Download (b) Market

Market
Managerial Economics
Jack Wu
Perfect Competition






homogeneous product
many buyers
many sellers
price takers
free entry and exit
equal information
Free Entry?
Japanese Beer Market, pre-’94:
Ministry of Finance
 production licenses for minimum of 2
million liters a year
 sales licenses limited to small familyowned stores
Information
Market with differences in information not
as competitive as one where all buyers
and sellers have equal information



photocopying service
medical treatment
legal advice
Market Equilibrium, I
Price at which quantity demanded equals
quantity supplied
 when market out of equilibrium, market
forces push price towards equilibrium
Price ($ per ton-mile)
Market Equilibrium, II
a
excess supply
supply
22
b
20
equilibrium
c
0
demand
8
10
11
Quantity (Million ton-miles a year)
Market Equilibrium, III

excess supply = excess of quantity
supplied over quantity demanded


triggers price decrease
excess demand = excess of qty
demanded over qty supplied

triggers price increase
Supply Shift, I



supply shifts down (right) -> lower
price, larger quantity
supply shifts up (left) -> higher price,
smaller quantity
final equilibrium depends on
elasticities of demand and supply
Price ($ per ton-mile)
Supply Shift, II
a
original supply
b
20
19.60
60 cents
new supply
d
demand
60 cents
c
0
e
10 10.4
Quantity (Million ton-miles a year)
Price Elasticities of Demand
Extremely inelastic demand
Extremely elastic demand
original supply
b
20
new supply
19.40
c
0
60 cents
60 cents
e
10
Quantity (Million ton-miles a year)
Price ($ per ton-mile)
Price ($ per ton-mile)
demand
original supply
20
b
c
0
60 cents
new supply
demand
60 cents
e
10
10.6
Quantity (Million ton-miles a year)
Price Elasticities of Supply
Extremely inelastic supply
Extremely elastic supply
20
b
demand
0
10
Quantity (Million ton-miles a year)
Price ($ per ton-mile)
Price ($ per ton-mile)
original and new supply
a
a
20
19.40
original supply
60 cents
new supply
b
60 cents
demand
0
10
11
Quantity (Million ton-miles a year)
Supply Shift: Price Impact


price change no more than amount of
the supply shift
price change


smaller if demand is more elastic than
supply
larger if supply is more elastic than
demand
Price ($ per unit)
Promoting Retail Sales
retail supply
1.50
after wholesale price cut
a
b
retail demand
0
1
Q
Quantity (Million units a year)
Demand Shift, I



demand shifts down (left) -> lower
price, lower quantity
demand shifts up (right) -> higher price,
larger quantity
final equilibrium depends on
elasticities of demand and supply
Price ($ per ton-mile)
Demand Shift, II
supply
a 1 million
f
b
20
new demand
1 million
original demand
c
0
10
10.8
Quantity (Million ton-miles a year)
Tanker Services, 1999

OPEC production cutback




reduced demand for tanker services
raised tanker operating cost
on balance, reduced tanker rates
rates for older tankers fell more than
for newer vessels
Valentine’s Day
Nearing Valentine’s Day, price of roses
always rises much more than the price of
greeting cards. Why?
Calculating Equilibrium, I
How would 3% increase in income affect
price and sales of gasoline?
 demand



price elasticity -.23
income elasticity 0.39
supply

price elasticity 0.62
Calculating Equilibrium, II
1.
2.
3.
4.
% change in qty demanded = -0.23
%p + 0.39 x 3
% change in qty supplied = 0.62 %p
equate and solve: %p = 1.38%
% change in qty = 0.87%
Short-Run Market Equilibrium
short-run
marginal cost
short-run
average
variable cost
22
20
price
(b) Market
Price ($ per ton-mile)
Price ($per ton-mile)
(a) Individual seller
short-run
supply
1 million
c
22
20
a
short-run
demand
0
100 105
Quantity (Thousand ton-miles a year)
0
10 12
Quantity (Thousand ton-miles a year)
Long-Run Market Equilibrium
long-run
marginal cost
21
20
0
new long-run
average cost
original longrun average
cost
100
Quantity (Thousand ton-miles a year)
(b) Market
Price ($ per ton-mile)
Price ($per ton-mile)
(a) Individual seller
long-run
supply
1 million
d
21
20
a
long-run
demand
0
10 13
Quantity (Thousand ton-miles a year)
Short/Long-Run Impact
If demand/supply shifts,
 market price is more volatile in the
short run than long run
 greater change in market quantity over
the long run than short run
Pricing and Freight Cost, I


cost and freight
ex-works pricing
 How
does pricing policy affect
sales?
Price ($ per pound)
Pricing and Freight Cost, II
CF supply
25 cents
25 cents
1.50
a
ex-works supply
b
CF demand
ex-works demand
0
1
Quantity (Million pounds a year)
Retailing: Why coupons?


alternative -- cutting wholesale prices
“With coupons, prevent retailers from
getting part of price cut.”