Question

Mr. A owns 1,000 shares of General Electric common stock. If he tries to sell some, he finds he can get a price of \(\$ 61.50\) per share for all 1,000 shares. If he offers only 500 shares, he can get a price of \(\$ 61,625\) which is \(\$ 0,125\) more per share. That is, reducing his amount sold by a half, he can get a price that is higher by about \(1 / 500\). If he sought a price of \(\$ 61.75\), he would sell nothing. Mr. A considers this an insignificant rise in price as a result of withholding his supply. Is this an example of a price- takers' market? Compute \(\mathrm{Mr}\). A's marginal revenues as best you can with the given data.

Short answer

This scenario is not an example of a price-takers' market, as Mr. A's decision to reduce the quantity of shares offered leads to an increase in the price per share. This indicates that he has some influence over the prices, which is inconsistent with the definition of a price-takers' market. Furthermore, we calculated Mr. A's marginal revenue for selling an additional 500 shares to be \$61.775.

Step-by-step solution

Understanding Price Takers' Market

A price takers' market is a type of market in which buyers and sellers have no control over prices. It occurs when there is perfect competition - lots of buyers and sellers who are not able to affect the price of the good or service. In this case, it must be determined whether the increase of price by reducing the number of shares sold indicates Mr.A having influence over the prices, which would not comply with the definition of a price takers' market.

Calculating Marginal Revenue

Marginal revenue is the change in total revenue that results from selling one additional unit of a product. To calculate it, divide the change in total revenue by the change in the quantity of the product sold.

Applying the Marginal Revenue Formula to Mr. A's Data

Let's apply the formula to Mr. A's scenario. When Mr. A sells 1000 shares, the total revenue is \(1000 \times 61.50 = \$61500\). When he sells 500 shares, the total revenue is \(500 \times 61.625 = \$30612.5\). Selling an additional 500 shares (the change in quantity), Mr. A's total revenue increases by \(\$61500 - \$30612.5 = \$30887.5\) (the change in total revenue). So, Mr. A's marginal revenue for selling an additional 500 shares is \(\frac{\$30887.5}{500} = \$61.775\).

Analyzing the Results

Clearly, the price Mr. A receives per share is not constant. It increases as he decreases the quantity of shares he is offering, indicating an influence over the prices. Therefore, this doesn't faire well with the definition of a price takers' market where all participants are believed to have no influence over price. So, this scenario is not an example of a price-takers' market. And we have computed Mr. A's marginal revenue as \$61.775.

Key concepts

Perfect Competition

Understanding the nature of a perfect competition is essential in economics, as it serves as a benchmark against which other market structures can be compared. In a perfectly competitive market, there are numerous buyers and sellers, with each one being too small to influence the market price on their own. This implies that the market price is determined by the overall supply and demand in the economy; individual sellers accept this market price as given and are thus labeled price takers.

Some additional characteristics of perfect competition include:

• Homogeneous products: All products are identical, and consumers have no preference for one producer over another.
• Free market entry and exit: Firms can easily enter or leave the market without significant barriers or costs.
• Perfect information: All buyers and sellers have full knowledge of market conditions and prices.

Businesses in such markets earn just enough to cover their opportunity costs, but no more, as any excess profits would attract new entrants and push profits back to the norm.

Marginal Revenue

In financial terms, marginal revenue (MR) represents the additional income generated from selling one more unit of a good or service. It is a crucial concept for businesses as it helps determine the optimal level of output to maximize profits. To calculate marginal revenue, we look at the change in total revenue that comes from selling an incremental unit of production.

For instance, if a lemonade stand sells 10 cups of lemonade at \(1 each, their total revenue is \)10. If they sell one more cup, their revenue rises to \(11. The marginal revenue earned from this 11th cup is \)1. Under perfect competition, marginal revenue is equal to the market price since firms can sell as much as they want at the market price. However, in non-competitive markets, marginal revenue can be much lower than the price, due to factors like price discrimination or diminishing returns.

Stock Market Economics

The stock market is a classic example of how supply and demand dynamics can influence prices, even though it may not always exhibit characteristics of perfect competition. The stock market is a collection of markets where stocks (shares of ownership in businesses) are bought and sold. Economics within the stock market is driven by information, expectations, and the interplay of hundreds of thousands of buyers and sellers attempting to maximize their gains and minimize their losses.

Factors that affect stock prices include:

• Corporate performance: Profit reports, growth forecasts, and other performance indicators can lead to increased or decreased demand for a company's stock.
• Economic indicators: Interest rates, employment rates, and GDP growth can steer investors' expectations and influence stock demands.
• Investor sentiment: Public perception and investor confidence can play a significant role in stock valuation.

The stock market, while influenced by supply and demand, deviates from perfect competition, as certain investors may exert significant influence on stock prices, and information asymmetry can occur.

Supply and Demand

Perhaps the most fundamental concepts in economics are supply and demand. They form the basis of economic understanding, encapsulating the behavior of markets and price determination. Supply represents how much the market can offer - the quantity of a good or service that producers are willing to sell at various prices over a certain period. Demand represents how much (quantity) of a product or service is desired by buyers.

The price of a good or service is determined by its supply and demand in a market economy. The core principle is that if demand exceeds supply, prices tend to rise, while if supply exceeds demand, prices tend to fall. This equilibrium ensures that the allocation of goods and services in a market is optimized, with no waste of resources. However, it is important to note that various factors can affect supply and demand, including policy decisions, market expectations, and changes in consumer tastes.