Question 2 (

Case Study - Competition in the New York Stock Market:

The for market for stocks traded on the New York and other major stock exchanges is a close as we come today to a perfectly competitive markets. In most cases, the price of a particular stock is determined by the market forces of demand and supply of the stock, and individual buyers and seller of the stock have an insignificant effect on price (i.e. they are price takers). All stocks within each category are more or less homogenous. The fact that a stock is bought and sold frequently is evidence that resources are mobile. Finally, information on prices and quantities traded is readily available.

In general, the price of a stock reflects all the publicly known information about the present and expected future profitability of the stock. This is known as the efficient market hypothesis. Funds flow into stocks, and resources flow into uses in which the rate of return, corrected for risk, is highest. Thus, stock prices provide the signals for the efficient allocation of investments in the economy. Despite the fact that the stock market is close to being a perfectly competitive market, imperfections, occur even here. For example, the sale of $1 billion worth of stocks by IBM or any other large corporation will certainly affect the price of its stocks. Furthermore, stock prices can sometimes become grossly overvalued and thus subject to a subsequent steep correction. This is, in fact, what happened in the New York Stock Exchange at the end of the 1990.

Today more and more Americans trade foreign stocks, and more and more foreigners trade American stocks. This has been the results of a communications revolution that linked stock markets around the world into a huge global capital market and around the clock trading. Although this provides immense new earning possibilities and sharply increased opportunities for portfolio diversification, it also creates the danger that a crisis in one market will quickly spread to other markets around the world. This actually happened when the collapse of the New York Stock Exchange in October 1987 caused sharp declines in stock markets around the world. It happened again 10 years in 1997. In 2002, sharp declines in the New York stock market quickly spread to other stock markets around the world. It happed again in 2008 as a result of the financial crisis triggered by the subprime mortgage problem in the U.S. housing market. Indeed, global markets securities, featuring automated, round-the-world, round-the-clock trading, could eventually eclipse Wall Street's capital-raising dominance.

a)Analyse the different market structures.

b)Why New York and other stock markets are considered to a perfectly competitive markets? Explain.

c)Explain what determines the price and quantity in a perfectly competitive market.