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What is Equity Market

DEFINITION OF 'EQUITY MARKET'

The market in which shares are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy because it gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance.

INVESTOPEDIA EXPLAINS 'EQUITY MARKET'

This market can be split into two main sectors: the primary and secondary market. The primary market is where new issues are first offered. Any subsequent trading takes place in the secondary market.

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What is Intraday Trade

Intraday trading, often called simply "day trading," is the practice of buying and selling a financial product on the same day. It is often mentioned in reference to the stock market, but you can also day trade many other types of financial vehicles. It is a high-energy field that carries substantial risks but also offers considerable profit opportunities. Successful day traders can earn a good and consistent living. 

Definition

• Day trading is a tightly regulated practice in the stock market. Thus, it requires a strict definition. The Financial Industry Regulatory Authority, or FINRA, defines day trading as the buying and selling of a security on the same day. The buying and selling may occur in either order. If you "short" stock, which means you sell stock you do not yet own, and then buy it back later in the same day, this is also a day trade. Day traders can profit from intraday declines in any stock in this way.

Pattern Day Trading

• People who day trade stocks, or securities, are subject to strict FINRA regulations. Anyone can day trade occasionally. But if you complete more than three day trades in a rolling five-day period, brokers must flag your account as a "pattern day trading" account.

  Once this is done, new rules apply. First, your account is immediately suspended if it does not have at least $25,000 in assets, including cash and stock. Second, you must convert your account into a margin account if it does not already use margin. Margin is the process by which your broker lends you cash for every stock transaction. Thus, you can purchase more shares than your cash would normally allow.
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Leverage

• When your account is automatically converted into a pattern day trading account, you immediately get access to "4x" leverage. This means the margin allows you to purchase up to four times the stock shares as your cash balance allows. A $50,000 account can buy up to $200,000 shares.

  Leverage allows day traders to meaningfully profit from small fluctuations in stock prices over short periods of time. However, as the potential for reward increases, so too do the risks. A bad trading decision that is highly leveraged can cause substantial loss very quickly.

Account Suspension

• If you fail to close a day trade before the market's end at 4 p.m. New York time, your account is suspended until enough funds are deposited to cover the size of the trade without 4x leveraged margin. It is important for all day traders to thus make sure they close any large positions before the session's end. Smaller positions require less capital, and the cash in the account miht be enough to satisfy the margin demands.

  Suspended accounts that do not receive a new cash deposit are reactivated after 90 days. Similarly, pattern day trading accounts can switch back to non-pattern accounts after 90 days.

Intraday Indicators

• Day traders tackle the market differently than long-term investors do. They use information that is not applicable to long-term results. One of the most popular day trading indicators in the "Tick," a data stream distributed by the New York Stock Exchange. The Tick shows at any point, any time, the number of stocks that are advancing minus those declining.

  When the Tick reaches extremes, day traders can often accurately predict a short reversal in prices across the market. But no day trading tool is foolproof, and the risks always remain high. It takes considerable experience to develop a winning strategy in day .

Negative Externalities

Many types of activity give rise to externalities. And these externalities can be positive and negative.

Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.

Externalities occur outside of the market i.e. they affect people not directly involved in the production and/or consumption of a good or service. They are also known as spill-over effects.

Economic activity creates spill over benefits and spill over costs – with negative externalities we focus on the spill over costs

Negative externalities

Negative externalities occur when production and/or consumption impose external costs on third partiesoutside of the market for which no appropriate compensation is paid.

• Smokers ignore the harmful impact of toxic ‘passive smoking’ on non-smokers
• Air pollution from road use and traffic congestion and the impact of road fumes on lungs
• External costs of scraping the seabed for supplies of gravel
• The external cost of food waste
• The external costs of cleaning up from litter and the dropping of chewing gum
• The external costs of the miles that food travels from producer to the final consumer
• The externalities linked to the oil sands project in the Canadian wilderness

The importance of property rights

• Property rights confer legal control or ownership of a good.
• For markets to operate efficiently, property rights must be protected – perhaps through regulation.
• Put another way, if an asset is un-owned, no one has an incentive to protect it from abuse. The right to own property is an essential building block of a market-based system
• Failure to protect property rights may lead to what is known as the Tragedy of the Commons  - examples include the over use of common land and the long-term decline of fish stocks caused by over-fishing which leads to long term permanent damage to the stock of natural resources.

Private Costs and Social Costs

The existence of externalities creates a divergence between private and social costs of production and the private and social benefits of consumption.

Social Cost      =          Private Cost + External Cost

Social Benefit   =          Private Benefit + External Benefit

When negative production externalities exist, social costs exceed private cost. This leads to over-production if producers do not take into account the externalities.

