Assignment for Managerial Economics
Find an actual news story that talks of either a demand shock or a supply shock
(not Covid-19 related) and show (using demand-supply graphs) the effect on
equilibrium price. What is the nature of the market - perfectly competitive,
oligopolistic or a monopoly? Submit a write-up of max 500 words
Answers
Answer: Stock Market Crash 1929
{which made all the old theories wrong }
Stock market crash of 1929, also called the Great Crash, a sharp decline in U.S. stock market values in 1929 that contributed to the Great Depression of the 1930s. The Great Depression lasted approximately 10 years and affected both industrialized and nonindustrialized countries in many parts of the world.
During the mid- to late 1920s, the stock market in the United States underwent rapid expansion. It continued for the first six months following President Herbert Hoover’s inauguration in January 1929. The prices of stocks soared to fantastic heights in the great “Hoover bull market,” and the public, from banking and industrial magnates to chauffeurs and cooks, rushed to brokers to invest their liquid assets or their savings in securities, which they could sell at a profit. Billions of dollars were drawn from the banks into Wall Street for brokers’ loans to carry margin accounts. The spectacles of the South Sea Bubble and the Mississippi Bubble had returned. People sold their Liberty Bonds and mortgaged their homes to pour their cash into the stock market. In the midsummer of 1929 some 300 million shares of stock were being carried on margin, pushing the Dow Jones Industrial Average to a peak of 381 points in September. Any warnings of the precarious foundations of this financial house of cards went unheeded.
Prices began to decline in September and early October, but speculation continued, fueled in many cases by individuals who had borrowed money to buy shares—a practice that could be sustained only as long as stock prices continued rising. On October 18 the market went into a free fall, and the wild rush to buy stocks gave way to an equally wild rush to sell. The first day of real panic, October 24, is known as Black Thursday; on that day a record 12.9 million shares were traded as investors rushed to salvage their losses. Still, the Dow closed down only six points after a number of major banks and investment companies bought up great blocks of stock in a successful effort to stem the panic that day. Their attempts, however, ultimately failed to shore up the market.
The panic began again on Black Monday (October 28), with the market closing down 12.8 percent. On Black Tuesday (October 29) more than 16 million shares were traded. The Dow lost another 12 percent and closed at 198—a drop of 183 points in less than two months. Prime securities tumbled like the issues of bogus gold mines. General Electric fell from 396 on September 3 to 210 on October 29. American Telephone and Telegraph dropped 100 points. DuPont fell from a summer high of 217 to 80, United States Steel from 261 to 166, Delaware and Hudson from 224 to 141, and Radio Corporation of America (RCA) common stock from 505 to 26. Political and financial leaders at first affected to treat the matter as a mere spasm in the market, vying with one another in reassuring statements. President Hoover and Treasury Secretary Andrew W. Mellon led the way with optimistic predictions that business was “fundamentally sound” and that a great revival of prosperity was “just around the corner.” Although the Dow nearly reached the 300 mark again in 1930, it sank rapidly in May 1930. Another 20 years would pass before the Dow regained enough momentum to surpass the 200-point level.
Perfect competition
In a perfectly competitive industry, all firms are price takers and this means they cannot control the market price of their product. Also, all firms have a relatively small market share and the consumer does not prefer one product to another.
Monopoly
In a monopoly, there is only one producer. The sources of a monopoly power could be big sunk costs, patents, trade secrets (Coca-Cola), regulations, or simply a natural monopoly due to economies of scales (railways). A monopolistic firm’s marginal revenue is calculated as Marginal revenue = ΔTotal revenue / ΔQuantity.
An oligopoly is a state of limited competition, in which a market is shared by a small number of producers or sellers. If firms within an oligopolistic industry have cooperation and trust with each other, then they can theoretically maximize industry profits by setting a monopolistic price.
If oligopolies collude successfully, they will set price and output such that Marginal revenue = Marginal cost (MR = MC) for the industry overall.
You could also simply think of an oligopoly as a hybrid between a perfectly competitive market and a monopolistic market