Perfectly Competitive Market and the Characteristics of New York Stock Exchange - Essay Example

? Perfect Competition Introduction A market is a place where buyers and sellers meet each in order to exchange goods and services. There are different kinds of markets and these markets are differentiated on the basis of their characteristics. Market types include: perfectly competitive markets where there are several buyers and seller, oligopolistic markets where there are limited number of sellers and monopolistic markets where there are only one to two sellers. In some markets, the sellers are price takers, while in other markets the buyers are price takers. This writing will focus on markets that are perfectly competitive in nature. This writing will focus on various characteristics of perfectly competitive markets and how buyers and sellers behave in such markets. The first section of the assignment will focus on the reaction of sellers to changes in demand for their goods and services. The second section of the writing will compare and contrast the characteristics of a perfectly competitive market with the characteristics of New York Stock exchange (NYSE). Body According to the law of demand when the demand for a product increases, the price of the product even elevates and vice-verse. Due to these changes in demand the marginal revenue that is being earned by a particular industry even alters. In order to analyze the changes that organizations in a perfectly competitive market experience as a result of changes in demand for a product, let us assume that the product being sold is bread. Let’s assume that according to research, eating brown bread helps individuals in preventing diabetes. Such revelations positively impact the demand for particular product. Let’s assume that the bread industry is a perfectly competitive industry and is currently experiencing long-run equilibrium at a price of $1.7 per loaf of bread and the value of the economic profit is equivalent to zero. Figure 1 Figure 1 is a depiction of short as well as long run adjustment experienced by a firm as well as market under perfect competition. The figure shows that in case of market the price of a loaf of bread is $1.7 when the quantity demanded for the product is at Q1 and in case of an organization that sells loaf of bread the market price of $1.7 is the organization’s marginal revenue which is at MR1. The figure shows that currently there is only one organization in the market. Since the new research suggests that there is health benefit of brown bread, the demand for brown bread increases which is depicted in figure 1 through a shift in the demand curve from D1 to D2. Due to this increase in demand, there is an increase in the price of the product and the price of the product elevates from p1 ($1.7) to P2 ($2.3) and this leads to an increase in the marginal revenue of a single firm operating in a market from MR1 to MR2. Due to this increase in price, the organization even increases its output from q1 to q2 in order to meet consumer demand in the short run (Douglas, 2011, p.615). Notice that the shaded region represents the economic profit that is experienced by the organization in the short run and similar profit will be experienced by other firms in the market in the short run. Since the market is perfectly competitive in nature and there are no barriers to entry or exit, the high stream of economic profit will attract more organizations to enter the market so they can even earn the profits being offered by the recent increase in demand. New organization s will enter the market and this would lead to an increase in the quantity supplied by the entire industry as more and more organizations will enter the market, more and more supply will elevate. New entrants will continue to enter the market as long as their entrance is resulting in an economic profit. Figure one depicts a shift in the supply curve from S1 to S2 which is a reflection of more firms entering the market. Due to this increase in supply, the price of the loaf of bread will start declining in the longer run and thus it will eventually match the price at which the load of bread was being offered at the price of $1.7 (P1). Thus in the long run, due to decrease in the price of the product (loaf of bread), the supplier will cut down on its production and the economic profits that was being earned by the organizations in the market will return back to zero (Sexton, 2013, p.325). In case of perfectly competitive markets, there are more than one organization selling the same good, the quantity will not decline and it will rather increase to Q3 as shown in figure 1. Due to a reduction in price levels, all the firms in the market will experience a downward sloping marginal revenue curve and organizations will end up experiencing losses and they will start leaving the market for other profitable opportunities in the longer run. This exit of organizations from the market will again lead to a decrease in quantity supplied and will result in an increase in prices. A perfectly competitive market model is hard to locate in the real world but several characteristics of the New York Stock Exchange makes the stock exchange a strong contender of being considered as a perfectly competitive market. One of the main assumptions of perfectly competitive markets is that there are countless numbers of buyers and sellers within the market who have the ability as well as the will power to purchase a particular good or service at any given price and similarly there are various stock options available in the New York Stock Market that are being sold at different prices within the market (Hirschey, 2009, p.382). According to NYSE (New York Stock Exchange) a total of 2800 companies are listed on the stock market, this means that a total of 2800 companies are selling their stock in NYSE (Nyse.com, 2013). On 22nd June of 2013, a total of 5.5 billion shares were traded on the NYSE, this means that the huge number of buyers in the stock market bought as well as sold nearly 5.5 billion shares on 22nd June, 2013(Nyse.com, 2013). Another important characteristic of the NYSE that makes it a perfectly competitive market is that there is no barrier to entry and exit for the sellers. This means that any organization meeting the standards and the guidelines of NYSE can start selling their shares on the stock exchange. Organizations operating in a perfectly competitive market are regarded as price takers instead of price markers. This means that the price of the product being sold by the competitors is not decided by the sellers themselves, instead the price of the product is decided by the forces of demand and supply (Whitman, 1999, p.141). This means that the price of the product being sold increases when the demand for a particular good or service increases and the price declines when the demand for the good and service declines. In the case of NYSE, when stock exchange investors demand more of a particular stock, the price of the stock increases and declines when the demand for a particular stock declines. But the problem with NYSE is that at times some investors join hands together and they increase the price of a particular share by purchasing high quantities of the share. This attracts other buyers to purchase the same stock, when other investors gain interest in the stocks, those who joined hands together to raise the price of stock start selling their stocks and offload all their stocks on smaller investors. Another feature of perfect markets is that the sellers have a relatively smaller market share and cannot influence the price of the entire market. Same is true in the case of NYSE as there are several sellers who cannot control market’s direction. But if few of them join together, they can manipulate individual shares being traded on the stock market. The individual shares of individual companies being sold by different sellers on the stock market are similar or homogenous in nature. Due to this sellers do not have enough power to influence the market. Conclusion In a perfectly competitive market where there is no barrier to entry or exit, companies tend to make economic profits due to increase in demand for a particular product in the short run. But in the long run, more sellers enter the market and quantity supplied increases, this results in decline in economic profits as the price of the product even declines due to increase in supply. The prices decline and organizations start making zero economic profits and sellers in such market are profit maximizers so they exit the market in search of new profitable markets in the long run. New York Stock Exchange is a close example of perfectly competitive market as it shares various features of perfect markets. In NYSE there are huge number of buyers and sellers and the price of the stocks being sold is decided by the forces of demand and supply. References Douglas Bernheim, B. and Whinston, M. 2011. Microeconomics. New Delhi: Tata McGraw Hill. Hirschey, M. 2009. Managerial economics. Mason, OH: South-Western Cengage Learning. Nyse.com. n.d.. NYSE Group, Inc.. [online] Available at: http://www.nyse.com/content/faqs/1050241764950.html [Accessed: 12 Aug 2013]. Sexton, R. 2013. Exploring microeconomics. Mason, OH: South-Western Cengage Learning. Whitman, M. 1999. Value investing. New York: Wiley. Read More