Social costs are the total costs incurred by society from an economic action – they include private and external costs

External costs from production

Production externalities are generated and received in supplying goods and services - examples include noise and atmospheric pollution from factories.

External costs from consumption

• Consumption externalities are generated and received in consumption - examples include pollution from driving cars and motorbikes and externalities created by smoking and alcohol abuse and also the noise pollution created by loud music being played in built-up areas.
• Negative consumption externalities lead to a situation where the social benefit of consumption is less than the private benefit.

Negative externalities from production – social cost > private cost

Marginal cost or marginal benefit is the change in total cost or benefits that results from an increase in production or consumption by one unit

In the absence of externalities, the private marginal costs of the supplier are the same as the costs for society. But if there are negative externalities, we must add the external costs to the firm’s supply curve to find the social marginal cost curve.

If the market fails to include these external costs, then the private equilibrium output will be Q1 and the price P1 where private marginal cost = private marginal benefit.

From a social welfare viewpoint, we want less output from activities that create an “economic-bad” such as pollution. A socially-efficient output would be Q2 with a higher price P2. At this price level, the external costs have been taken into account. We have not eliminated the pollution – but at least the market has recognised them and priced them into the price of the product.

Economic and Social Welfare

Private economic welfare requires us to consider only the private (or internal) costs and benefits of production and consumption of goods and services.

But if we wish to look at the economic welfare of the whole community (i.e. the social welfare) then we need to calculate the positive and negative externalities and add them to private benefits and costs. Here is a simple numerical example:

A government is considering four possible capital investment projects. It has the resources to finance and implement only one of these projects. The table below shows the estimated value of the private and external costs and benefits that each project is expected to yield:

	New city by-pass (£ million)	New schools (£ million)	Improvement to an existing airport (£ million)	New hospitals (£ million)
Private benefits	50	135	130	80
Private costs	120	80	100	65
Positive externalities	90	55	35	120
Negative externalities	60	20	60	45
Net private benefit	-70	+55	+30	+15
Net social benefit	-40	+80	+5	+90

Net social benefit may be taken into account by a government when deciding which project offers the best potential return for society as a whole

Negative Externalities and Government Intervention

To many economists interested in environmental problems the key is to internalise external costs and benefits to ensure that those who create the externalities include them when making decisions.

Pollution Taxes

One common approach to adjust for externalities is to tax those who create negative externalities.

• This is known as “making the polluter pay”.
• Introducing a tax increases the private cost of consumption or production and ought to reduce demand and output for the good that is creating the externality.
• Some economists argue that the revenue from pollution taxes should be ‘ring-fenced’ and allocated to projects that protect or enhance our environment.
• For example, the money raised from a congestion charge on vehicles entering busy urban roads, might be allocated towards improving mass transport services; or the revenue from higher taxes on cigarettes might be used to fund better health care programmes.

Examples of Environmental Taxes include some of the following

• The Landfill Tax - this tax aims to encourage producers to produce less waste and to recover more value from waste, for example through recycling or composting and to use environmentally friendly methods of waste disposal.
• The Congestion Charge: -this is a high profile environmental charge introduced in February 2003. It is designed to cut traffic congestion in inner-London by charging motorists £8 per day to enter the central charging zone.
• Plastic Bag Tax: A tax on plastic bags in Wales has seen the number given away drop by sizeable amounts according to this news report Since 1 October 2011, there has been a minimum charge of 5p on all single use carrier bags. The Welsh government acted in a bid to encourage re-use of bags and therefore lower demand for single-use free bags. The justification was on economic and environmental grounds:
• Vehicle excise duty (VED): Also known as ‘road tax’ – VED starts from a theoretical 'nil' rate and accelerating up depending on the carbon emissions of the vehicle

Problems with Environmental Taxes

Many economists argue that pollution taxes can create problems which lead to government failure.

• Assigning the right level of taxation: There are problems in setting tax so that private cost will exactly equate with the social cost.
• Consumer welfare effects: Producers may pass on the tax to the consumers if the demand for the good is inelastic and, as result, the tax may only have a small effect in reducing demand. Taxes on some de-merit goods (for example cigarettes) may have a regressive effect on lower-income consumers and leader to a widening of inequalities in the distribution of income.
• Employment and investment consequences: If pollution taxes are raised in one country, producers may shift to countries with lower taxes. This will not reduce global pollution, and may create problems such as structural unemployment and a loss of international competitiveness.

