer and reorganization of the economic means of production among entrepreneurs although the market economy is clearly the modern system of choice there continues to be significant debate regarding the amount of government intervention considered optimal for efficient economic operations most economists believe that market oriented economies are most successful at generating wealth economic growth and rising living standards for a nation but they differ on the precise scope scale and specific roles for government intervention that are necessary to provide the fundamental legal and institutional framework that markets need to function well market economy countrieslike the united states most countries have primarily market economies keep in mind however that such economies are still influenced to some degree by government policies this may take the form of laws setting minimum wage subsidies for certain industries or sectors and policies that prohibit the production and sale of certain products and services due to potential risks to consumers among the some of the largest economies in the world the following have primarily market economies 2 | |
what is a mixed economy | most modern nations considered to be market economies are strictly speaking mixed economies that is the law of supply and demand is the main driver of the economy the interactions between consumers and producers are allowed to determine what goods and services are offered and what prices are charged for them that is the law of supply and demand rules however most nations also see the value of a central authority that steps in to prevent malpractice correct injustices or provide necessary but unprofitable services without government intervention there can be no worker safety rules consumer protection laws emergency relief measures subsidized medical care or public transportation systems | |
is capitalism and a market economy the same thing | capitalism and a market economy both are used to describe a system that allows the law of supply and demand not a central government to determine the production and prices of goods and services capitalism as a political philosophy maintains that production must remain in private hands and be motivated by the pursuit of private profit | |
is a market economy good or bad | most economists say that a market economy system is best able to deliver a high quality of life to most of its citizens its benefits include increased efficiency steady economic growth and motivation for innovation its potential downsides include the risks of monopolies exploitation of labor and income inequality the bottom linea market economy is driven by the law of supply and demand however most modern economies could strictly be called mixed economies that is the government steps in as needed to alleviate problems or correct injustices the real problem for economists and for all citizens is defining the degree of government intervention that is needed | |
what is market efficiency | market efficiency refers to the degree to which market prices reflect all available relevant information if markets are efficient then all information is already incorporated into prices and so there is no way to beat the market because there are no undervalued or overvalued securities available the term was taken from a paper written in 1970 by economist eugene fama however fama himself acknowledges that the term is a bit misleading because no one has a clear definition of how to perfectly define or precisely measure this thing called market efficiency despite such limitations the term is used in referring to what fama is best known for the efficient market hypothesis emh 1the emh states that an investor can t outperform the market and that market anomalies should not exist because they will immediately be arbitraged away fama later won the nobel prize for his efforts investors who agree with this theory tend to buy index funds that track overall market performance and are proponents of passive portfolio management 2at its core market efficiency is the ability of markets to incorporate information that provides the maximum amount of opportunities to purchasers and sellers of securities to effect transactions without increasing transaction costs whether or not markets such as the u s stock market are efficient or to what degree is a heated topic of debate among academics and practitioners market efficiency explainedthere are three degrees of market efficiency the weak form of market efficiency is that past price movements are not useful for predicting future prices if all available relevant information is incorporated into current prices then any information relevant information that can be gleaned from past prices is already incorporated into current prices therefore future price changes can only be the result of new information becoming available 3based on this form of the hypothesis such investing strategies such as momentum or any technical analysis based rules used for trading or investing decisions should not be expected to persistently achieve above normal market returns within this form of the hypothesis there remains the possibility that excess returns might be possible using fundamental analysis this point of view has been widely taught in academic finance studies for decades though this point of view is no long held so dogmatically the semi strong form of market efficiency assumes that stocks adjust quickly to absorb new public information so that an investor cannot benefit over and above the market by trading on that new information this implies that neither technical analysis nor fundamental analysis would be reliable strategies to achieve superior returns because any information gained through fundamental analysis will already be available and thus already incorporated into current prices only private information unavailable to the market at large will be useful to gain an advantage in trading and only to those who possess the information before the rest of the market does 4the strong form of market efficiency says that market