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State Space

State:

  • Clearning - Equilibrium - At Which Price Point Does an Item Sells?
  • Excess Supply
  • Excess Demand
  • Price Rigidity
  • Dynamic Disequilibrium

Finantial Market Efficiency

Note: The Efficient Market Hypothesis specifically refers to financial markets.

Market Efficiency refers to the degree to which market prices fully and accurately reflect all available relevant information at any given time. In an efficient market, asset prices adjust quickly and unbiasedly to new information, ensuring that no participant can consistently achieve excess returns by exploiting publicly known data.

Type of Market Efficiency Definition Impact
Financial Market Efficiency Asset prices fully reflect all available information. Investors can only consistently achieve higher returns by taking on additional risk.
Goods and Services Market Efficiency Prices reflect all relevant information about supply and demand, leading to optimal resource allocation. Consumers pay fair prices, and producers allocate resources efficiently.
Labor Market Efficiency Wages reflect all relevant information about worker productivity and employer demand. Optimal matching of workers to jobs, leading to higher productivity and economic growth.

Market Failure

Market failure refers to a situation in which the allocation of goods and services by a free market is not efficient. In other words, the market fails to efficiently allocate resources to maximize social welfare.

This can occur due to various reasons, such as:

  1. Externalities are when the actions of individuals or firms impose costs or benefits on others who are not involved in the transaction. For example, pollution is a negative externality because environmental damage imposes costs on society.
  2. Imperfect competition occurs when markets are dominated by a small number of firms or when firms have significant market power, leading to prices that do not reflect true costs and benefits.
  3. Public goods: Goods that are non-excludable and non-rivalrous, meaning that individuals cannot be excluded from using them, and one person's use does not diminish the availability to others. This leads to the under-provision of public goods by the market because individuals have no incentive to pay for them.
  4. Information asymmetry occurs when one party in a transaction has more or better information than the other party, leading to inefficient outcomes. This can result in adverse selection or moral hazard problems.

Market Saturation

aka. Overcapacity

Excessive capacity for production or services in relation to demand.

Industrial competition refers to the rivalry or competition between companies or firms within a particular industry.

"Excessive competition" refers to a situation where the intensity or aggressiveness of rivalry among competitors surpasses healthy or sustainable levels, potentially leading to negative consequences such as market inefficiency or harm to participants.

References

  • Adaptive market hypothesis
  • Efficient-market hypothesis
  • Grossman, Sanford J.; Stiglitz, Joseph E. (June 1980). "On the Impossibility of Informationally Efficient Markets" (PDF). American Economic Review. 70 (3): 393–408.
  • Mandelbrot, Benoit (January 1963). "The Variation of Certain Speculative Prices". The Journal of Business. 36 (4): 394. doi:10.1086/294632. ISSN 0021-9398.
  • Grossman, Sanford J., and Joseph E. Stiglitz. "On the impossibility of informationally efficient markets." The American economic review 70.3 (1980): 393-408.
  • Clark, G. “Why Isn’t the Whole World Developed? Lessons from the Cotton Mills.” Journal of Economic History (March 1987).
  • Stiglitz, J. “Markets, Market Failures and Development,” American Economic Review 79 (1989).
  • North, D. C. “Institutions, Transactions Costs and Economic Growth.” Economic Inquiry 25 (1987).
  • Cao, Jianhai. "Is Competition Always Effective?: The Theoretical Basis of Excessive Competition." Chinese economy 41.4 (2008): 77-104.