Demand and Supply in the Stock Market
Discuss About The Dynamic Constraints And Market Competition.
According to the New Straits Times, a leading newspaper of Malaysia, Apple Company is going to be the first US$ 1 trillion publicly listed company of the U.S. However, due to Amazon.com, the second largest listed company of this country, Apple Company may not hold this position further in future (BNN. 2018). The specified company has started its journey from a garage in 1976 and consequently has earned huge amount of revenue by selling iPhone and other Apple products (Margulis and Galli 2018). On May 10, 2018, market capitalism of this iPhone seeling company has made a record US$ 934 billion while its last week buyback budget has remained US$ 100 billion (NST Online 2018). Moreover, Berkshire Hathaway of Warren Buffett has increased its stake in Apple. On the other side, Amazon, with its market value at US$ 780 billion, may surpass Apple very soon. It is also essential to notice that the stock price of Amazon and their sales have increased more quickly compare to that of Apple. Hence, stock of Amazon has become more demanding with more than 100 times expected earnings while Apple’s stock has traded 15 times earnings with more profits but slower growth. After introducing iPhone X, stock of Apple has increased by 24% for the last one year (U.S. 2018). However, demand for this particular gadget has negatively influenced investors and consequently, stock market has focused on Apple’s decision to return cash to its shareholders. On the contrary, stock of Amazon has increased by more than 70% during last 1 year and this in turn has boosted up revenue growth of this company by 31%. The chief reason behind this consequence is that, more people have shifted their buying pattern and have started to prefer online purchases. In addition to this, other strong competitor of Apple and Amazon, which is, Google owner Alphabet, has also played a significant role in the market. With US$ 765 billion, the company has become the third largest market capitalism in the U.S followed by Microsoft.
The above-discussed article can be explained more precisely with the help of some microeconomical concepts, which are, demand, revenue and perfect competition.
According to the above article, stock of Amazon has earned huge demand while that of Apple has decreased among investors in the U.S stock market. In share market, investors pay particular price for a stock of a company. Investors purchase stocks on market expecting that the price of this stock may increase further in future and consequently they can earn profit by selling those stocks with higher prices in future (Arthur 2018.). In this context, the concept of demand and supply have played important role. If the demand for a company’s product increases rapidly, then investors may expect than the business of this concerned company may grow further. As a result, investors purchase more stocks. If the supply of this company’s stock remains at a same level, then increasing demand can influence the stock price of this company to increase further.
Revenue in the Stock Market
In this context, the concept of demand law can be explained. According to this law, price and quantity demanded for a particular product has a negative relationship, which means, increasing price of a particular product can influence the demand for it to decrease further while the opposite situation has also occurred during decrease in price of this product. Hence, the particular product has obtained a negatively sloped demand curve. However, in stock market, this law cannot exist and a positively sloped demand curve can be seen over here (Graham, Leary and Roberts 2015). This situation has occurred for both Apple and Amazon. As consumers have started to use online portals for buying products, demand for Amazon has increased rapidly and this in turn has helped the company to increase its stock price. On the other side, demand for iPhone X has helped investors of Apple to speculate decrease in stock price of this Apple product further has consequently demand for stocks has also decreased among those concerned investors.
Revenue is another important concept of microeconomics. Based on the mentioned article, Apple has earned huge amount of annual revenue and that has remained high compare to the gross national income of Portugal and New Zealand (Lipowsky and Schmidt 2016). According to the definition, revenue is the amount that a particular firm can receive by selling its products in the market. Revenue and sales has positive relationship, which means, increase in sale can help the company to increase its revenue. Moreover, this concept can influence a company to produce more or less output, based on its value. This means, the concerned company can produce more products in future if it can earn higher amount of revenue while the opposite situation can also be occurred when revenue decreases further. In microeconomics, revenue has three parts, which are, total revenue (TR), average revenue (AR) and marginal revenue (MR) (Joshi and Lohiya 2017). TR measures the total receipts of the company by selling a given amount of commodity. Hence, this represents total income of the company. Therefore, total revenue is multiplication of quantity with price (TR = Q * P). Average revenue measures revenue of this company for per unit selling of products. Hence, AR is the total revenue of the firm divided by total quantity it has sold (AR = TR / Q). Marginal revenue, on the other side, refers the amount that the company can generate by selling an extra unit of output. Hence, this is the difference between total revenue of this company for selling one unit of extra output (MR = TR0 – TR1).
