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Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh Review of Economics Session 1 Markets and market processes To create value, organisations need to understand their environment Two levels of environment: • The contextual environment (remote/macro). • The transactional environment. Markets are part of the organisation’s transactional environment We look at markets in a broad, abstract way. Analysis applies to commercial and not-for-profit organisations. But remember that events and processes in the contextual environment impact the organisation through market forces. Markets For the moment, forget individual businesses Think about the all suppliers - the “industry” The market process • A market is a process of interaction between buyers and sellers • Both sides matter. Objectives of market participants • Consumers (demanders) seek to maximise value from the satisfaction of their wants and needs • Producers (suppliers) seek to maximise added value Demand and supply analysis We can analyse markets using the notions of Market demand and Market supply These turn out to give us a tremendously powerful way of marshalling our thoughts. Market demand for a product … depends on customers’ willingness to pay it. This, in turn, depends on • tastes or preferences • price relative to other products • consumers’ income Market supply of a good … depends on the how many businesses are willing and able to sell products at various prices. This, in turn, depends on • input/raw material prices • the state of technology • the price of the good relative to the prices of other goods MARKET EQUILIBRIUM A market is in equilibrium when supply and demand are balanced, so that the price has no tendency to change from its current level. Equilibrium Price and Quantity Traded Price of product S P1 D Q1 Quantity demanded/supplied of product per time period Excess demand, excess supply and price adjustments Price of good X S Excess supply P2 P1 D QD Q1 Qs Quantity demanded/supplied of good X per time period Does this work for desktop PC’s? Price of PC S P1 D Q1 Quantity demanded/supplied of PCs per time period CHANGES IN MARKET PRICE ARISE FROM Anything that changes the conditions of demand or Anything that changes the conditions of supply An increase in demand D2 Price of good X D1 S P2 P1 Q1 Q2 Q3 Quantity demanded/supplied of good X per time period LET US TRY TO DEDUCE WHAT HAPPENS TO MARKET PRICE IN THE FOLLOWING CASES: • The product has a successful advertising campaign (by all competitors together) • The economy has an exchange rate appreciation • Wage costs rise • Technological progress takes place Applications of market analysis • The market for crude oil and supply side interruptions. • The market for heroin: supply side and demand side interventions • The UK National Health Service and waiting lists 1990: The Gulf war and its effect on the price of crude oil S, post-war S, pre-war $10 D 52 Million barrels/day 1990: The Gulf war and its effect on the price of crude oil S, post-war S, pre-war $40 $10 D 48 52 Mill b/day Price Supply P1 Demand Q1 The market for heroin Quantity per period Price Supply P2 P1 Demand Q2 Q1 The market for heroin Quantity per period Price Supply P2 New Supply P1 Demand Q1 The market for heroin Quantity per period Price Market supply P1 Demand Q1 A private health service Quantity per period Price Imputed market supply P1 P2 Demand Q1 Q2 Q* A publicly provided health service Quantity per period Price Imputed market supply P1 New demand P2 Demand Q1 Q2 Q 3 Quantity per period A health service dilemma: more supply adds to demand Reading and further issues Perman and Scouller, Business Economics, Chapter 2 Task 1 • Select one business that one organisation of which you are aware is involved in. • What market does this business operate in? Answer these questions for the market as a whole, not a single business • Using PEST analysis, identify any important changes in external conditions that might affect market supply or demand. • Which, if any, of these changes affect demand conditions in that market? • Which, if any, of these changes affect supply conditions in that market? • Using a supply and demand sketch diagram, illustrate how these changes might affect market demand and supply (this analysis need only be qualitative). Chapter 9 Applying the Competitive Model Figure 9.1 Consumer Surplus Figure 9.1a Consumer Surplus Figure 9.1b Consumer Surplus Figure 9.2 Fall in Consumer Surplus From Roses as Price Rises Table 9.1 Effect of a 10% Increase in Price on Consumer Surplus (Revenue and Consumer Surplus in Billions of 1999 Dollars) Page 278 Solved Problem 9.1 Figure 9.3 Producer Surplus Figure 9.3a Producer Surplus Figure 9.3b Producer Surplus Page 281 Solved Problem 9.2 Figure 9.4 Why Reducing Output from the Competitive Level Lowers Welfare Figure 9.5 Why Increasing Output from the Competitive Level Lowers Welfare Figure 9.6 Effect of a Restriction on the Number of Cabs Figure 9.7 Welfare Effects of a Specific Tax on Roses Figure 9.8 Welfare Effects of a Per-Unit Subsidy on Roses Figure 9.9 Effect of Pricing Supports in Soybeans Page 298 Solved Problem 9.3 Page 300 Solved Problem 9.4 Figure 9.10 Loss from Eliminating Free Trade Figure 9.11 Effect of a Tariff (or Quota) Table 9.2 Welfare Cost of Trade Barriers (millions of 1999 Dollars) Adobe Acrobat 7.0 Document