Bid and ask
Encyclopedia
Price mechanism is an economic term that refers to the buyers and sellers who negotiate prices of goods or services depending on demand and supply. A price mechanism or market-based mechanism refers to a wide variety of ways to match up buyers and sellers through price rationing.
An example of a price mechanism uses announced bid and ask prices. Generally speaking, when two parties wish to engage in a trade
, the purchaser will announce a price he is willing to pay (the bid price
) and seller will announce a price he is willing to accept (the ask price
).
The main advantage of such a method is that conditions are laid out in advance and transactions can proceed with no further permission or authorization from any participant. When any bid and ask pair are compatible, a transaction occurs, in most cases automatically.
The crisis caused more nations to start producing its own oil due to dramatic price increases of oil. Since more nations started to produce oil, the supply curve shifted more to the right meaning there was more supply of oil.
Price Mechanism affects every economic situation in the long term. Another good example of price mechanism in the long run is fuel for cars. If fuel becomes more expensive, then the demand of fuel would not decrease fast but eventually companies will start to produce alternatives such as biodiesel fuel and electrical cars.
, a person who has share
s to sell may not wish to sell them at the current market price (quote
). Likewise, a person who wishes to buy shares may not wish to pay the current market price either. Some negotiation
is necessary in order for a transaction to occur.
The negotiation often comes in the form of adjusting the bid prices and the ask prices as the value of the share goes up and down. For example, if the share is worth $10, a buyer may "bid" $9.97 (3 cents less), and a seller may ask for $10.02 (2 cents more). If the value of the stock goes down, a seller may be forced to reduce his asking price. Conversely, if the value of the stock goes up, a buyer may be forced to increase his bidding price.
Most of the time, the bid and ask prices remain very close to the market value of the share, often separated by only a couple of cents. The difference between the bid and ask price is called the Bid/ask spread.
In actual trading, the parties involved might use a limit order to specify which bid or ask price he wishes to trade at. The trader specifies the number of shares and his bid/ask price (depending on whether he is buying or selling). Such orders can have execution limits, such as "by end of day" or "all or nothing".
s can be enabled this way. Internet dating for instance could be based on offers to talk for a period of time, accepted by those who are compensated not in money but in additional credits to keep using the system. Or, a political party
could trade support for different measures in a platform, perhaps using allocation voting to "bid" a certain amount of support for a measure that a leader has "asked" them to support: if the measure has enough support in the party, the leader will proceed; a very explicit model of so-called "political capital
".
Though there are many concerns about liquidating any given transaction, even in a conventional market
, there are ideologies which hold that the risks are outweighed by the efficient rendezvous. In greenhouse gas
emissions trading
, companies doing the "bidding" argue that Earth's atmosphere
can be seen as affected almost uniformly by emissions anywhere on Earth. They argue further that, as a result, there are almost no local effects, and only a measurable and widely agreed climate change
effect, of a greenhouse gas emission, justifying a "cap and trade" approach. Somewhat more controversially, the approach was applied even earlier to sulfur dioxide
emissions in the United States
, and was quite successful in reducing overall smog
output there.
In most applications of such methods, however, the comprehensive outcome of the transaction is not so easily measured or universally agreed. Some theorists assert that, with appropriate controls, a market mechanism can replace a hierarchy
, even a command hierarchy
, by ordering actions for which the highest bid is received:
An infamous example is the assassination market
proposed by Timothy C. May
, which were effectively bets on someone's death. This has since been generalized into the prediction market
idea which the Pentagon
proposed to operate as part of Total Information Awareness
; however, this proved controversial as it would theoretically let assassin
s predict and then benefit from their predictions, which they would cause to come true. This is a problem even with the commodity markets
and any other financial markets, where a single person's choices or fate might be influenced, predicted, or decided by someone already in the market.
Less controversial applications of bid and ask matching include:
An example of a price mechanism uses announced bid and ask prices. Generally speaking, when two parties wish to engage in a trade
Trade
Trade is the transfer of ownership of goods and services from one person or entity to another. Trade is sometimes loosely called commerce or financial transaction or barter. A network that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and...
, the purchaser will announce a price he is willing to pay (the bid price
Bid price
A bid price is the highest price that a buyer is willing to pay for a good. It is usually referred to simply as the "bid."In bid and ask, the bid price stands in contrast to the ask price or "offer", and the difference between the two is called the bid/ask spread.An unsolicited bid or purchase...
