South-Western College Publishing - Economics  
Some NASDAQ Millionaires Are Now Half-Millionaires
Subject Comparative statics
Topic Supply and Demand
Equilibrium
Key Words Stock market, technology companies, investors, wealth, mortgage payments, labor market, stock options, price, profit, companies, competitiveness, market, recruits
News Story

April has seen the stock markets tumble, particularly the NASDAQ, which includes a lot of technology companies. As a result, investors have seen their paper wealth diminish rapidly.

The result is that people are delaying buying homes, or are nervous about being able to meet their mortgage payments on their newly-purchased expensive homes. In the labor market, workers are contemplating quitting Internet companies because the promise of stock options (where workers buy stock at a fixed price in the future, and sell it at reigning prices to make a profit) is less attractive. Also, investors are likely to put less money into dot.com companies.

Consequently, companies are urging workers to focus on the underlying competitiveness of their firms and the long-term prospects for the companies, not on the short-run gyrations of the market. Some companies are also making recruits sign agreements limiting their ability to leave and work for a competitor, and only giving stock options that do not vest for a long time.

(Updated May 1, 2000)

Questions
1. Draw a supply and demand diagram of the market for homes. Mark the initial equilibrium.
  a) The rapid rise in the stock market affected consumer behavior. Which determinant of demand was primarily affected?
  b) Illustrate the effect on the equilibrium price and quantity of homes traded.
. c) Now the market has tumbled, what will happen to the equilibrium price and quantity of homes?
  d) Companies are encouraging workers to take a long-term view of their wealth. If employees are convinced this is appropriate, how will this affect the changes in c)?
2. Labor markets can be analyzed in the same way as product markets. Since the price and quantity of labor become the wage rate and the employment level, the labor supply and demand curves determine the equilibrium wage and employment level. Draw a diagram of the labor market for technology sector workers.
  a) The news story states that workers are finding the rewards of working in technology companies relative to elsewhere are less attractive than they used to be. How will this affect the equilibrium wage and employment level? Illustrate on your diagram and describe what is likely to happen.
  b) If workers sign the agreements limiting their ability to move to a competing firm, how would your prediction concerning the equilibrium wage and employment level in a) be different?
Source Stephanie Armour, "Wealth slip slidin' away," USA Today, April 6, 2000.

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