Unit 11 - Price, Rent-Seeking and Market Dynamics Flashcards
What are exogenous shocks to a model and how would it respond
Changes from outside the model
Market responds with endogenous responses (within the market)
What is market equilibrium through rent-seeking
When the market responds to an exogenous shift by equilibrating through rent-seeking on the short side of the market
What determines how relationships between buyer and sellers influence price
Market organisation
What are the short-run and long-run elasticities
Number of firms in short run is exogenous as it is given by the model (fixed)
Endogenous in the long run as it is determined by the model (more entrants)
This means supply is more elastic in the long run, as more firms enter production
Why do short-run fluctuations in supply reflect short-run scarcity (oil)
Demand is inelastic in the short run because of the limited substitutions possible
Supply is inelastic in the short run because:
- Oil wells are expensive to drill, therefore capacity fixed
- OPEC; Policies on petroleum production
What is a negative supply shock
When the percentage increase in price is much greater than the percentage decrease in quantity
What are two reasons people buy assets
1) To benefit from owning it
2) To be able to sell it later
What does the value of a financial asset (or security) depend on
1) the size of the cashflows that the asset is expected to generate (dividends)
2) The uncertainty in one’s forecasts of these cash flows
What is a bond
A security that promises to pay fixed amount of money at specific intervals
It is essentially a loan from an investor into a company which they are then issued a bond. In return for the loan, the company will give regular interest payments and pay back the bond amount at the end of the term
What is the price of an asset if the stream of payments of it is fixed
It will be inversely related to the interest rate it yields
What are the risks on government vs co-operate bonds
Government bonds risk of default is usually negligible
Co-operation bons are not risk-free: high risk of default means investors demand a higher interest rate, which then lowers the bond price
What are stocks / shares
A claim on a part of assets of a firm and hence on it profits
Stocks do not offer a specific promised stream of payments and time period over which payments are made is not fixed
What types of risks do stocks hold
Systematic risk - events that effect broad classes of financial assets (undiversifiable)
Idiosyncratic risk - events that only affect a given firm/asset; such as a law suit or successful drug trial. (Undiversifiable)
What is market capitalisation rate
The rate of return that will induce investors to buy share in a company
this would be higher for companies subject to higher systematic risk
What is an asset market bubble
A sustained and significant departure of the price of any asset from its fundamental value
