Price Efficiency

  

Categories: Company Management

Prices at 7-Eleven and the grocery store are sticky. Not because they’re covered in goo, but because they’re slow to change. Things like stocks are different: very un-sticky, since the prices of stocks ebb and flow daily.

While the theory of price efficiency definitely doesn’t apply to groceries, it does apply to stocks. The idea behind price efficiency is that asset prices are efficient because both sides—buyers and sellers—have all available information about the asset.

The key word here is “available,” since some information is not available. If you were on the inside of Lehman Brothers on the eve of the financial crisis, and you knew everything was about to go downhill, that’s special information you have that the public does not. This is where things like insider trading come into play...sharing info that’s not public in order to make a profit.

When secrets are made public, they then affect prices, adjusting them to this new information. This shows price efficiency at work, with new information changing prices in the market accordingly. If you buy this price efficiency theory, then it’s not possible for investors to earn alpha (extra returns). Basically, you can’t “beat” everyone else in the market because the market is efficient.

Price efficiency is a foundational idea of efficient market hypothesis (EMH), which purports that efficient prices mean efficient markets, and that only current information (not past info) will determine which way prices are likely to go.

How low (or high) can they go?

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Econ: What is Aggregate Demand v. Aggreg...13 Views

00:00

And finance Allah Shmoop What is aggregate demand versus aggregate

00:06

supply We're assuming you all know about supply and demand

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Really Nothing The fundamental concepts of economics Anyone crickets were

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not mad We're just disappointed in you But we'll go

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over It quickly supplies the amount of something There is

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like I'll imagine a warehouse one filled with Roquefort cheese

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Row after row of shelves filled with you know pungently

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stinky Roque for cheese that people want to eat voluntarily

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so that supplies fly cheese All right Now demand out

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there mostly in France and in small pockets throughout the

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rest of the cheese eating world There are people who

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love Roque for cheese They just want to stick its

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moldy tang right into their mouths And actually like tasting

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That's the demand People want the cheese right now to

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aggregate supply and aggregate demand Well aggregate here just means

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total Like in everything in all the world all the

01:00

demand added up and that equals aggregate demand All right

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and all the supply added up and all that stuff

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you have that equals aggregates supply Well these two terms

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come up when you talk about an economy as a

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whole Aggregate demand is that man for all goods and

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services available in an economy All the cheese yes but

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also all the haircuts the overrides the sushi dinners the

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massages and fancy colorful drinks with little umbrellas in them

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at all that up in a whole lot more That's

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aggregate demand and also all the cars and appliances and

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pianos and air conditioners and electricity and gasoline and furniture

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And Kato diet shakes those everything Meanwhile you have aggregate

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supply Well that's a total supply of all these goods

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and services that an economy supplies all the output of

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the makers or providers of haircuts and sushi dinners and

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massages and fancy drinks as well as all the other

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stuff that gets made in an economy will aggregate demand

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can be affected by a few items and it's a

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huge number so tiny little one percent d kind of

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effects are still huge numbers All right so what affects

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it Well one is the value of money so changes

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in inflation expectations can either encourage people to buy more

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stuff or encourage them to sock away money for the

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future If people think inflation is going to be high

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in the future well people may run out today and

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buy stuff before prices go up This would increase aggregate

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demand right If they're confident they're currency will hold its

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value in the future People will be more likely to

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save or invest their money well This a lower aggregate

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demand as people put off purchases until later Will interest

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rates play a role as well Here low interest rates

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make borrowing and thus buying easier Low interest rates Allow

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people to buy more big ticket stuff you know like

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cars or houses or yachts On the other side of

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the world there are some things that traditionally impact aggregates

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Supply supply shocks can temporarily impact aggregates supply like of

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a hurricane wipes out a major oil refinery or coal

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area Or if a herd of elephants runs rampant in

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the country's strategic peanut reserve Or there's a zombie apocalypse

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leading workers to exit the region So the cost of

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labor then goes up right because when your toilets overflowing

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you don't care what your pain for that plumbing Or

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there's a rare goat disease that cuts into cheese production

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you know or at least adds to production costs So

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now all of a sudden there's less supply of cheap

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goat cheese There's only the expensive greenhouse grown goat cheese

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and still the same amount of demand So supplies your

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last and then and then costs go up right It's

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also productivity gains from technology can impact aggregate demand That's

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another factor here of force As the economy gets better

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it producing things it can make more stuff from the

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same supply or same amount of resource is so of

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robots could suddenly make muffins for five cents each instead

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of the twelve cents each it cost When humans make

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him well then aggregate demand for muffins would probably go

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up because they suddenly got a whole lot cheaper Thank

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you Mr Robot Danger Danger What does that mean from

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an investment side Well if companies invest less because of

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negative expectations higher taxes or higher borrowing costs well then

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everything shifts to the left meaning it cools down There's

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less volume being traded around less supply less demand because

04:14

the higher borrowing costs have added friction to the process

04:17

And usually governments do that when they're afraid of high

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inflation spiraling out of control and they raise the central

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bank rates around the world or the Fed in the

04:26

U S so remember again the very small changes and

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things like borrowing costs just a half a percent or

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something on fifty trillion dollars Sloshing around out there have

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enormous effects on the marginal supply and marginal demand volumes

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that you know get put through the system You know

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I think about a drainpipe in a heavy rainstorm that's

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totally full of rain and suddenly that big pipe contracts

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happen inch in diameter Well bad things happen to the

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other end So back to our mad goat disease Well

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if robots find a way to mold cheese more efficiently

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and make it cheaper by the pound while there's going

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to be more rope for to go around and then

05:00

think about all of this applied to globally lower interest

05:04

rates like even the difference of one percent globally in

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a desa trillion dollar economy one percent All that borrowing

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is a massive number So if they lower interest rates

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you'll be able to borrow more money to be able

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to buy all the high end stinky cheese when you

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could get your hands on So yeah I think about

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aggregate demand aggregate supply their huge numbers across the whole

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global economy So very small things still affect a ton 00:05:27.77 --> [endTime] of people a lot Yeah

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