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What Is a Market Model?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 25 June 2014
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    Conjecture Corporation
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A market model is a mathematical representation of various business situations and economic information. Companies often use these models to predict specific outcomes related to their operations, or to explain information gleaned from the economic marketplace. There are countless types of market models used in the business environment. Companies often select a few specific types that best fit their operations and provide a simple format for analyzing information. These models are often separated out into groups, such as accounting, economic, and corporate finance.

Financial ratios are a common accounting market model used to analyze financial information on an industry- or sector-wide basis. These ratios present companies with financial indicators that can be used to compare financial performance among several businesses. This market model analysis is primarily based on historical information. Financial ratios usually include liquidity, asset turnover, financial leverage, and profitability measurements.

These mathematical ratios calculate the company’s ability to meet short-term financial obligations, how efficiently the company uses business assets to generate revenues, the long-term solvency of business operations, and how well the company generates profits from revenue needs. Companies that compare their financial indicator numbers to the industry standard may find areas or operations can be improved, and thus achieve greater success from operations.

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Economic market models are tools companies use to forecast future sales or shifts in market conditions. This analysis provides important information to companies when making business decisions regarding operational expansion or accepting new business growth opportunities. Common economic models include decision trees, supply and demand, or game theory calculations. Each market model outlines specific opportunities or goals a company can focus on and attaches a probability of success to each opportunity. External factors such as competition, consumer behavior, or the current political and monetary policy can affect economic market models. These models can be quite complex, depending on the company’s operations and the size of the economic market included in the model.

Quantitative and qualitative analysis is commonly use in economic models. While quantitative analysis provides specific financial information and figures, qualitative analysis requires the personal judgment or experience of company management when making decisions.

Corporate finance uses market model analysis to assess the potential cash flows from various business opportunities. Finance models can also provide information on the available amount of financing options in the business environment. Models include net present value, return on investment, and the capital asset pricing model. Companies use these models to help choose financing methods which can help them advance business operations and limit the negative effects of high interest rates are cash outflows.

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