prices reflect all information both public and private building on and incorporating the weak form and the semi strong form given the assumption that stock prices reflect all information public as well as private no investor including a corporate insider would be able to profit above the average investor even if he were privy to new insider information 5differing beliefs of an efficient marketinvestors and academics have a wide range of viewpoints on the actual efficiency of the market as reflected in the strong semi strong and weak versions of the emh believers in strong form efficiency agree with fama and often consist of passive index investors practitioners of the weak version of the emh believe active trading can generate abnormal profits through arbitrage while semi strong believers fall somewhere in the middle 6for example at the other end of the spectrum from fama and his followers are the value investors who believe stocks can become undervalued or priced below what they are worth successful value investors make their money by purchasing stocks when they are undervalued and selling them when their price rises to meet or exceed their intrinsic worth people who do not believe in an efficient market point to the fact that active traders exist if there are no opportunities to earn profits that beat the market then there should be no incentive to become an active trader further the fees charged by active managers are seen as proof the emh is not correct because it stipulates that an efficient market has low transaction costs an example of an efficient marketwhile there are investors who believe in both sides of the emh there is real world proof that wider dissemination of financial information affects securities prices and makes a market more efficient for example the passing of the sarbanes oxley act of 2002 which required greater financial transparency for publicly traded companies saw a decline in equity market volatility after a company released a quarterly report it was found that financial statements were deemed to be more credible thus making the information more reliable and generating more confidence in the stated price of a security there are fewer surprises so the reactions to earnings reports are smaller this change in volatility pattern shows that the passing of the sarbanes oxley act and its information requirements made the market more efficient this can be considered a confirmation of the emh in that increasing the quality and reliability of financial statements is a way of lowering transaction costs 7other examples of efficiency arise when perceived market anomalies become widely known and then subsequently disappear for instance it was once the case that when a stock was added to an index such as the s p 500 for the first time there would be a large boost to that share s price simply because it became part of the index and not because of any new change in the company s fundamentals this index effect anomaly became widely reported and known and has since largely disappeared as a result this means that as information increases markets become more efficient and anomalies are reduced 8 | |
what is market exposure | market exposure refers to the dollar amount of funds or percentage of a broader portfolio that is invested in a particular type of security market sector or industry market exposure is usually expressed as a percentage of total portfolio holdings for instance as in 10 of a portfolio being exposed to the oil and gas sector or a 50 000 in tesla stock market exposure represents the amount an investor can lose from the risks unique to a particular investment or asset class it is a tool used to measure and balance risk in an investment portfolio having too much exposure to a particular area can indicate a portfolio needs to undergo broader diversification understanding market exposuremarket exposure describes the risk and reward potential for an investor given the division of assets within an investment portfolio the proportion of assets invested in any given asset class market segment geographic region industry or stock can be used to measure the degree to which the investor is exposed to potential loss due to those specific assets market exposure can be separated based on a variety of factors that then allows an investor to mitigate the risks involved in certain investments by balancing exposure via diversification to other asset classes regions or industries the greater one s market exposure the greater their total market risk in that specific investment area a concentration of market exposure in any one area can lead to large losses if that area happens to get hit hard investments can be segmented based on the type of asset class involved for example a portfolio can consist of 20 bonds and 80 stocks the investor s market exposure to stocks is thus 80 this investor stands to lose or gain more depending on how stocks perform than from how bonds perform | |
when examining the market exposure in a portfolio an investor can also examine holdings by geographic location this may include separating domestic investments from those of foreign economies or further dividing foreign markets by their specific region in the world or as emerging markets | for example an investor could have a portfolio that is allocated to 50 domestic and 50 foreign stocks if additional exposure separation is desired the foreign holdings may be divided further to show 30 in asian markets and 20 in european markets moreover we can describe the asian segment as allocated 50 to developed and emerging markets apiece investments can also be divided up by the industry or economic sector within which the underlying companies operate using the above hypothetical investor s 80 market exposure to stocks there might be a 30 market exposure to the health care sector 25 exposure to the technology sector 20 to the financial services sector 15 to the defense sector and 10 to the energy sector the portfolio s returns are more influenced by health care stocks than by energy stocks because of the greater market exposure to the former exposure diversification and risk managementthe exposure of a portfolio to particular securities markets or sectors must be considered when determining a portfolio s overall asset allocation since diversification can greatly increase returns while also minimizing losses for instance a portfolio with both stock and bond holdings that includes market exposure to both types of assets typically has less risk than a portfolio with exposure only to stocks in other words diversification in this way reduces market exposure risks this applies to allocating assets across different asset classes or industries using the aforementioned example if the investor wanted to reduce high market exposure to health care because of major changes in the industry brought by new federal regulations selling 50 of those holdings reduces that particular exposure to 15 | |
