StudentShare solutions
Triangle menu

Equilibrium - Essay Example

Not dowloaded yet

Extract of sample

In real life, equilibrium is a constantly moving target. We cannot say that the stock market is in equilibrium at the end of the day or week or year. Prices move based on the perception of brokers and shareholders, driven by information (Fama, 1970), psychology (Kahneman and Tversky, 1982), or anything under the sun (Barberis, Shleifer, and Vishny, 1998). As investors try to maximise returns or minimise losses, they either push up or pull down stock prices, or keep it level, the differences between the demand of buyers and the supply of sellers being reflected in stock price changes.
This is equilibrium, which is not a static point but more of a dynamic process where adjustments constantly take place, reflecting the free agreement of investors in the market that stocks are bought and sold at the right price. Of course, one side thinks the price will go up, while the other side thinks it will go down. By 'assuming' equilibrium as an ideal state towards which everything moves, finance academics have discovered a tool that allows them to pin down a moving target - the behaviour of stock prices over the last fifty years, for example - so they can study it, test their theories, develop a mathematical model, and see if the model explains reality.
One such aspect of reality that is being studied for the last half a century is the relationship between the return of a stock price and the risk that the return will not be realised. Several years of observations have made academics ask: how should investors decide which stocks to buy
This is what Markowitz did in his paper (Markowitz, 1952), where he drew attention to the practice of portfolio diversification. After observing that stock prices move differently in relation to the general movement of the stock market, he showed that investors could reduce the unpredictability of returns by investing in a mixture or portfolio of stocks whose prices do not move exactly in the same way. When stock market prices are rising, some stock prices rise with it while some go the opposite way, and not at the same rates.
Markowitz measured these stock price movements using a statistical tool called 'standard deviation', which indicates how far a stock price has moved from its average value. His first observation was that the higher the standard deviation, the higher the average, or expected, return. This looks like common sense, because a stock A whose price swings from 2 to 10 per share surely promises a higher return than a stock B whose price swings from 4 to 8 even if both have an "average" price of 6. Conversely, such large price swings also promise a bigger loss if the investor bought stock B at the wrong time.
One of Markowitz's insights is that every investor wants to get the highest expected return (r) for a given standard deviation (), so he suggested that investors put their money in what he called an efficient portfolio. Using historical stock prices, he determined that different stocks have different values of and r. Next, he computed what would happen if he mixed stocks and discovered that one could get a higher ...Show more


Equilibrium as a concept in economics means a state where supply equals demand. Economists predict that prices of goods, just like water seeking its own level, adjust based on supply and demand conditions until equilibrium is reached. This applies to petrol, soccer game tickets, iPods, and the stocks of companies.
Author : carole77
Equilibrium essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
with a personal 20% discount.
Grab the best paper

Related Essays

Market equilibrium
A change in demand occurs when the demand curve shifts due to changes in demand determinants such as income, buyer preferences, expectations, prices of other goods, etc (Hobday, 1999). Law of supply states that as the price of a product rises, keeping all other factors constant, one would be willing to supply more for sale.
2 pages (500 words) Essay
Hearing and Equilibrium
It functions to catch sound and direct it towards the auditory canal (or ear canal), a 24-inch long passageway between the external ear and the middle ear. At the end of the ear canal is the tympanic membrane or the eardrum, that part of the ear that separates the external ear from the middle ear and is part of the latter itself (Brooker & Nicol 2003, pp.
3 pages (750 words) Essay
Supply, Demand and Equilibrium Price
The above diagram represents on way in which Mrs. Acres can act. Here, suppose the initial equilibrium occurs at the point where Demand meets Supply curve at D = S. The equilibrium quantity here is 8000 pies at a price of $4.5. However, Mrs. Acres find that this quantity is not meeting the current demand.
4 pages (1000 words) Essay
Increased Labor Demand and the Equilibrium Wage
400). In other words, in a state of labor market equilibrium, employers have hired as many workers needed to render the value of the marginal product equal to wage. This delicate balance among supply, demand, wage and marginal production value, though, is subject to market changes that shift the worth of the factors involved, and thereby disrupt the equilibrium.
2 pages (500 words) Essay
General Equilibrium and welfare economies
First, we will take a look at Microeconomics from a general point of view. Then we will see the partial equilibrium model of supply and demand. Next, we will study General Equilibrium and Welfare Economics. "Being denied a sufficiently secure experimental base, economic theory has to adhere to the rules of logical discourse and must renounce the facility of internal inconsistency.
14 pages (3500 words) Essay
Supply, Demand, & Equilibrium
Using real world example, professional sports players are paid much higher than farmers, factory workers, engineers, and teachers even though all of them are generally in competitive markets. In order to assess this situation, this paper will
2 pages (500 words) Essay
Temperature and Equilibrium Virtual Lab
Richardson is also at a higher altitude compared to New Orleans. Their similarities lies in the fact that they are both located in extreme weather prone zones. 6. A massive rescue and recovery effort would definitely be carried
1 pages (250 words) Essay
irms in the industry will maximizes its profits in the short run while they cannot make bigger profits through alteration of the prices of milk, thus, in the short run, the firm may make super-normal profits. In the short-run, the firms will not necessarily need to make profits
1 pages (250 words) Essay
This translates to raising revenue. This is what is termed as price effect. On the other hand, after a price increase, in another dimension, it could also mean fewer units of the goods will be sold. This has the effect of lowering revenue. Price elasticity
1 pages (250 words) Essay
Equilibrium national income
Moreover, this should be in line with the planned aggregate supply, which is equal to planned aggregate demand. However, aggregate expenditure play a much greater role in determining the equilibrium price as compared to the aggregate
2 pages (500 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation