Final answer:
In the over-the-counter market, 'spread' refers to the difference between the bid and asked prices, which represents the transaction cost of trading in the market. A larger spread indicates a higher transaction cost, whereas a narrower spread suggests lower costs. The correct answer is A. bid and asked prices.
Step-by-step explanation:
In the context of the over-the-counter (OTC) market, the term "spread" refers to the difference between the bid price, which is the price a buyer is willing to pay for a security, and the asked (or ask) price, which is the price a seller is willing to accept for the security. This spread can represent the transaction cost of trading, as a wider spread indicates a higher cost to complete a transaction while a narrower spread suggests lower costs. The market makers or brokers in OTC trading often profit from this spread.
Understanding the concept of spread is important as it is an indicator of liquidity in the market. A larger spread might indicate a less liquid market, as there are fewer buyers and sellers at any given moment, which can lead to higher transaction costs. Conversely, a narrow spread typically signifies high liquidity, meaning that financial assets can easily be bought or sold without causing a significant movement in the price.
Related concepts such as price floor, producer surplus, quantity demanded and supplied, and shift in demand are also key to understanding market dynamics, but they do not directly relate to the spread in OTC markets. In case of price floors, it's a regulatory boundary on how low prices can go. Producer surplus is the profit producers make over their minimum acceptable price. Quantity demanded and quantity supplied deal with the number of goods buyers want and sellers offer at certain prices, respectively. Shift in demand refers to changes in demand due to factors other than price.
The correct answer to the student's question is A. bid and asked prices.