Operation of an efficient market and causes of market inefficiencies

Operation of an efficient market and causes of market inefficiencies Introduction Market efficiency can be defined as the degree to which the prices reflect all the available information in the market. In other words, market efficiency is a condition where the market prices display the prevailing conditions.Advertising We will write a custom essay sample on Operation of an efficient market and causes of market inefficiencies specifically for you for only $16.05 $11/page Learn More In some cases, the market prices may not reflect the prevailing market conditions based on the available information. In this case, the market is said to be inefficient. Market inefficiencies occur in rare cases. When this occurs, the market is interrupted from the normal arrangements and this lead to complications. Explanation for an Efficient Market and How It Operates As already seen, market efficiency can be defined as the situation where the prices charged in the market reflects all the information available to the participants. In order for th e market to function effectively, it is always necessary to have enough participants willing to sell or buy goods (Kirschen and Strbac, 2004). The price determination process is of great significance in the market. However, this is based on the information available in the market. The information available to buyers and sellers should be unbiased in order to come up with reliable and sustainable prices. The market where all these conditions are satisfied is referred to as an efficient market. Therefore, under the efficient market conditions for instance, buying or selling of the stock reflects fair returns after deducting the costs incurred through a transaction. In many cases, when people puts money in the stock market their main goal is generation of returns. In some cases, many investors even aim at getting more than necessary returns by surpassing the market (Heakal, 2011). However, the prices of a particular stock reflect all the information available about the stock. This impl ies that there is no investor who can have an advantage of forecasting on the returns of a stock because all the players have access to all available information. Such kind of a market is efficient. Decisions are made with reference to the information available (Investo 2011). All investors have similar knowledge about a certain stock. In this case, all investors are assumed to be rational.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Consequently, they will most likely have similar choices. In other words, investors are assumed to behave in a certain way. Mankiw (2008, Essentials of Economics), observed that the prices only respond to the information available in the market. Therefore, since every person in the market has equal access to the same information, then no one has the ability to make more profit than the other. In a perfect market, it is assumed that there are a lar ge number of buyers and sellers and a homogenous product and full information (Evans 2004). Therefore, a perfect market is efficient since the participants make informed decisions. Example of an efficient market; Market for polythene bags In the illustration above, the supply curve reflects the costs of the sellers where in this case are the polythene bag sellers. On the other hand, the demand curve reflects the value of the buyers. In this case, both the consumer and producer surplus is maximised. Therefore, this leads to an efficient market. In other words, the equilibrium market price leads to an efficient market. Explanation for Market Inefficiency and Its Causes In an inefficient market, the prices become random rather than predictable. Even with access to all the available information about the market, the participants’ prediction is rarely reflected in the prices (Barnes, 2009). In this case, the prices become random. When there are market inefficiencies, the prices m ay be set in such a way that they don’t reflect the market value. This difference is what is referred to as the market inefficiency. The prices are determined by external forces rather than the market forces. Market inefficiency is regarded as one of the market failure.Advertising We will write a custom essay sample on Operation of an efficient market and causes of market inefficiencies specifically for you for only $16.05 $11/page Learn More Externalities are the main causes of the market inefficiencies. Externalities lead to an inefficient allocation of resources (Mankiw, 2008, principles of economics). This is the main reason why externalities cause inefficiency in the market. One of the common causes of these inefficiencies through externalities is the government intervention. For instance, the government may intervene in the market fort the polythene bags due to its contribution in environmental pollution. In the absence of the government interv ention, the equilibrium price will be reflecting what the consumers are willing to pay for the product given the prices in the market (Boyes and Melvin, 2006). This is determined by the information available to both sellers and buyers in the market. Therefore when there is no government intervention, the prices will adjust to balance the supply and demand of the polyphone bags in this case. In this case, both consumers and sellers are able to maximize their surplus. In other words, this allocation leads to maximization of the total value to the consumers who purchase the polythene bags less the costs incurred in its production (Dimson and Mussavian, 2000). In