COMM 121 Chapter Notes - Chapter 4-5: Net Present Value, Perfect Competition, Cash Flow
Document Summary
Market clearing means that the total amount lent to the market, say million, equals the total amount borrowed. We assume, then, in all of our subsequent discussions and analysis that the financial market is perfectly competitive. It is the condition of perfectly competitive financial markets (or, more simply, perfect markets). The following conditions characterize perfect financial markets: trading is costless. Information about borrowing and lending opportunities is readily available: there are many traders, and no single trader can have a significant impact on market prices. This process of striking a deal in one market and an offsetting deal in another simultaneously and at more favorable terms is called arbitrage; the individuals who do it are called arbitrageurs. The financial markets give the individual, the corporation, or even the government a standard of comparison for economic decisions. This benchmark is critical when investment decisions are being made.
