Stock Market Price Volatility and Investor Behaviour Essay

Introduction

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Supply and Demand
Supply and demand are the fundamental factors that influence a capitalist economy. Demand refers to the amount of a product or service that is sought by the consumers in the economic system. Supply refers to the goods able to be offered by the market to the consumer. There are many conditions that change the demand and supply curves, including a change in expected future prices, changes in consumer preference, and change in income. In the following essay, I will examine the laws that govern the most fundamental concepts of supply and demand and the factors that can shift the competitive framework of the entire economy.

Factors Affecting Supply and Demand

            The law of demand states that consumers will buy much more when the price of the object decreases. Conversely, if the price increases, the consumers will purchase (or demand) less. Factors that can cause a shift in demand to the right include increased income of households, expected future price increases, and higher price of substitutes (Kibbe, 2007). Factors that cause a shift of the demand curve to the left include lower competitor prices for substitute goods, changes in styles or fads, or a decreased population.

            The law of supply states that products will be produced at a much higher rate when the cost to the producer is lowered. Some factors influencing a shift in the supply curve to the right are technological improvements, lower cost for production, or favorable seasonal conditions (Vienneau, 316). Factors that can cause a shift to the left include high production costs, poor seasonal conditions, or lack of technological innovations.

On a possibility curve, choosing one option means having to forfeit another. In other words, the manager of a company may have to decide between two ways to spend his money. Therefore, the curve on a production possibilities graph may shift according to the choice. For example, if the manager of the company chooses to buy capital instead of supplies for the product sales, the curve may shift to the left temporarily until the machines or human resources have time to adjust and begin mass producing (White, 70). Once the capital has been put to use, the possibility curve will shift right as the potential of the increase in supplies causes a greater possibility. If the manager chooses to allot more money to the direct product supplies than new capital, then the curve will shift to the right to show more supply to meet demands (Basij, 1988).

            The production possibilities curve shows the maximum potential of the ability to produce supplies according to different levels of capital and human resources. Depending on the potential of new capital, the director will have to measure the greatest, most profitable allotment of funds to acquire just the right combination and benefit the most. Human resource capital is a fairly good investment for the manager. A human will produce multiple supplies, and produce according to guidelines (Anyadike-Danes, 178).

            The production possibilities curve responds to changes in capital and supplies. If an employer fires some employees, then the production will lessen and thus the curve will shift left. Therefore production possibilities curves are determined by different capital and resources in the company (Ritter, 2000).

There are four factors of production that influence the demand. Land provides the supplies that are used in production. This formulates the very beginning of the cycle. From there, the cycle moves on to human resource capital, in which laborers use the land to create products for sale. The laborers use the capital to ensure maximum efficiency in the production of the supplies. Finally, all of these factors combine to form an enterprise, which is established by an entrepreneur. To be successful, each factor has to work together to ensure the best efficiency (Opocher, 940).

Diagrams:

Original Curve:

Demand Effects

Supply Effects

            Rental ceilings, or rent control, involves the regulation of the amount of rent a landowner can charge, as set by the city. This was imposed to protect the tenants from malicious acts by the landlords. Opponents to the imposition of rent control cite the discouragement of investment in housing, reducing the availability and living conditions of the housing (Garegnani, 413).

            Commonwealth-funded rent assistance is a payment added to a person’s pension to help with the rental payment for consumers who take part in the private rental market. This includes amounts of money for meals, room and board, service and maintenance. This will keep investors interested in the realty market (Oppocher, 2000). Therefore the commonwealth-funded rent assistance is better for the economy, promoting investment and thus ensuring better economic circumstances.

            The laws of supply and demand govern the market economy in capitalist regimes. The factors that can influence the curves include a number of factors. These can involve environmental factors that are unpredictable and can have a huge effect on the market. Other factors can include man-derived factors such as increased wages or new technological innovations. The fluctuating conditions of the market economy gives the competitiveness that is makes capitalist markets their unique fabric.

Sinking Funds and Bonds
Bonds are certificates in which an issuer (sometimes called a ‘lendee’) owes money to the holder (sometimes called a ‘lender’) that needs to have the principal and the interest paid after a certain period of time. Once the bonds have reached maturity, they can be turned in for the full amount originally issued (the principal) as well as the interest accumulated. The US Treasury has declared that any debt that lasts over ten years is to be considered a bond. Of all the categories of debt, bonds are the highest risk due to the long time until maturity.

            A sinking fund is an account which will grow to a specified amount of money in a specified amount of time. When a person desires an amount of money because he knows he will have to make an extravagant purchase in a few years, he might set up a sinking fund at his bank. The bank will set up an accumulating interest for the account and figure out exactly how much he must deposit every month in order to get the amount he needs in the amount of time he needs it in. Corporations typically set up a sinking fund when so that preferred stocks, debentures, or stocks can be retired.

            Bonds differ from a sinking fund in two main ways. The first is that with the money being used by the issuer is given to him immediately for his purpose. A sinking fund is accumulated over time for a purchase in the future. The second difference is that bonds grow to a maturity and have to be paid back by the issuer. A sinking fund is the accumulation of money given in monthly installments by the person who is in need of the money after a certain amount of time. Both are similar in that they are both considered loan-type situations.

Monetary Policy and Interest Rates
Since its inception, one of the chief functions of the Federal Reserve has been to regulate the country’s monetary policy. The ever-changing economy must have many recourses to compliment the changes, otherwise, instability and economic crises might ensue.

