Download IMBA Managerial Economics Lecture Five Fall 2015

MARKET
IMBA NCCU
Managerial Economics
Jack Wu
CASE: TANKER SERVICE MARKET, 2005

Impact of
Increasing oil prices
 Increasing China imports
 More stringent tanker standards

CHARACTERISTICS OF PERFECTLY
COMPETITIVE MARKET
homogeneous (identical) product
 many small buyers
 many small sellers
 price takers (No influence on price)
 free entry and exit (No barriers)
 Both buyers and sellers share equal (symmetric)
information

DIFFERENTIATED OR HOMOGENEOUS?
In market where products are differentiated,
competition is not as keen as that in a market
where products are homogeneous.
 Compare

mineral water – differentiated
 gold – pure commodity

NO MARKET POWER
Many small buyers
 Many small sellers
 Both buyers and sellers have no market powers.
 Both buyers and sellers are price takers.


Note: buyer/seller with market power can influence
market conditions
NO BARRIERS

Free entry and exit
No entry barriers to potential competitors
 No exit barriers to existing sellers

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 family-owned
stores
SYMMETRIC OR ASYMMETRIC
INFORMATION


Market with differences in information not as
competitive as one where all buyers and sellers
have equal information
Compare
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)
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, 2005

Increasing oil prices


Increasing China imports


Higher costs for tanker services  supply curve up
Higher demand for tanker services
More stringent tanker standards

Non-complying tankers scrapped  supply curve
shifted to left
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 ($per ton-mile)
(a) Individual seller
long-run
supply
1 million
d
21
20
a
long-run
demand
0
10 13
Quantity (Thousand ton-miles a year)
SHORT/LONG-RUN IMPACT
If demand/supply shifts,
 market price is more volatile in the short run
than long run
 greater change in market quantity over the long
run than short run
DEMAND INCREASE
DEMAND REDUCTION
PRICING AND FREIGHT COST, I


cost and freight
ex-works pricing
 How
does pricing policy affect
sales?
Price ($ 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.”