) and seller will announce a price he is willing to accept (the ask price
Ask price
Ask price, also called offer price, offer, asking price, or simply ask, is the price a seller states she or he will accept for a good....
).
The main advantage of such a method is that conditions are laid out in advance and transactions can proceed with no further permission or authorization from any participant. When any bid and ask pair are compatible, a transaction occurs, in most cases automatically.
Effects of Price Mechanism
Price Mechanism causes many changes in the economic environment. If there is an increase in demand, then prices will go higher causing a movement along the supply curve. An example of price mechanism in the long term is the oil crisis during the 1970’s.The crisis caused more nations to start producing its own oil due to dramatic price increases of oil. Since more nations started to produce oil, the supply curve shifted more to the right meaning there was more supply of oil.
Price Mechanism affects every economic situation in the long term. Another good example of price mechanism in the long run is fuel for cars. If fuel becomes more expensive, then the demand of fuel would not decrease fast but eventually companies will start to produce alternatives such as biodiesel fuel and electrical cars.
Stock market
When trading in a stock marketStock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
, a person who has share
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
s to sell may not wish to sell them at the current market price (quote
Quote
Quotation is the repetition of someone else's statement/thoughts. This can be in the form of words, songs, American Sign Language, written, or any other form of communication. Quotation marks are punctuation marks used in text to indicate the words of another speaker or writer...
). Likewise, a person who wishes to buy shares may not wish to pay the current market price either. Some negotiation
Negotiation
Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective advantage, to craft outcomes to satisfy...
is necessary in order for a transaction to occur.
The negotiation often comes in the form of adjusting the bid prices and the ask prices as the value of the share goes up and down. For example, if the share is worth $10, a buyer may "bid" $9.97 (3 cents less), and a seller may ask for $10.02 (2 cents more). If the value of the stock goes down, a seller may be forced to reduce his asking price. Conversely, if the value of the stock goes up, a buyer may be forced to increase his bidding price.
Most of the time, the bid and ask prices remain very close to the market value of the share, often separated by only a couple of cents. The difference between the bid and ask price is called the Bid/ask spread.
In actual trading, the parties involved might use a limit order to specify which bid or ask price he wishes to trade at. The trader specifies the number of shares and his bid/ask price (depending on whether he is buying or selling). Such orders can have execution limits, such as "by end of day" or "all or nothing".
Auctions
An auction is a price mechanism where bidders can make competing offers for a good. The minimum bid may or may not be set by the seller, who may choose to predetermine an ask price. The highest bidder, or the first one to reach a preset ask price, would be awarded the transaction.Other Applications
If the terms "pay" and "sell" are understood very generally, then, a very broad range of applications and different market systemMarket system
A market system is any systematic process enabling many market players to bid and ask: helping bidders and sellers interact and make deals. It is not just the price mechanism but the entire system of regulation, qualification, credentials, reputations and clearing that surrounds that mechanism and...
s can be enabled this way. Internet dating for instance could be based on offers to talk for a period of time, accepted by those who are compensated not in money but in additional credits to keep using the system. Or, a political party
Political party
A political party is a political organization that typically seeks to influence government policy, usually by nominating their own candidates and trying to seat them in political office. Parties participate in electoral campaigns, educational outreach or protest actions...
could trade support for different measures in a platform, perhaps using allocation voting to "bid" a certain amount of support for a measure that a leader has "asked" them to support: if the measure has enough support in the party, the leader will proceed; a very explicit model of so-called "political capital
Political capital
Political capital is primarily based on a public figure's favorable image among the populace and among other important factors in or out of the government. Political capital is essentially the opinion of another person, group of people, or nation about you, your organization, or your government...
".
Though there are many concerns about liquidating any given transaction, even in a conventional market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
, there are ideologies which hold that the risks are outweighed by the efficient rendezvous. In greenhouse gas
Greenhouse gas
A greenhouse gas is a gas in an atmosphere that absorbs and emits radiation within the thermal infrared range. This process is the fundamental cause of the greenhouse effect. The primary greenhouse gases in the Earth's atmosphere are water vapor, carbon dioxide, methane, nitrous oxide, and ozone...
emissions trading
Emissions trading
Emissions trading is a market-based approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants....
