Market Efficiency for Investor Groups

In 1776, Adam Smith questionedthe leading mercantile theory of the time inThe Wealth of Nations.[] Smith offered a new trade theory called absolute advantageabsolute advantageThe ability of a country to produce a good more efficiently than anothernation., which focused on the ability of a country to produce a good more efficiently than anothernation. Smith reasoned that trade between countries shouldn't be regulated or restricted bygovernment policy or intervention. He stated that trade should flow naturally according to marketforces. In a hypothetical two-country world, if Country A could produce a good cheaper or faster(or both) than Country B, then Country A had the advantage and could focus on specializing onproducing that good. Similarly, if Country B was better at producing another good, it could focuson specialization as well. By specialization, countries would generate efficiencies, because theirlabor force would become more skilled by doing the same tasks. Production would also become moreefficient, because there would be an incentive to create faster and better production methods toincrease the specialization.

What market efficiency does not imply:

Efficient Markets and Profit-seeking investors: The Internal Contradiction

And this is an implication ofmarket being efficient.

Proposition 1: The probability of finding inefficiencies in an asset market decreases as the ease of trading on the asset increases. To the extent that investors have difficulty trading on a stock, either because open markets do not exist or there are significant barriers to trading, inefficiencies in pricing can continue for long periods.

This does not contradictwith the market being efficient or not.

The deadweight loss from a monopoly is illustrated in . The monopolist produces a quantity such that marginal revenue equals marginal cost. The price is determined by the demand curve at this quantity. A monopoly makes a profit equal to total revenue minus total cost. When the total output is less than socially optimal, there is a deadweight loss, which is indicated by the red area in .

If they earn profits in doing so, is thisfact inconsistent with market efficiency?


Implication of the hypothesis
An implication of securities market efficiency is that a security’s market price should fluctuate randomly over time. The reason being anything about a firm that can be expected will be properly reflected in its security price by the efficient market as soon as the expectation is formed. The only reason that prices will change is if some relevant, but unexpected, information comes along and unexpected events occur randomly.

ECMC49Y Market Efficiency Hypothesis Practice Questions

Deadweight loss arises in other situations, such as when there are quantity or price restrictions. It also arises when taxes or subsidies are imposed in a market. Tax incidence is the way in which the burden of a tax falls on buyers and sellers—that is, who suffers most of the deadweight loss. In general, the incidence of a tax depends on the elasticities of supply and demand.

Efficient market hypothesis expect, at the margin, the net expected economicprofits is zero.

Market Efficiency – CFA Level 1 | Investopedia

The thin class of accretion disks observed around some stellar-mass black holes are also the most efficient presently known local harvesters, as much as 50 times as efficient as stellar nuclear fusion (Narayan and Quataert 2005).

At the pub, you argue strongly for thestrong form of the efficient market hypothesis.

The Efficient Mart Stocket - Forbes

A certain degree (2-5%?) of central planning is always needed, and this need for control and variety-reduction increases during a crisis, but on average, centrally planned economies are outcompeted by ones that locally self-organize their own laws, markets, and prices via two-way, evolutionary communications.

If you canlink this analogy with the efficient market hypothesis, you are doing verywell.

Stock market indices may be classified in many ways

The outcome of a competitive market has a very important property. In equilibrium, all gains from trade are realized. This means that there is no additional surplus to obtain from further trades between buyers and sellers. In this situation, we say that the allocation of goods and services in the economy is efficient. However, markets sometimes fail to operate properly and not all gains from trade are exhausted. In this case, some buyer surplus, seller surplus, or both are lost. Economists call this a deadweight loss.