This essay Date: 12/14/00 has a total of 693 words and 4 pages.
To: Securities and Exchange Commission
From: Bryan Economic Analysis, Inc.
Re: Report on Stock Prices of Internet Companies
Priority: Urgent & Confidential
In Response to the SEC memorandum regarding the adoption of the policy of capping the stock prices of internet-related companies at 90% of their current value, Bryan Economic Analysis, Inc. has come to the following conclusions. Bryan Economic Analysis, Inc. agrees that if something is not done regarding the price of stock of internet-related companies, a drastic drop in the price of these stocks will eventually occur. This drop in the price of these stocks will have an incredibly adverse effect on the state of the US economy and the world stock market in general. The problem of this venture would be that capping of stock prices will result in temporary inefficiencies and a shortage in the market for stocks. However, the capping of stock prices is highly necessary to the future of the US economy. If the prices of these stocks continue to rise without check, the inevitable drop would cause the US to enter into an era of deep recession.
The fate of the US economy depends on the capping of the stock prices of internet-related companies. If something were not done, the US economy and the world’s financial markets would experience devastating consequences. This report intends to show why it is necessary to put a cap on the price of stock of internet-related companies for the continuation of a prosperous economy, even though short-term inefficiencies will occur.
If the SEC were to put a cap on the price of stock of internet-related companies, several things would occur. First of all, the price would be lowered by 10%, causing an increase in the quantity of stock demanded, because buyers are more willing to buy at the lower price. The demand curve itself would not shift; rather there would be movement along the demand curve.
Second, the lowering of the stock price by 10% would cause a decrease in the quantity of stocks supplied, because the sellers are less willing to sell at the lower price. Again, this doesn’t involve a shift in the supply curve, only movement along it.
The effect of adopting this policy would be the on come of a shortage in the market. The quantity demanded has risen, and the quantity supplied has fallen in comparison to the quantities demanded and supplied before the price cap. In this situation, there is not enough supply to meet the demand of the economy. This shortage means good news for some, and bad news for others.
Who Gets Hurt? Who Benefits?
The stockholders who own the stock of internet-related companies will be adversely affected, because their stocks will be worth less (only 90% of their original price). The other group that will be adversely affected is the group of people who want to buy stock at the new price, but can’t because of the scarcity. At the original price, these people could have bought the stock, but because the price was lowered beneath the equilibrium, they no longer have the opportunity. There is, however, a group who benefits from the price cap. These are the people who want to buy stock, and are still able to buy. These people benefit from the new lower price caused by the price cap.
Normally in a situation in which the quantity demanded is so much more than the quantity supplied, the price would rise until demand once again equaled supply. The higher price would decrease quantity demanded and increase quantity supplied until the two were at equilibrium. However, because of the price cap, the price of stock will not exceed 90% of its original price.
It is obvious to Bryan Economic Analysis, Inc. that the price cap for stocks of internet-related companies in highly necessary for the continuation of a stable and prosperous economy. If the rise of the price of internet-related companies were to continue to rise, the economy would certainly feel the effects of a drastic drop in the stock market, causing a major recession in the US economy.
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