            When there is too much money circulating in the economy and the supply of goods not adequate enough to fulfill the needs or demand of the people, inflation occurs. Inflation would be a serious problem if the Federal Reserve didn’t know how to change the monetary policy accordingly. Instead, the Fed responds by cutting off the money supply, and actually takes more money into its base. In addition to these strategies, people are encouraged to start saving by higher bond and savings account rates. This reduces spending so the economy can reestablish some order. This helps to keep inflation down and regulate the system.

            When there is too little money circulating in the economy and the supply of goods is mostly out of reach of the consumers who need them, a recession and unemployment occur. Purchases lessen and as a result, businesses must lower the prices of their goods and therefore have less money to buy supplies. The Fed regulates these problems by tossing more money into the economy and encouraging buying and increasing demand. As a result more people are buying products which cause the need for higher supplies, and therefore, new workers are needed to accommodate the needs of the people. When the economy experiences high purchasing rates, nearly full employment, and high production an expansion of the economic system occurs.

The Federal Reserve signals its intentions ahead of time to enable the banks and other financial institutions which drive the economy time to adjust to its new regulations. If the Federal Reserve simply changed the monetary policy without a sufficient amount of time for adjustment, the economy would be unstable – institutions would struggle to meet the new requirements and the market would be in a state of confusion.

The Federal Reserve is supposed govern the economy with its counter-cyclical function. If it has a set policy where it does not fluctuate according to the market needs, the supply would eventually exceed the demand. While a steady growth rate of money supply would encourage spending, the dollar is already losing value. The Federal Reserve must regulate based on the fluctuating market which is the essence of a capitalist economy.

The Fed has refused to implement such a rule because it is supposed to govern the economy with its counter-cyclical function. The Federal Reserve responds to the regular business cycle of the economy. continuously increasing the supply of money in the economy would eventually drop the value of the dollar to unprecedented lows.

When there is too much money circulating in the economy and the supply of goods not adequate enough to fulfill the needs or demand of the people, inflation occurs. Inflation would be a serious problem if the Federal Reserve didn’t know how to change the monetary policy accordingly. Instead, the Fed responds by cutting off the money supply, and actually takes more money into its base. In addition to these strategies, people are encouraged to start saving by higher bond and savings account rates. This reduces spending so the economy can reestablish some order. This helps to keep inflation down and regulate the system.

When there is too little money circulating in the economy and the supply of goods is mostly out of reach of the consumers who need them, a recession and unemployment occur. Purchases lessen and as a result, businesses must lower the prices of their goods and therefore have less money to buy supplies. The Fed regulates these problems by tossing more money into the economy and encouraging buying and increasing demand. As a result more people are buying products which cause the need for higher supplies, and therefore, new workers are needed to accommodate the needs of the people. When the economy experiences high purchasing rates, nearly full employment, and high production an expansion of the economic system occurs.

Today, when the economy is facing such hardships, I would pick a low inflation rate. We are already experiencing high inflation despite the high unemployment rate of roughly 10%; high employment usually entails lower inflation rates. Recently the U.S. economy has endured a $2.1 trillion monetary base which will cause costs to soar (Forbes.com, 2010). This is exactly what the economy cannot handle at this point in time. Currently the inflation rate is 2.7% annually which should cause a higher bank reserve (Forbes.com, 2010).

            An in ideal system, these changes would be immediate, and the Federal Reserve would be able to manipulate the economic system at any time in whatever way they desired. But of course, real life conditions are different. Unforeseen occurrences cause lapses in the time of between the establishment of new fiscal policy and its effect on the economy. For example, when the Federal Reserve encourages saving by increasing the rate of return, the time it takes for people to start saving and stop buying causes there to be a lengthy time lapse before significant results can be seen. When the time lapses are too long, often there will be another policy change before the full effect of the first policy can be established. Keynes once likened the Federal Reserve to a ‘fool in the shower’. To get hot water, ‘the fool’ initially turns the lever all the way to the hot side. Then as he feels the water becoming hot he quickly turns the lever all the way to the cold side, and continues going back and forth without letting the full effects of either side settle in.

            The great responsibilities of the Federal Reserve are effective in their goals, but because the full extent of the fiscal policy tools is never experienced, the true strength of the policy cannot be seen. Time lags negatively affect fiscal policy, causing the tools full efficacy to be left to the hypotheticals and theories of economists worldwide.

References
·  Kibbe, Matthew B.. “The Minimum Wage: Washington’s Perennial Myth”. Cato Institute. http://www.cato.org/pubs/pas/pa106.html. Retrieved 2007-02-09.

·  P. Garegnani, “Heterogeneous Capital, the Production Function and the Theory of Distribution”, Review of Economic Studies, V. 37, N. 3 (Jul. 1970): 407-436

·  Robert L. Vienneau, “On Labour Demand and Equilibria of the Firm”, Manchester School, V. 73, N. 5 (Sep. 2005): 612-619

·   Arrigo Opocher and Ian Steedman, “Input Price-Input Quantity Relations and the Numeraire”, Cambridge Journal of Economics, V. 3 (2009): 937-948

·  Michael Anyadike-Danes and Wyne Godley, “Real Wages and Employment: A Sceptical View of Some Recent Empirical Work”, Machester School, V. 62, N. 2 (Jun. 1989): 172-187

·  Graham White, “The Poverty of Conventional Economic Wisdom and the Search for Alternative Economic and Social Policies”, The Drawing Board: An Australian Review of Public Affairs, V. 2, N. 2 (Nov. 2001): 67-87

·   Basij J. Moore, Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, 1988

· Ritter, Lawrence S. (2000). Principles of Money, Banking, and Financial Markets (10th ed.). Addison-Wesley, Menlo Park C.

 

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