what is market failure | market failure refers to a situation defined by an inefficient distribution of goods and services in the free market in an ideally functioning market the forces of supply and demand balance each other out with a change on one side of the equation leading to a change in price that maintains the market s equilibrium in a market failure however this balance is disrupted | |
when markets fail the individual incentives for rational behavior do not lead to rational outcomes for the group in other words each individual makes the correct decision for themselves but those prove to be the wrong decisions for the group as a whole | matthew collins investopediaunderstanding market failurea market failure refers to the inefficient distribution of resources that occurs when the individuals in a group end up worse off than if they had not acted in rational self interest in the case of a market failure the overall group incurs too many costs or receives too few benefits the economic outcomes under market failure deviate from what economists usually consider optimal and are usually not economically efficient 1contrary to what the name implies market failure does not describe imperfections only in market economies there can be market failures in government activity too one noteworthy example is rent seeking by special interest groups 2 special interest groups can benefit by lobbying for small costs on everyone else such as through a tariff when each small group imposes its costs the whole group is worse off than if no lobbying had taken place not every bad outcome from market activity counts as a market failure in addition while correcting the imbalances underlying a market failure often requires government intervention private market actors may also be able to solve the problem on the flip side not all market failures have a potential solution even with prudent regulation or extra public awareness 3causes of market failurethere are many types of imbalances that can affect the equilibrium of the markets the following list provides an overview of some common causes of market failure solutions to market failurethere are many potential solutions for market failure these can take the form of private market solutions government imposed solutions or voluntary collective action solutions | |
what are common types of market failures | types of market failures include negative externalities monopolies inefficiencies in production and allocation incomplete information and inequality | |
how can market failure be corrected | the primary means by which market failure can be corrected is through government intervention this requires the government to pass legislation such as antitrust policies and to incorporate various price mechanisms such as taxes and subsidies | |
is poverty a market failure | poverty is considered to be a result of market failure when a recession hits the poverty rate increases because employees lose their jobs or lose working hours which results in no income or less income inequality which is a component of market failure can eventually lead to poverty when wealth is not distributed equally throughout society this can be remedied with government intervention such as by taxing the wealthy more or incorporating subsidies for those below the poverty level the bottom linemarket failure refers to inefficient allocation of resources in the free market that occurs when individuals acting in rational self interest generate sub optimal economic outcomes these economic inefficiencies may occur in explicit markets where goods and services are exchanged or in implicit markets such as the exchange of favors in the legislative process the causes underlying market failures include negative externalities incomplete information concentrated market power inefficiencies in production and allocation and inequality government intervention such as taxes and subsidies may be effective in solving market failures while other solutions may emerge within the private market or through collective actions | |
what is a market index | a market index is a hypothetical portfolio of investment holdings that represents a segment of the financial market the calculation of the index value comes from the prices of the underlying holdings some indexes have values based on market cap weighting revenue weighting float weighting and fundamental weighting weighting is a method of adjusting the individual impact of items in an index investors follow different market indexes to gauge market movements the three most popular stock indexes for tracking the performance of the u s market are the dow jones industrial average djia s p 500 index and nasdaq composite index in the bond market bloomberg is a leading provider of market indexes with the bloomberg u s aggregate bond index serving as one of the most popular proxies for u s bonds investors cannot invest directly in an index so these portfolios are used broadly as benchmarks or for developing index funds understanding a market indexa market index measures the value of a portfolio of holdings with specific market characteristics each index has its own methodology which is calculated and maintained by the index