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Markets and Competitive Equilibrium
Lecture 5
In This Lecture
• Market Equilibrium and the Forces Moving
the Market Toward Equilibrium
• The Hypothesis of a Single Price
• Changes in Demand and Supply
• Case Study--Gasoline Prices
• Case Study--Scalping ND Football Tickets
Demand and Supply Review
• Demand
Price
–
S
–
Given a price, how much will be
demanded?
Given a quantity, what is the
maximum amount would the
demanders be willing to pay?
PH
• Supply
–
–
Given a price, how much will be
supplied?
Given a quantity supplied, what is
the minimum price per unit would be
acceptable to the suppliers?
D
• Is PH an Equilibrium Price?
QD
QS
Donuts
Too High of a Price Results
in Excess Supply
Price
•
At the price, PH, there is more of
the good being supplied than
demanded
•
Consequently, these suppliers
who can’t sell at PH will offer
their output at a slightly lower
price -- have a sale.
•
The sale will take away
purchases from competitors
who will be forced to lower their
prices to maintain sales
•
Price will fall!
S
PH
D
QD
QS
Donuts
Too Low of a Price Results
in Excess Demand
Price
S
•
At the price, PL, there is more of
the good being demanded than
supplied
•
Consequently, supplies will sell
out and still have customers
wanting to buy product at PL.
•
Price will rise!
PL
D
QS
QD
Donuts
Equilibrium Price
Price
•
At PE, the quantity demanded is
equal to the quantity supplied
•
At this price, everyone’s wishes
are being met -- no one has
incentive or desire to do
something different
•
If nothing else changed, we
would expect the price and
amount of donuts produced and
sold to be constant over time
S
PE
D
QE=QS=QD
Donuts
Social Function of Prices
• Prices coordinate decisions between
sellers and buyers
• Will everyone be on the same page?
Single Price
In a significant number of situations, individuals are charged
different amounts for the same good (car purchases). Yet we
would expect there to be a single price in a competitive market.
Why?
IF everyone knew the rate (price) that others were trading, why
would they every pay more than others were paying? Why would
sellers accept less? If they did then the multiple prices could not be
an equilibrium since they would want to do something else.
We are assuming perfect information on the part of buyers and
sellers of the goods.
Alternatives to Price Rationing
• Prices ration scarce goods to those who
are willing and able to pay.
• What other rationing mechanisms are
there?
• Can these alternatives produce
outcomes equal in efficiency?
Increase in Demand
Price
So
•
Increase in Demand
•
At existing price, Po, there is
excess demand -- customers
want more of the good
•
Both price and the quantity
supplied rise, a movement
along the supply curve
•
New Equilibrium
P1
Po
D1
Do
Qo
Q1
Donuts
– Higher equilibrium price
– Higher equilibrium quantity
Decrease in Demand
Price
So
Po
•
Decrease in Demand
•
At existing price, Po, there is
excess supply -- there are
goods on the shelf -- sale!
•
Both price and the quantity
supplied fall, a movement
along the supply curve
•
New Equilibrium
P1
D1
Q1 Qo
Do
Donuts
– Lower equilibrium price
– Lower equilibrium quantity
Decrease in Supply
Price
•
Decrease in Supply
•
At existing price, Po, there is
excess demand -- customers
want more
•
Price rises and quantity
demanded falls, movement
along the demand curve
•
New Equilibrium
S1
So
P1
Po
Do
Q1 Qo
Donuts
– Higher equilibrium price
– Lower equilibrium quantity
Increase in Supply
Price
So
•
Increase in Supply
•
At existing price, Po, there is
excess supply -- inventories
rise -- sales
•
Price falls and quantity
demanded increases,
movement along the demand
curve
•
New Equilibrium
S1
Po
P1
Do
Qo
Q1
Donuts
– Lower equilibrium price
– Higher equilibrium quantity
Nominal Gasoline Prices
Real Gasoline Prices
Why has the price of gas risen?
• Increase in the price of crude oil (supply consideration)
– Decrease in oil reserves?
– Instability in oil producing regions
• No increase in the refinery capacity (supply considerations)
• Increase in the demand for gasoline
– Economic Growth in China and other developing nations
– Our own growth
Monthly Gas Prices
(1992-1996)
Explaining Monthly Changes
• Summer Vacations -- Drive More
(Demand Shift)
• In May, refineries shut down for
maintenance and shift over to seasonal
blends (Supply Shift)
Seasonal Changes
SM
Price
SS
SW
PS
PW
DS
DW
Gallons
Variation in Gas Prices
over the Week
1. Why does the price of gas rise during the
weekend?
a. Demand considerations
b. Supply considerations
2. Are the increases justified? That is, are
they fair to the consumer?
ND Football Ticket Policy
• What is ND’s pricing strategy?
– Tickets sales account for ~90% of athletic budget
– Opposed to filling the stadium with season ticket
holders; unfair to alums who live far away
• 4,000 season ticket holders account for ~15,000 seats
– Uses a lottery to fill remaining seats
• Refundable Application fee per game:
– 5 yrs < $50 < 50 yrs
– $100 all other graduating classes
• Application fees are sent to Development Office
ND Football Ticket Policy
• What are the determinants of ND’s printed
ticket prices?
– Explicit philosophy: Do NOT let ticket prices reach
market price
– Uniform price regardless of location
• What is ND’s resale policy?
– Resale above the printed ticket price is illegal and
subject to penalty
• Resale is “unethical.” The football game is “our product.”
Others should not profit.
The Secondary Market for ND
Football Tickets
• Why is ticket scalping inevitable?
– Hint: Why are ticket available for resale? Who
are the sellers
• Who are the buyers in the secondary market?
• Is the secondary market competitive?
• Does the secondary market improve the
allocative efficiency of the market for ND
football tickets?
Notre Dame Ticket Scalping
• What we learned from interviews with
scalpers
– Scalpers are both buy and sell
– Their strategy is to buy low and sell high
– There are two categories of scalpers
• Corporate brokers (PJ Tickets, Victory Tickets)
• Amateurs (High school buddies)
– Corporate brokers buy from ticket holders hoping
to make a profit
– Amateurs buy from ticket holders hoping to get
their money back.
Notre Dame Ticket Scalping
Amateurs:
– Their profit margin goal is $15 per sale
– Take turns like car dealers. The lowest price is
quoted by the up guy.
– The reduce risk, they hold no more than 10 tickets
at a time
– Each amateur sells 50 to 100 tickets a game and
pocket $750 TO $1,500 in profits.
– Guesstimate of the number of tickets scalped per
game: ~3,000
Assignment for Next Lecture
• Do Homework 4 on ‘Homework Assignment’
by Wednesday at 5 pm
• Read Chapter 4
• Topics Next Time
– The Market Strikes Back (It’s difficult to control the
market)