For some investors, there is the possibility that an asset will need to be sold quickly. In such cases, the asset’s liquidity is particularly important. An asset with a high degree of liquidity is one that can be sold quickly without a significant price concession. Such an asset is said to be liquid. Notice that liquidity has two related dimensions. After all, any asset can be sold quickly and easily if the price is cut sufficiently, so it’s not just a question of the ease with which an asset can be sold. Liquidity is difficult to measure precisely, but some assets are clearly much more liquid than others. A good way to think about liquidity is to imagine buying an asset and then immediately reselling it. The less you would lose on this “round-trip” transaction, the more liquid is the asset.
Economic organization
by adminThe structure of production and consumption will influence economic outcomes. Goods and services can be either produced by private enterprises or supplied by the government. They can be paid for either by the consumer directly or by the taxpayer or some other third party. There are four possible combinations of production and consumption. Let’s take a closer look at each and consider its impact on the allocation of resources and the incentive to economize.
In quadrant 1, goods are produced by private firms and purchased by consumers with their own money. Clearly, consumers will have a strong incentive to economize in this case. They will compare value with cost, and will make purchases only when they value items more than their purchase price. Correspondingly, the owners of private enterprises have a strong incentive to both cater to the views of consumers and supply goods efficiently. Net revenues can be increased if the output can be produced at a lower cost. Producers will continue supplying goods only if consumers are willing to pay an amount sufficient to cover their production costs.
Quadrant 2 represents the case in which goods are produced privately but are paid for by the taxpayer or some other third party. Providing health care to citizens financed primarily by government (Medicare and Medicaid) or insurance is an example. If someone else is paying the bill, consumers have little incentive to care much about the price of their health-care services. Instead of economizing, many consumers will simply purchase from suppliers they believe offer the highest quality, regardless of the price. The behavior of producers will also be affected. If consumers are largely insensitive to prices, producers have little reason to control costs and offer services at attractive prices. This can dramatically affect economic efficiency.
Quadrant 3 represents the situation in which consumers pay for a good or service, but production is handled by the government. First-class mail delivery via the U S . Postal Service, water and electricity by municipal governments, and the operation of toll roads are examples that fall into this category. When consumers pay for a good or service directly, they will economize and seek the most value per dollar they spend. This will be true whether their purchases are from private or government enterprises. As we just discussed, however, there is reason to believe that government-operated firms will generally be less efficient than private enterprises. Cost consciousness is also likely to be reduced if the government firm is a monopolist – if it is protected from competition with potential private rivals. Competition, however, is difficult to maintain in some markets. When this is the case, government enterprises may offer a reasonable alternative. As we proceed, we will investigate this issue in more detail.
The political process determines what will be produced, how it will be produced, and how it will be allocated among the general public. Under these circumstances, consumers are in a very weak position to either discipline the suppliers or alter their production. The incentive to produce efficiently is weak, and there is likely to be a disconnect between the goods produced and the preferences of consumers. As we discussed in previous posts, the nature of public goods – items such as national defense – makes it difficult, if not impossible, to supply them through markets. In these cases, there may be little alternative to having the government provide them. In other instances, however, there are feasible alternatives. This is true for education.
Most goods and services in the United States are allocated under conditions approximating those of quadrant 1. Thus, most of our analysis focuses on this case. However, a sizable portion of economic activity takes place under conditions present in quadrants 2, 3, and 4, where the incentive structure often creates problems. As a result, our analysis also considers modifications that might improve the efficiency of activities currently undertaken in these quadrants.
Other Technical Indicators
by adminWe close our discussion of technical analysis by describing a few additional technical indicators. The “odd-lot” indicator looks at whether odd-lot purchases (purchases of fewer than 100 shares) are up or down. One argument is that odd-lot purchases represent the activities of smaller, unsophisticated investors, so when they start buying, it’s time to sell. This is a good example of a “contrarian” indicator. In contrast, some argue that since short selling is a fairly sophisticated tactic, increases in short selling are a negative signal. Some indicators can seem a little silly. For example, there is the “hemline” indicator. The claim
here is that hemlines tend to rise in good times, so rising hemlines indicate a rising market. One of the most famous (or fatuous, depending on how you look at it) indicators is the Super Bowl indicator, which forecasts the direction of the market based on whether the National Football Conference or the American Football Conference wins. A win by the National Football Conference is bullish. This probably strikes you as absurd, so you might be surprised to learn that for the period 1967 – 1988, this indicator forecast the direction of the stock market with more than 90 percent accuracy!