Externalities and Regulation

• The government may intervene through the use of regulations and laws.
• For example, the Health and Safety at Work Act covers all public and private sector businesses. Local Councils can take action against noisy, unruly neighbours and can pass by-laws preventing the public consumption of alcohol. The British government introduced a ban on smoking in public places from July 1st 2007.
• The European Union has introduced directives on how consumer durables such as cars, batteries, fridges freezers and other products should be disposed of. The onus is now on producers to provide facilities for consumers to bring back their unwanted products.

Carbon Emissions Trading

The EU Emissions Trading Scheme (EUETS) was launched in 2005 and is a market-based mechanism to incentivise reduction of C02 emissions in a cost-effective and efficient manner.

The EU scheme operates through the trade of CO2 emissions allowances. It creates a market in the right to emit C02. One allowance represents one tonne of C02 equivalent. Companies get most permits free now but many electricity generators in Europe will have to pay for all these from 2013.

A cap is set on emissions – this creates the scarcity required for the market. At the end of each year businesses are required to ensure they have enough allowances to account for their installation’s actual emissions. There are heavy fines for those without such permits.

The aim of carbon trading is to create a market in pollution permits and put a price on carbon. In this way, policy can help internalize environmental costs of firms’ production and encourage lower emissions to tackle climate change

In a cap and trade system, the number of available permits would gradually decline. As the price of the permits rises, so the economics of investing in cleaner technologies will change.  The hope is that businesses will look for ways of reducing c02 emissions in the most efficient way possible

Supply and demand analysis diagrams can be used when discussing carbon trading schemes. The idea is to gradually cut the supply of permits so that the carbon price is sufficiently high to incentivise businesses to look for ways to cut their total emissions in the most cost-efficient way.

Subsidising positive externalities

• An alternative to taxing activities that create negative externalities is to subsidise activities that lead to positive externalities
• This reduces the costs of production for suppliers and encourages a higher output
• For example the Government may subsidise state health care; public transport or investment in new technology for schools and colleges to help spread knowledge and understanding
• There is also a case for subsidies to encourage higher levels of training as a means to raise labour productivity and improve our international competitiveness.

Inflation notes for B.E KERALA

What is inflation?

• Inflation is a sustained increase in the cost of living or the average / general price level leading to a fall in the purchasing power of money.
• The opposite of inflation is deflation which is a decrease in the cost of living or average price level.

How is the rate of inflation measured?

• The rate of inflation is measured by the annual percentage change in consumer prices.
• The British government has set an inflation target of 2% using the consumer price index (CPI)
• It is the job of the Bank of England to set interest rates so that aggregate demand is controlled, inflationary pressures are subdued and the inflation target is reached
• The Bank is independent of the government with control of interest rates and it is free from political intervention. The Bank is also concerned to avoid price deflation – we return to this a little later.

Falling inflation does not mean falling prices!

Please remember that a fall in the rate of inflation is not the same thing as a fall in prices! Have a look at the chart above which measures the rate of consumer price inflation for the UK. Notice how in 2009 there was a steep drop in inflation from 5 per cent to 1 per cent over the course of the year. Inflation was falling – but the rate remained positive – meaning that prices were rising but at a slower rate! A slowdown in inflation is not the same as deflation! For this to happen, inflation would have to be negative.
How is the rate of inflation calculated?

• The cost of living is a measure of changes in the average cost of buying a basket of different goods and services for a typical household
• In the UK there are two measures, the Retail Price Index (RPI) & the Consumer Price Index (CPI).
• The major difference between the two measures, is that CPI calculations excludes payments on mortgage interest - it is thought that by excluding mortgages, the CPI is a better measure of the impact of macroeconomic policy
• The CPI is a weighted price index. Changes in weights reflect shifts in the spending patterns of households in the British economy as measured by the Family Expenditure Survey.

Calculating a weighted price index

The following hypothetical example shows how to calculate a weighted price index.

Category	Price Index	Weighting	Price x Weight
Food	104	19	1976
Alcohol & Tobacco	110	5	550
Clothing	96	12	1152
Transport	108	14	1512
Housing	106	23	2438
Leisure Services	102	9	918
Household Goods	95	10	950
Other Items	114	8	912
		100	10408

The price index for this year is: the sum of (price x weight) / sum of the weights

• So the price index for this year is 104.1 (rounding to one decimal place)

• The rate of inflation is the % change in the price index from one year to another.
• So if in one year the price index is 104.1 and a year later the price index has risen to 112.5, then the annual rate of inflation = (112.5 – 104.1) divided by 104.1 x 100. Thus the rate of inflation = 8.07%.

Limitations of the Consumer Price Index as a measure of inflation

• The CPI is not fully representative:
• Since the CPI represents the expenditure of the ‘average’ household, inevitably it will be inaccurate for the ‘non-typical’ household, for example, 14% of the index is devoted to motoring expenses - inapplicable for non-car owners.
• Single people have different spending patterns from households that include children, young from old, male from female, rich from poor and minority groups.
• We all have our own ‘weighting’ for goods and services that does not coincide with that assigned for the consumer price index.
• Housing costs: The ‘housing’ category of the CPI records changes in the costs of rents, property and insurance, repairs. It accounts for around 16% of the index. Housing costs vary greatly from person to person.
• Changing quality of goods and services: Although the price of a good or service may rise, this may also be accompanied by an improvement in quality as the product. It is hard to make price comparisons of, for example, electrical goods over the last 20 years because new audio-visual equipment is so different from its predecessors. In this respect, the CPI may over-estimate inflation. The CPI is slow to respond to the emergence of new products and services.

Our chart above illustrates sub-sections of the UK consumer price index. The base year for the calculation is 2005 so prices in January 2005 are given an index number of 100. Since then overall the consumer price index has increased by nearly 24% but energy prices (e.g. electricity and gas bills) have jumped by much more whereas there has been persistent and deep deflation in the prices of many audio-visual products.

Deflation

• Price deflation happens when the rate of inflation becomes negative. I.e. the general price level is falling and the purchasing power of say £1,000 in cash is increasing
• Some countries have experienced periods of deflation in recent years; perhaps the most well-known example was Japan during the late 1990s and in the current decade. In Japan, the root cause of deflation was slow growth and a high level of spare capacity that was driving prices lower. 

Hyperinflation

• Hyperinflation is extremely rare. Recent examples include Yugoslavia Argentina , Brazil , Georgia andTurkey (where inflation reached 70% in 1999)
• The classic example of hyperinflation was the rampant inflation in Weimar Germany between 1921 and 1923 .
• When hyperinflation occurs, the value of money becomes worthless and people lose all confidence in money both as a store of value and also as a medium of exchange
• The recent hyperinflation in Zimbabwe is a good example of the havoc that can be caused when price inflation spirals out of control. It has made it virtually impossible for businesses to function in any kind of normal way.

For Britain the worst inflation experienced in modern times was during the mid to late 1970s when prices were rising at an annual rate of over twenty per cent. At the same time the economy was suffering from slow growth and rising unemployment and this gave rise to the idea of stagflation. 

Understanding the main causes of inflation

• Inflation can come from both the demand and the supply-side of an economy
• Inflation can arise from internal and external events

Some inflationary pressures direct from the domestic economy, for example the decisions of utility businesses providing electricity or gas or water on their tariffs for the year ahead, or the pricing strategies of the food retailers based on the strength of demand and competitive pressure in their markets.

A rise in the rate of VAT would also be a cause of increased domestic inflation in the short term because it increases a firm’s production costs.

Inflation can also come from external sources, for example a sustained rise in the price of crude oil or other imported commodities, foodstuffs and beverages.

Fluctuations in the exchange rate can also affect inflation – for example a fall in the value of the pound against other currencies might cause higher import prices for items such as foodstuffs from Western Europe or technology supplies from the United States – which feeds through directly or indirectly into the consumer price index.

Demand-Pull Inflation

• Demand pull inflation occurs when aggregate demand is growing at an unsustainable rate leading toincreased pressure on scarce resources and a positive output gap
• When there is excess demand, producers are able to raise their prices and achieve bigger profit margins because demand is running ahead of supply
• Demand-pull inflation becomes a threat when an economy has experienced a boom with GDP rising faster than the long-run trend growth of potential GDP
• Demand-pull inflation is likely when there is full employment of resources and SRAS is inelastic

Main Causes of Demand-Pull Inflation

• A depreciation of the exchange rate increases the price of imports and reduces the foreign price of a country’s exports.  If consumers buy fewer imports, while exports grow, AD in will rise – and there may be a multiplier effect on the level of demand and output
• Higher demand from a fiscal stimulus e.g. lower direct or indirect taxes or higher government spending.  If direct taxes are reduced, consumers have more disposable income causing demand to rise. Higher government spending and increased borrowing creates extra demand in the circular flow
• Monetary stimulus to the economy: A fall in interest rates may stimulate too much demand – for example in raising demand for loans or in leading to house price inflation. Monetarist economists believe that inflation is caused by “too much money chasing too few goods” and that governments can lose control of inflation if they allow the financial system to expand the money supply too quickly.
• Fast growth in other countries – providing a boost to UK exports overseas. Export sales provide an extra flow of income and spending into the UK circular flow – so what is happening to the economic cycles of other countries definitely affects the UK

Cost-Push Inflation

Cost-push inflation occurs when firms respond to rising costs, by increasing prices to protect their profit margins.