provider index methodologies will typically be weighted by either price or market cap a wide variety of investors use market indexes for following the financial markets and managing their investment portfolios indexes are deeply entrenched in the investment management business with funds using them as benchmarks for performance comparisons and managers using them as the basis for creating investable index funds types of market indexeseach individual index has its own method for calculating the index s value weighted average mathematics is primarily the basis for index calculations as values are derived from a weighted average calculation of the value of the total portfolio as such price weighted indexes will be more greatly impacted by changes in holdings with the highest price while market capitalization weighted indexes will be most greatly impacted by changes in the largest stocks and so on depending on the weighting characteristics market indexes as benchmarksas a hypothetical portfolio of holdings indexes act as benchmark comparisons for a variety of purposes across the financial markets as mentioned the dow jones s p 500 and nasdaq composite are three popular u s indexes these three indexes include the 30 largest stocks in the u s by market cap the 500 largest stocks and all of the stocks on the nasdaq exchange respectively since they include some of the most significant u s stocks these benchmarks or market proxies can be a good representation of the overall u s stock market 123other indexes have more specific characteristics that create a more narrowly targeted market focus for example indexes can represent micro sectors or maturity in the case of fixed income indexes can also be created to represent a geographic segment of the market such as those that track the emerging markets or stocks in the united kingdom and europe the ftse 100 is an example of such an index 4investors may choose to build a portfolio with diversified exposure to several indexes or individual holdings from a variety of indexes they may also use benchmark values and performance to follow investments by segment some investors will allocate their investment portfolios based on the returns or expected returns of certain segments further a specific index may act as a benchmark for a portfolio or a mutual fund index fundsinstitutional fund managers use benchmarks as a proxy for a fund s individual performance each fund has a benchmark discussed in its prospectus and provided in its performance reporting thus offering transparency to investors fund benchmarks can also be used to evaluate the compensation and performance of fund managers the year the dow jones railroad average a precursor to the dow jones industrial average was published by charles dow the average was composed of nine railway companies a steamship company and western union 5institutional fund managers also use indexes as a basis for creating index funds individual investors cannot invest in an index without buying each of the individual holdings which is generally too expensive from a trading perspective therefore index funds are offered as a low cost way for investors to invest in a comprehensive index portfolio gaining exposure to a specific market segment of their choosing index funds use an index replication strategy that buys and holds all of the constituents in an index some management and trading costs are still included in the fund s expense ratio but the costs are much lower than fees for an actively managed fund examples of market indexessome of the market s leading indexes include investors often choose to use index investing over individual stock holdings in a diversified portfolio investing in a portfolio of index funds can be a good way to optimize returns while balancing risk for example investors seeking to build a balanced portfolio of u s stocks and bonds could choose to invest 50 of their funds in an s p 500 etf and 50 in a u s aggregate bond index etf investors may also choose to use market index funds to invest in emerging growth sectors some popular emerging growth indexes and corresponding exchange traded funds etfs include the following | |
what are the major stock indexes | in the united states the three leading stock indexes are the dow jones industrial average the s p 500 and the nasdaq composite for international markets the financial times stock exchange 100 index and the nikkei 225 index are popular proxies for the british and japanese stock markets respectively | |
why are indexes useful to investors | indexes provide investors with a simplified snapshot of a large market sector without having to examine every single asset in that index for example it would be impractical for an ordinary investor to study hundreds of different stock prices in order to understand the changing fortunes of different technology companies however a sector wide index like the nasdaq 100 technology sector index can show the average trend for the sector 9 | |
what is the most widely cited u s stock index | the dow jones industrial average is the oldest u s stock index as well as the most frequently cited one however the s p 500 represents a larger cross section of the economy 10the bottom linemarket indexes are hypothetical portfolios of investment holdings that investors use as an indicator of market movement there are many different types of market indexes market indexes are also used to create index funds allowing investors to buy a basket of securities rather than picking individual stocks | |