Perfect Competition in the Stock Market
However, in this article, the concept of total revenue is considered. Apple has sold its iPhone by large number over the last few years while price of this each device has also remained very high. Hence, the company has successfully earned huge amount of revenue and consequently stock price of this company has also increased significantly.
According to this article, perfect competition exists in the stock market. There is large number of investors or buyers in the market while number of sellers is also very large. Apple, Amazon, Google, Microsoft and Facebook have sold their share in market (Hsiao, Tu and Chen 2017). Moreover, price of each share has been determined in the market with the help of demand and supply of this company. Hence, buyers or sellers cannot influence this share price and consequently they have become the price taker (Ahern 2014). Moreover, in share market, any firm or investor can enter or exit freely. This is other criteria of perfectly competitive market. In addition to this, stock or share of all companies can be considered as similar products, as investors can earn profit or can incur loss by selling those shares in future and they cannot do other activities with the help of those shares rather than purchasing, holding and selling it again in market (Monnet, Gabriel and Percebois 2017). From this concept, it can be said that the share market has possessed many characteristics, which are almost similar with a perfectly competitive market. Hence, Apple, Amazon and others have always tried to increase demand for their products in market so that people can buy share of their company by large amount. As investors or buyers have complete knowledge about the market, investors can shift their demand for shares from a slowly growing company to a rapidly growing one for earning more revenue.
The chief issue of this article is to focus the position of the Apple in stock market along with Amazon, Alphabet and Microsoft. However, the share of Apple has obtained negative impacts from its investors as the demand for iPhone X has decreased in the market. On the other side, demand for stocks of Amazon has increased rapidly as people have increased to purchase online products (Harvard Business Review. 2018). Initially, Apple is going to be the first publicly listed company of the U.S with US$ 1 trillion (NST Online 2018). However, increasing demand for stocks of Amazon can help the company to defeat Apple in future. Amazon also has strongly competed with Google owner Alphabet, which has also higher demand for its customers by selling music and video contents. Thus, the demand for stock of Alphabet, Microsoft and Facbeook has increased rapidly and consequently the stock market has experienced strong competition among them.
Figure 1: upward rising demand curve for stocks
Source: (created by author)
According to figure 1, investors can demand Q0 amount of stocks when price remains P0. After observing performaance and demand for product of a company, those investors can predcit that stock price of this company can increase further like Amazon (Graham, Leary and Roberts 2015). As a reslut, they can purchase more amount of stocks when price incrases so that they can sell those stocks in future with higher prices in future market as consequetly can earn higher amount of profit.
References:
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Arthur, W.B., 2018. Asset pricing under endogenous expectations in an artificial stock market. In The economy as an evolving complex system II (pp. 31-60). CRC Press.
BNN. 2018. Apple is the richest company, so where are all the billionaires? – Article – BNN. [online] Available at: https://www.bnnbloomberg.ca/apple-is-the-richest-company-so-where-are-all-the-billionaires-1.1053394 [Accessed 20 May 2018].
Graham, J.R., Leary, M.T. and Roberts, M.R., 2015. A century of capital structure: The leveraging of corporate America. Journal of Financial Economics, 118(3), pp.658-683.
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Hsiao, J.L., Tu, T.T. and Chen, M.C., 2017. Factors Influencing Equity Return Correlations between China’s Pairs of A-and B-Share Markets: Effect of QFII’s Implementation. International Journal of Financial Research, 8(2), p.105.
Joshi, K.P. and Lohiya, N., 2017. Improved Seating Plans for Movie Theatre to Improve Revenue: An Integrated Best Worst Method with EMSR-B. In Handbook of Research on Intelligent Techniques and Modeling Applications in Marketing Analytics(pp. 149-158). IGI Global.
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Margulis, C.S. and Galli, B.J., 2018. A case study of Apple v. Samsung and how big data analytics might have changed the outcome. International Journal of Qualitative Research in Services, 3(1), pp.21-35.
Monnet, A., Gabriel, S. and Percebois, J., 2017. Analysis of the long-term availability of uranium: The influence of dynamic constraints and market competition. Energy Policy, 105, pp.98-107.
NST Online. 2018. Apple worth almost US$1 trillion. [online] Available at: https://www.nst.com.my/business/2018/05/368881/apple-worth-almost-us1-trillion [Accessed 20 May 2018].
U.S. 2018. Apple is almost a $1 trillion company, but watch out for Amazon. [online] Available at: https://www.reuters.com/article/us-apple-stock-trillion-race/apple-is-almost-a-1-trillion-company-but-watch-out-for-amazon-idUSKBN1IC257 [Accessed 20 May 2018].
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