this case, the supply curve reflects the costs of the sellers where in this case are the polythene bag sellers. On the other hand, the demand curve reflects the value of the buyers. In this case, both the consumer and producer surplus is maximised. Therefore, this leads to an efficient market. The case of government interventi onAdvertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More In this case, the government intervention in effort to reduce the level of pollution has led to a drop in the quantity provided in the market below the equilibrium level. The government intervention interferes with the equilibrium level of prices. This shifts the equilibrium level from the original position to another. This will lead to shortage in polythene bags which will induce the suppliers to increase their prices. This will lead to a decrease in consumer surplus. The prices charged will also not reflect the equilibrium price. This will lead to inefficiency in the market. In other words, any intervention in the market will lead to the market inefficiency. Similarly, taxation will also act by increasing the prices above the equilibrium level. Consequently, this will result into market inefficiency. This is because the prices will not reflect the equilibrium, market prices. Other government interventions will lead into similar results. Conclusion In conclusion, this discussion h as given a clear understanding of an efficient market and inefficient market. The study has clearly shown that in an efficient market, all the participants have equal access to the available information. The market price in a particular time is reflected by the information available in the market (Crosier, 2004). On the other hand, an inefficient market is characterised by random prices. In this case, the prices are not predictable. From the discussion, it can be seen that the markets cannot be absolutely efficient all absolutely inefficient. In most cases, the market reflects all these aspects of the market. Based on this information, it is advisable for all participants to refer to all the information available in the market in order to come up with the most feasible decisions. To those investors seeking to invest on shares, they are advised to find out all information necessary about the company in question. This will enable the company. This will enable the investor to determine whether the prices set for shares are reasonable before making their final decisions to buy. Reference List Barnes, P., 2009. Stock Market Efficiency, Insider Dealing and Market Abuse. England, Gower Publishing, Ltd. Boyes, W. and Melvin, M., 2006. Economics. U.S.A., Cengage Learning. Crosier, L., 2004. Selling Your Business: The Transition from Entrepreneur to Investor. New Jersey, John Wiley and Sons. Dimson, E. and Mussavian, M., 2000. â€Å"Market Efficiency.† Spellbound Publications, 2000. Vol.3, Pp. 959-970. Evans, A. 2004. Economics, Real Estate and the Supply of Land. Wiley-Blackwell. Heakal, R., 2011. What Is Market Efficiency? [Online] Available at:  https://www.investopedia.com/insights/what-is-market-efficiency/ . Investo, 2011. What Is an Efficient Market and How Does It Affect Individual Investors? [Online] Available at:  https://www.investopedia.com/ask/answers/05/marketefficiency.asp . Kirschen, D. and Strbac, G., 2004. West Sussex: Fundamentals of power system economics. New York, John Wiley and Sons. Mankiw, N., 2008. Essentials of Economics. Mason, OH, Cengage Learning. Mankiw, N., 2008. Principles of Economics. Mason, OH, Cengage Learning.

Three ways to make an impact with numbers

Three ways to make an impact with numbers How to make an impact with numbers Numbers can play a crucial role in many of your documents at work. But beware of the trap of thinking that data can speak for itself. You need to do that part. Figures can back up your claims with evidence and help draw attention to your most important facts, trends and comparisons. If what youre writing about is quite dry, theres usually a statistic that will grab your readers attention. Unfortunately, numbers can also have the opposite effect. If they’re poorly explained, they’ll slow your reader to a crawl as they try to work out exactly what youre saying. You risk losing the reader altogether in a sea of context-free figures – and statistics that arent related to their concerns will be no sooner read than forgotten. But there are ways that you can make the most of your figures – and your research – that were going to explore here. Remember these three things and youll be sure to give your numbers real impact. 1. Frame your statistics to show their significance A well-written statistic can capture your reader’s attention by itself. Heres a widely quoted example that dates back to 2007: One in every  £7 spent in retail (in the UK) is spent in Tesco. Its an arresting statistic. But what made it so popular? Lets start with some alternative ways of saying the same thing. Simply talking about the raw numbers of Tescos sales figures wouldnt have had nearly the same effect: Tescos retail sales totalled  £35.6 billion. This won’t mean anything to the average person – you could change the number to  £350.6 billion or  £3.56 billion and many people would accept it as true. (And, more than that, not really know how much they should care.) In other words, without any context, 35.6 billion is just a very large number. Putting the number in context is what starts to give it meaning: Tesco accounted for  £35.6 billion of the  £303.6 billion spent in retail sales in the UK. This gives you a sense of Tesco being a major