what are market indicators | market indicators are quantitative in nature and seek to interpret stock or financial index data in an attempt to forecast market moves market indicators are a subset of technical indicators and are typically comprised of formulas and ratios they aid investors investment trading decisions understanding market indicatorsmarket indicators are similar to technical indicators in that both apply a statistical formula to a series of data points to draw a conclusion the difference is that market indicators use data points from multiple securities rather than just a single security often times market indicators are plotted on a separate chart rather than appearing above or below an index price chart most stock market indicators are created by analyzing the number of companies that have reached new highs relative to the number that created new lows known as market breadth since it shows where the overall trend is headed the two most common types of market indicators are here s an example of the nasdaq advance decline issues index popular market indicatorsthere are hundreds of different market indicators covering various indexes in the united states and around the world including the nyse nasdaq amex tsx tsx v and various options exchanges some of the most popular market indicators include | |
what is a market leader | a market leader is a company with the largest market share in an industry that can often use its dominance to affect the competitive landscape and direction the market takes a market leader typically enjoys the largest market share or the largest percentage of total sales in a given market it may surpass its competitors according to other metrics too including brand loyalty perceived value distribution coverage image price promotional spending and profit such a company may be the first to develop a product or service which would allow it to set the tone for messaging define the ideal product characteristics and to become considered by the market as the brand that consumers associate with the offering itself | |
how market leadership works | a company can establish itself as the market leader by being the first to offer a product or service the product or service must be novel enough to attract a consumer base and then the company must keep on top of consumer preferences to maintain leadership if a company enters a market as a competitor to the first mover s it can aggressively market its own version of the product with differentiated features competitors that seek market leadership status may invest heavily in market research and product development and then use consumer information to develop attributes that improve an existing product market leaders may be able to leverage economies of scale to control market prices consumers trust market leaders and will choose to minimize risk by purchasing from market leaders market leaders have a detailed awareness of the purchasing decision makers in their customer base and leverage aggressive advertising to take advantage of that knowledge while strengthening their brand market leaders attract the highest quality development partners and are most likely to be innovative in adopting the technologies and processes that will help them continue to outshine their competition examples of market leadersmaintaining a dominant market share requires a company to not only retain its existing customers by building brand loyalty but also attract new customers who may be unfamiliar with the product or service the company may also attract the customers of competitors by figuring out the ideal combination of quality and price in this modern age of the internet it is easy to identify consumer oriented market leaders such as apple google and amazon in capital goods boeing and caterpillar are two examples market leaders have to be careful when it comes to how they use and obtain their market share if a company becomes too dominant in the market or if it seems to be abusing its position it may become subject to anti trust lawsuits microsoft once became a target of regulators for example also from an investor s perspective a market leader may not necessarily be the most profitable despite having the most market share it could be the case that the company s total expenses including product r d manufacturing costs marketing costs etc are too high to make the company the most profitable among its competitors | |
what is a market maker | the term market maker refers to a firm or individual who actively quotes both sides of a market in a particular security by providing bids and offers known as asks along with the market size of each in fact they are obligated to engage in such trading activity 1market makers provide liquidity and depth to markets and profit from the difference in the bid ask spread they may also trade for their own accounts such trades are known as principal trades understanding market makersmany market makers are brokerage houses that provide trading services for investors they make markets in an effort to keep financial markets liquid a market maker can also be an individual trader who is commonly known as a local the vast majority of such market makers work on behalf of large institutions due to the lot sizes needed to facilitate the volume of purchases and sales each market maker displays buy and sell quotations two sided markets for a guaranteed number of shares once the market maker receives an order from a buyer they immediately sell their position of shares from their own inventory this allows them to complete the order a market maker must commit to continuously quoting prices at which it will buy or bid for and sell or ask for securities 2 market makers must also quote the volume in which they re willing to trade along with the frequency of time they will quote at the best bid and best offer prices market makers must stick to these parameters at all times no matter what their market outlook when markets become erratic or volatile market makers must remain disciplined in order to continue facilitating smooth transactions market makers must operate under a given exchange s bylaws which are approved by a country s securities regulator in the united states that regulator is the securities and exchange commission sec 3 the rights and responsibilities of market makers vary by exchange and by the type of financial instrument they trade such as equities or options making a market signals a willingness to buy and sell the securities of a certain set of companies to broker dealer firms that are members of an exchange |
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