There are many reasons why costs might rise:

• Component costs: e.g. an increase in the prices of raw materials and other components. This might be because of a rise in commodity prices such as oil, copper and agricultural products used in food processing. A recent example has been a surge in the world price of wheat.
• Rising labour costs - caused by wage increases, which are greater than improvements in productivity. Wage costs often rise when unemployment is low because skilled workers become scarce and this can drive pay levels higher. Wages might increase when people expect higher inflation so they ask for more pay in order to protect their real incomes. Trade unions may use their bargaining power to bid for and achieve increasing wages, this could be a cause of cost-push inflation
• Expectations of inflation are important in shaping what actually happens to inflation. When people see prices are rising for everyday items they get concerned about the effects of inflation on their real standard of living. One of the dangers of a pick-up in inflation is what the Bank of England calls “second-round effects” i.e. an initial rise in prices triggers a burst of higher pay claims as workers look to protect their way of life. This is also known as a “wage-price effect”
• Higher indirect taxes – for example a rise in the duty on alcohol, fuels and cigarettes, or a rise in Value Added Tax. Depending on the price elasticity of demand and supply for their products, suppliers may choose to pass on the burden of the tax onto consumers.
• A fall in the exchange rate – this can cause cost push inflation because it leads to an increase in the prices of imported products such as essential raw materials, components and finished products
• Monopoly employers/profit-push inflation – where dominants firms in a market use their market power (at whatever level of demand) to increase prices well above costs

Cost-push inflation such as that caused by a large and persistent rise in the world price of crude oil can be shown in a diagram by an inward shift of the short run aggregate supply curve. The fall in SRAS leads to a contraction of national output together with a rise in the level of prices.  This is shown in the next diagram.

What are some of the main consequences of inflation?

"The lesson of the past fifty years is that, when inflation becomes embedded, the cost of getting it back down again is a prolonged period of sluggish output and high unemployment. Price stability – returning inflation to the target – is a precondition for sustained growth."

Source: Mervyn King, Governor of the Bank of England, Mansion House speech, June 2008

Many government s have a target for a low but positive rate of inflation. They believe that persistently high inflation can have damaging economic and social consequences.

• Income redistribution: One risk of higher inflation is that it has a regressive effect on lower-income families and older people in society. This happen when prices for food and domestic utilities such as water and heating rises at a rapid rate.
• Falling real incomes: With millions of people facing a cut in their wages or at best a pay freeze, rising inflation leads to a fall in real incomes.
• Negative real interest rates: If interest rates on savings accounts are lower than inflation, people who rely on interest from their savings will be poorer. Real interest rates for millions of savers have been negative for at least four years
• Cost of borrowing: High inflation may also lead to higher interest rates for businesses and people needing loans and mortgages as financial markets protect themselves against rising prices and increase the cost of borrowing on short and longer-term debt. There is also pressure on the government to increase the value of the state pension and unemployment benefits and other welfare payments as the cost of living climbs higher.
• Risks of wage inflation: High inflation can lead to an increase in pay claims as people look to protect their real incomes. This can lead to a rise in unit labour costs and lower profits for businesses
• Business competitiveness: If one country has a much higher rate of inflation than others for a considerable period of time, this will make its exports less price competitive in world markets. Eventually this may show through in reduced export orders, lower profits and fewer jobs, and also in a worsening of a country’s trade balance. A fall in exports can trigger negative multiplier and accelerator effects on national income and employment.
• Business uncertainty: High and volatile inflation is not good for business confidence partly because they cannot be sure of what their costs and prices are likely to be. This uncertainty might lead to a lower level of capital investment spending.

High and volatile inflation can have serious economic and social consequences – summarized below

Why is the rate of inflation difficult to forecast accurately?

The rate of inflation is one of the most important macroeconomic indicators that we study in macroeconomics. Data on prices is published regularly and given lots of attention by the media and the financial markets. Many agents be they businesses, households and governments would like to have accurate forecasts of what is likely to happen to prices in the future because they affect spending, saving and investment decisions.

Inflation is a difficult indicator to forecast accurately. Our chart below shows the UK CPI inflation forecast published by the Bank of England in their quarterly Inflation Report. Remember that the Bank of England has a mandate to control the rate of inflation so that CPI inflation remains close to the 2% target. The probability fan chart for inflation indicates the range of probabilities for inflation in the forecast period. Notice how wide is that range, there is much uncertainty about what is likely to happen to inflation in the UK. In 2014, there is the possibility of deflation (inflation of -1%) or inflation higher than 4%. The darker the shading, the higher the probability attached to the outcome.

