stocks – if some small group of investors think a stock is worth $100, now every share that exists of that stock is now worth $100 (people hold on to stocks in the form of retirement accounts)
homes – in 2020 many people had the chance to move to "work from home", this small group pushed up demand for houses and house prices, so why does the price of every home in the whole market go up? even the homes that aren't for sale. (increased their property taxes) and (most people LIVE in their homes, they don't keep moving to make a profit)
I hope that made sense.
ELI, why does demand from a small group equal the demand of the entire economy?
byu/RODAMI inAskEconomics
Posted by RODAMI
1 Comment
In economics we talk about this, as how prices are determined on the margin. When we have supply and demand curves, in 101, Value starts really high and Cost start really low for initial units. Each additional unit consumed has a lower value than the previous one and each additional unit has a higher cost than the previous one. Until they cross then the marginal cost of the last good consumed/produced is equal to the marginal value. We don’t go any further because additional goods would have a cost higher than the value, and for every unit already existing value is greater than price which is greater than cost.
When supply, demand or something that determines supply or demand changes we only see reactions by the people whose position on the one side or the other of the margin changes but that is not saying the same thing as saying those are the only people who are causing the price shift.
>stocks – if some small group of investors think a stock is worth $100, now every share that exists of that stock is now worth $100
If previously I valued a stock at $95.01 and these other guys valued the stock at $94.99 and the price was $95, I own the stock, and they don’t. Then something happens that changes this small group of investors to increase their valuation to $100. If this “something happens” led to no one else changing their valuation, then as soon as these small investors started driving up the price with their purchases, me and everyone else who only valued it at $95.01 will start selling our shares to them. So the limit of one small group of investors in influencing price is the risk that comes from concentrating their ownership in this one company, which if they are small enough and the only ones whose opinion of value changed means, they won’t actually have an impact on price.
If on the other hand, everyone’s valuations increased by $5, I’ll just continue to hold on to my share even as prices increase. So, it is the action of trading that we see but if prices actually increase a lot, it is only because a lot of people actually had their valuations increase.
>homes – in 2020 many people had the chance to move to “work from home”, this small group pushed up demand for houses and house prices, so why does the price of every home in the whole market go up?
Same story. If people didn’t believe the values were really and actually going up they would have responded to the price increases by unloading their homes and renting, pushing prices back down.