player in the market. We understand this better now because we have a frame of reference – the overall size of the retail market. But, the numbers are still not framed in a way that most people will directly relate to. After all, most of us dont deal with the retail market – its an abstraction. On top of that, extremely large numbers are hard to understand intuitively. The majority of us do, however, spend money on products and fuel. Saying One in every  £7 spent in retail is spent in Tesco turns this statistic into the very familiar context of the coins and notes in our wallets. At the same time, the problem of talking about big, difficult-to-grasp numbers disappears. Finding your winning examples So how do you do the same thing? As ever, the most important person to consider is your reader. So profile them. By asking what your reader knows and wants, you can more easily set numbers into the appropriate context. For example, lets take these basic statistics: According to data from the Land Registry, house prices in East Sussex rose by over  £18,000 between February 2015 and February 2016. This means that the average home in East Sussex now sells for over  £214,000. The same statistics have different implications depending on whom youre writing for. If you were writing for someone interested in buying a house, you might compare this to the national average house prices. Whereas, if you were writing a report on the cost of living, you could compare this to the median wage in East Sussex. 2. Watch out for unfamiliar units of measurement It’s easy to think of numbers as somehow fundamentally different from words. Of course, in your work documents, they’re alike in one key respect: they both have to make sense to your readers. Whatever specialist area you work in and write about, you always need to be aware of what technical language and jargon might need explaining along the way – and numbers are a magnet for specialist terms. Each domain has its own measures that are widely understood within the field, but widely unintelligible to anyone outside it – from economists measuring Terms of Trade to consultants looking at Net Promoter Score feedback. You can reduce the chances of confusing your readers by thinking about them before you start writing. Do they work in the same field? Do they share your terminology? Are they likely to understand the significance of the measurements? Again, profiling your reader is vital. Youll probably find that, with a little thought, you already have a pretty good idea of what your readers will and wont understand. And if youre still uncertain, try giving a draft of your document to your reader – or to someone you think is similar to them in terms of background knowledge. See if they can understand your technical terms and measurements. If they have trouble, youll either need to explain your terms more clearly or think of a way of rewriting what youre saying in a way that doesnt involve them. 3. Work smart with tables and charts There are three main ways of presenting numbers in your documents: text, tables and charts. These options can complement each other, rather than being strict alternatives. However, in most situations, you will only need either a chart or a table – both is usually overkill. So which should you use? If you need to report lots of precise figures for reference, its better to put them in a table. This saves you from having to write long, hard-to-follow sentences containing all of your values. (Remember too that if most of your readers wont need access to your data, you can always put tables in an appendix rather than in your main document.) Charts and graphs are usually better for showing detailed relationships, relative proportions and trends – but remember that your readers wont be able to read off precise figures. Whichever you use, just including charts, graphs and tables isnt enough. Its very important to interpret them in your text. So always remember to draw out the main implications that are relevant to your reader. For tables, draw out typical values if you want to show a general relationship, or exceptional values if you want to draw attention to a particular figure. For example: Every year, fewer people are using Internet Explorer. Table 1 shows how Internet Explorers usage share has plummeted from 66 per cent in 2009, to just 16 per cent in 2016. For graphs and charts, describe the size and kind of overall trend that youre showing. For example, a graph might show a trough in sales over Christmas or a fluctuating number of support tickets. (For more ways to describe trends, click here.) When youve interpreted graphs and tables well, your reader should be able to understand what they show – and the significance of it – just by reading the text. Putting your interpretation of the graphs or charts data into the body of your text also means you can bring your readers attention to the figures at the relevant point in your argument. Your reader can then test your conclusions by looking at the data for themselves. Keeping your numbers working Although you might think of words and numbers as different languages, in business writing success lies in seeing what the two have in common. Theyre both there to help you achieve the aims and objectives you have for your document – and, ultimately, to meet the needs of your reader. As with all writing, the key to getting your message across is keeping the needs and knowledge of your reader in mind as you write. Do that, and you can be confident that you’ll be making your numbers and research count. Image credit: Jason Salmon / Shutterstock