Some reasons for difficulties in forecasting inflation

The Bank’s Inflation Target
In order to maintain price stability, the Government has set the Bank’s Monetary Policy
Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%. Subject to that, the MPC is also required to support the Government’s objective of maintaining high and stable growth and employment

Controlling inflation – macroeconomic policies

Inflation can be reduced by policies that (i) slow down the growth of AD or (ii) boost the rate of growth of aggregate supply (AS)

• Fiscal policy:

1. Controlling aggregate demand is important if inflation is to be controlled. If the government believes that AD is too high, it may choose to ‘tighten fiscal policy’ by reducing its own spending on public and merit goods or welfare payments
2. It can choose to raise direct taxes, leading to a reduction in real disposable income
3. The consequence may be that demand and output are lower which has a negative effect on jobs and real economic growth in the short-term

• Monetary policy:

1. A ‘tightening of monetary policy’ involves the central bank introducing a period of higher interest rates to reduce consumer and investment spending
2. Higher interest rates may cause the exchange rate to appreciate in value bringing about a fall in the cost of imported goods and services and also a fall in demand for exports (X)

• Supply side economic policies:

1. Supply side policies seek to increase productivity, competition and innovation – all of which can maintain lower prices. These are ways of controlling inflation in the medium term

• A reduction in company taxes to encourage greater investment
• A reduction in taxes which increases risk-taking and incentives to work – a cut in income taxes can be considered both a fiscal and a supply-side policy
• Policies to open a market to more competition to increase supply and lower prices

2. Rising productivity will cause an outward shift of aggregate supply
3. Direct controls -  a government might choose to introduce direct controls on some prices and wages
1. Public sector pay awards – the annual increase in government sector pay might be tightly controlled or even froze (this means a real wage decrease).
2. The prices of some utilities such as water bills are subject to regulatory control – if the price capping regime changes, this can have a short-term effect on the rate of inflation

Evaluation points – how best can inflation be controlled?

• The most appropriate way to control inflation in the short term is for the government and the central bank to keep control of aggregate demand to a level consistent with our productive capacity
• AD is probably better controlled through the use of monetary policy rather than an over-reliance on using fiscal policy as an instrument of demand-management
• Controlling demand to limit inflation is likely to be ineffective in the short run if the main causes are due to external shocks such as high world food and energy prices
• The UK is an open economy in which inflation is strongly affected by events in the rest of the world
• In the long run, it is the growth of a country’s supply-side productive potential that gives an economy the flexibility to grow without suffering from acceleration in cost and price inflation.

Definition of Market price

dEFINITION OF 'MARKET PRICE'

The current price at which an asset or service can be bought or sold. Economic theory contends that the market price converges at a point where the forces of supply and demand meet. Shocks to either the supply side and/or demand side can cause the market price for a good or service to be re-evaluated.

INVESTOPEDIA EXPLAINS 'MARKET PRICE'

For example, suppose that the market price for a widget has been $10 for a number of years. Suddenly, the market price shifts to $20 when it is announced that only half of this year's widgets will be sold in stores. In this case, a drop in supply causes the market price to increase.

In regard to stocks, the market price of a stock is the most recent price at which the stock was traded. It does not guarantee that an investor will receive the same price upon buying the stock afterward. For example, suppose that a company's stock has been halted from trading because it was planning to release some material news in the next hour. While the market price of the stock at the time will be the last price at which the stock traded, buying the stock when trading resumes will definitely yield a different price.

Market for Health care- Gce o level notes.

Markets in Action - Market for Health care

Health care uses up scrace resources and involves both an economic and an opportunity cost. The NHS estimates that in 2011, a single visit to accident and emergency (A&E) costs on average £117. Delivering a baby without complications costs £1,200 whilst a hip replacement costs £6,000.

Who should pay for health care?

In 2008 the British National Health Service celebrated its 60th birthday but the future of the NHS as it exists at present always seems to be under question. How much longer can most NHS treatments and other services be provided free at the point of treatment and based on clinical need rather than people’s ability to pay?

In most advanced countries the state is the dominant provider and funder of health care. The lowest share is in the United States where state funding represents less than fifty per cent of total health spending.  In Canada, Britain and Sweden, the health service is funded mainly through general taxation. In Germany and France the system is funded largely from compulsory contributions made by employers and workers and from voluntary private insurance.

