Page 157 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Figure 9.12

Caselet The Stock Market

he stock market is very close to a perfect competitive market. The price of a stock
usually is determined by the market forces of demand and supply of the stock and
Tindividual buyers and sellers of the stock have little effect on price (they are price-
takers). Resources are mobile as stock is bought and sold frequently. Information about
prices and quantities is readily available. Funds flow into stocks and resources flow into
uses in which the rate of return. Thus stock prices provide the signal for efficient allocation
of investment in the economy. However, imperfections occur here also though the stock
market is very close to a perfect competition, for example, sale of huge amount of stocks
by a large corporation will certainly affect (depress) the price of its stocks.

Case Study Perfect Competition: The U.S. Bicycle Industry

(In words of J Townley)
I had an epiphany, as in a sudden insight into reality, in May at a meeting where a long
time friend in the industry offered the opinion that the U.S. bicycle industry is in a classic
state of perfect competition. My immediate response was "...that sounds like a good thing!"
My friend, who went back to graduate school after working in a bike shop, for a major
component manufacturer and prominent bicycle brand quickly responded with "...no, you
don't understand." He went on to explain that when he studied economics in graduate
school he became aware of perfect competition which is a term of art in economics for the
most competitive market imaginable - one where the companies and businesses realize
the bare minimum profit necessary to keep them in business.
At the time we were in a meeting together with six other people from the bicycle
industry - and the room went silent for a time. As the group started to discuss the notion

Contd...

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