, companies doing the "bidding" argue that Earth's atmosphere
Earth's atmosphere
The atmosphere of Earth is a layer of gases surrounding the planet Earth that is retained by Earth's gravity. The atmosphere protects life on Earth by absorbing ultraviolet solar radiation, warming the surface through heat retention , and reducing temperature extremes between day and night...
can be seen as affected almost uniformly by emissions anywhere on Earth. They argue further that, as a result, there are almost no local effects, and only a measurable and widely agreed climate change
Climate change
Climate change is a significant and lasting change in the statistical distribution of weather patterns over periods ranging from decades to millions of years. It may be a change in average weather conditions or the distribution of events around that average...
effect, of a greenhouse gas emission, justifying a "cap and trade" approach. Somewhat more controversially, the approach was applied even earlier to sulfur dioxide
Sulfur dioxide
Sulfur dioxide is the chemical compound with the formula . It is released by volcanoes and in various industrial processes. Since coal and petroleum often contain sulfur compounds, their combustion generates sulfur dioxide unless the sulfur compounds are removed before burning the fuel...
emissions in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, and was quite successful in reducing overall smog
Smog
Smog is a type of air pollution; the word "smog" is a portmanteau of smoke and fog. Modern smog is a type of air pollution derived from vehicular emission from internal combustion engines and industrial fumes that react in the atmosphere with sunlight to form secondary pollutants that also combine...
output there.
In most applications of such methods, however, the comprehensive outcome of the transaction is not so easily measured or universally agreed. Some theorists assert that, with appropriate controls, a market mechanism can replace a hierarchy
Hierarchy
A hierarchy is an arrangement of items in which the items are represented as being "above," "below," or "at the same level as" one another...
, even a command hierarchy
Command hierarchy
A command hierarchy is a group of people committed to carrying out orders "from the top", that is, of authority. It is part of a power structure: usually seen as the most vulnerable and also the most powerful part of it.-Sociology:...
, by ordering actions for which the highest bid is received:
An infamous example is the assassination market
Assassination market
An assassination market or market for assassinations is a prediction market where any party can place a bet on the date of death of a given individual, and collect a payoff if they "guess" the date accurately...
proposed by Timothy C. May
Timothy C. May
Timothy C. May, better known as Tim May, is a technical and political writer, and was an electronic engineer and senior scientist at Intel in the company's early history...
, which were effectively bets on someone's death. This has since been generalized into the prediction market
Prediction market
Prediction markets are speculative markets created for the purpose of making predictions...
idea which the Pentagon
The Pentagon
The Pentagon is the headquarters of the United States Department of Defense, located in Arlington County, Virginia. As a symbol of the U.S. military, "the Pentagon" is often used metonymically to refer to the Department of Defense rather than the building itself.Designed by the American architect...
proposed to operate as part of Total Information Awareness
Information Awareness Office
The Information Awareness Office was established by the Defense Advanced Research Projects Agency in January 2002 to bring together several DARPA projects focused on applying surveillance and information technology to track and monitor terrorists and other asymmetric threats to national security,...
; however, this proved controversial as it would theoretically let assassin
Assassination
To carry out an assassination is "to murder by a sudden and/or secret attack, often for political reasons." Alternatively, assassination may be defined as "the act of deliberately killing someone, especially a public figure, usually for hire or for political reasons."An assassination may be...
s predict and then benefit from their predictions, which they would cause to come true. This is a problem even with the commodity markets
Commodity markets
Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts....
and any other financial markets, where a single person's choices or fate might be influenced, predicted, or decided by someone already in the market.
Less controversial applications of bid and ask matching include:
- industrial process control
- various applications in social networkSocial networkA social network is a social structure made up of individuals called "nodes", which are tied by one or more specific types of interdependency, such as friendship, kinship, common interest, financial exchange, dislike, sexual relationships, or relationships of beliefs, knowledge or prestige.Social...
s (including dating above) - calculating interest in court judgments or homestead credit
- determining which of several assets in a divorce are most prized by each party, and accordingly, who should receive what for maximum amiability and minimum capital assetCapital assetThe term capital asset has three unrelated technical definitions, and is also used in a variety of non-technical ways.*In financial economics, it refers to any asset used to make money, as opposed to assets used for personal enjoyment or consumption...
sale and lifestyle disruption