In most countries, health care is provided by the mixed economy. Doctors are usually self employed or in private practice. The government sector is most heavily involved in operating hospitals. Although in Britain, the government is giving hospitals greater autonomy in running their own affairs and in contracting out some health care to the private sector through its foundation hospital system

Four of the possible funding options for health care are

• Co-payments - Ask patients to contribute towards the cost of non-emergency surgery, such as hernias and varicose veins.
• Ration care - To some extent, this is already done by the National Institute for Clinical Excellence watchdog,
• NHS tax - A specific tax could be levied to help pay for treatment
• Social insurance - Public could be asked to pay into an insurance scheme

Equity and Efficiency in Health Care

(1) Economic Efficiency

Consider first the two main types of efficiency – allocative and productive:

• Does the health care provided in Britain meet people’s changing needs and wants (i.e. do we achieve allocative efficiency?)
• Is health care provided at the lowest possible cost per treatment (i.e. do we achieve productive efficiency?) or could improvements be made in the efficiency with which health services are provided for millions of people?

(2) Equity

Are people’s health needs met by health treatments on the basis mainly of clinical need or alternatively based on an ability to pay for health services? Are health outcomes in the UK reasonably equal across localities, regions, ethnic groups, age groups and by gender? Or are there unacceptable inequalities in the provision of health care across different sections of the population? The issue of equitable provision of health is an important ongoing issue.

Market Failure in Health Care

What might cause market failure in the provision of health services?

Imperfect information among health care providers and consumers - Consumers may under-value the long-term private benefits of consuming health care – due to information failure (or ‘patient ignorance’). Health providers such as doctors and consultants have more specialised knowledge than consumers – an example here of asymmetric information.

Moral hazard: Many consumers in the healthcare market take out insurance to help pay for treatment; this, however, leads to a problem of moral hazard, where they take more risks and therefore require more treatment because they are insured. Again, this is a consequence of asymmetric information in the market where consumers know more than insurers about their intended future actions

Lack of adequate health insurance: It is virtually impossible for people to predict their future health needs. Sudden illness or injury may require extensive and expensive medical care for which most people are unlikely to have adequate health care insurance. Indeed the private health insurance market will not provide cover for all groups of people. High-risk individuals may find it impossible or expensive to get medical insurance if the market was the only provider of health care. The ‘failure’ of health insurance companies to provide cover for high risk groups is an example of ‘missing markets’ – another cause of market failure

Externalities arising from health care provision: Health services are normally assumed to be merit goodsproviding a private benefit for people who consume them and additional external benefits for society as a whole.

Inequalities in access to basic health care: There are regional and local differences in the quality and quantity of health care available (media stories are fond of discussing so-called “postcode prescribing”). Millions of people are wholly dependent on the NHS for health care– they have no hope of being able to fund private health insurance. If people were required to pay for more treatments they would often be unable to afford them

Monopoly power among health care suppliers: if there was a wholly free market in providing health care, it is likely that in the long run, several dominant health care providers would emerge raising concerns about increasing market concentration and the opportunities for these firms to exploit their monopoly power.

The fundamental policy question regarding health care in the UK is this: Should it remain essentiallyfunded by the tax system and provided mainly free at the point of need?

In the United States, which remains the world’s largest spender on health care, state provided and state-financed health care goes mainly to the old and families on low incomes. Most American workers are insured privately through the health insurance schemes run by their employers. But this does not stop many millions of Americans being unable to afford their own health care insurance – this has become a huge political issue in the United States. There are also huge worries among US companies about the soaring cost of employer-funded health benefit schemes.

In rich developed countries, health care spending on average takes up nearly ten per cent of national income (GDP) and the projections for the years ahead see that figure continuing to rise.

The NHS will always face the problem of resource scarcity because our ever-growing demand for different types of health care exceeds the available supply. The Labour government is committed to significant increases in real spending on health + share of health in total GDP.

Fundamental Principles of the National Health Service

The Fundamental building blocks of the NHS are as follows:

• Providing a national universal (comprehensive) service
• Health care free at the point of use
• Medical care is not based on ability to pay but rather on the basis of clinical need

Who should pay for the drugs dispensed by the National Health Service?

The Economic and Social Importance of Health Care

• Quality of Life and Poverty: Health and well-being in childhood affect educational attainment with consequences for people throughout their lives. Ill health in adulthood is associated with poverty and long periods out of work. There is now solid evidence that improvements in medical care pay off in the long term in terms of healthier and longer lives.
• Employment: The NHS is the largest employer in UK with over 1.3 million people employed in the NHS in England alone. After social security payments, health is the biggest single component of government expenditure.
• Productivity: Ill health imposes a restriction on the productive potential of the economy. Around 2 per cent of working days each year are lost due to short-term sickness, while more than 7 per cent of the working age population is unable to work due to long-term sickness or disability costing over £12 billion a year in welfare benefits.
• Higher Economic Growth and Standard of Living: If average life expectancy could be increased by five years, UK real GDP could be £5 billion a year higher.

Fundamental Problems Facing the NHS

Rarely a day goes by without a health story featuring in the newspapers. The NHS faces many challenges – these are four of the main ones:

Persistent resource crises: Resource problems are the consequence of under-funding and under-investment in the health service over many years – affecting the quality and quantity of the capital stock available to health providers

Hospital waiting lists: There are persistent delays in people receiving appointments to see consultants and delays in receiving emergency treatment

Problems in recruiting sufficient well qualified staff which leads to long hours for NHS staff and contributes to wide disparities in the quality of care and range of care from region to region and between local health authorities.

Meeting the growing demand for health care: There are growing doubts as to whether the NHS is meeting changing consumer preferences and growing health needs

Health Care Rationing – An Inevitable Process

Health rationing occurs because demand for health care always outweighs supply. In a free market, markets match supply and demand by altering price. This form of rationing relies on the simply fact that post-tax incomes are unequal and that those households on relatively low incomes will be the first to be priced out of the market. Rationing in the NHS is inevitable - no amount of resources from the Government funded by taxation could possibly meet all of our demands for health care when the NHS system remains based on the fundamental principle of most health services being free at the point of need.

In the diagram below, even if the government invests higher levels of money into the NHS system permitting an outward shift in the PPF for health care services, there is still an issue of scarcity to resolve even though the total “output” of the NHS can rise as a result.

The NHS currently rations health resources in a variety of ways

• Government rationing: Ministers and Parliament decide on the overall size of the NHS budget thus dictating the type and volume of care the NHS can provide
• The National Institute for Clinical Excellence (NICE) advises the NHS on clinical and economic benefits and costs of certain health care interventions
• Health authorities and primary care groups allocate money to particular disease/treatment areas. Treatment decisions for individuals are made at the clinical level by health care professionals

Key Factors Putting Increased Financial Pressures on the NHS

• Developments in medical technology and treatments: The fruits of research and development in health sciences has brought us many new medical procedures (such as transplants); new treatments and new products (e.g. magnetic-resonance imaging scanners)
• New drugs including drugs that reduce the “risk” of disease rather than the symptoms of illness – e.g. statins to lower cholesterol
• The increased costs of staffing in the NHS -the NHS is a highly labour intensive industry. The costs of staff can take up to sixty per cent of the operating expenses of a hospital.
• Growing health problems including diseases associated with affluence and the health issues following an increase in relative poverty – for example the costs of treating smoking related diseases and the costs of treating illness associated with rising levels of obesity
• Long term change in age structure of the population - The cost of health care rises dramatically for older patients and the UK population along with that of many other countries is becoming older as average life expectancy continues to grow
• Increasing expectations of patients and their families – in part the result of politicians promising to achieve improved health outcomes from extra funding

Demographic Change and the NHS

The UK population is ageing. The medical conditions that account for the majority of the burden of disease in the UK are primarily related to old age – e.g. cancer and coronary heart disease. Spending on health varies significantly with age. The beginning and end of life are the most expensive. On average, around a quarter of all the health care someone consumes in their lifetime is consumed in the last year of their life. Just over a third of all spending on hospital and community health services is for people who are over the age of 65.

Case for Maintaining a Tax Funded Health Care System

The NHS can exploit economies of scale and provide health services for millions of people at an efficient cost – these scale economies include the benefits of specialization and significant buying power in the purchasing of drugs from pharmaceutical companies

Revenue to fund the NHS is drawn from a millions of taxpayers who pay mainly through a progressive system of direct taxation- satisfying the principle of vertical equity. Higher income taxpayers are therefore paying more towards the general provision of health care – the NHS is a means towards greater equality of opportunity within society

Basing health care treatments on being able to pay might discourage people from seeking important treatments

Case for using the Market Mechanism

With user charges, households would choose their own pattern of consumption and the supply of health care would then adjust to the pattern of preferences

The demand for health treatments would be linked to the private benefit to the patient – so a wider system of charging / private sector provision would lead to a lower demand for non-essential treatments and free up resources for more urgent treatments

Some user charges already exist within the NHS such as those for dental treatment, eye examinations and prescriptions – the principle of user charges could be extended without challenging the fundamental principles upon which the NHS is based

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