MARKET IMBA NCCU Managerial Economics Jack Wu
Mar 31, 2015
MARKETIMBA 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
0
20
22
8 10 11
supply
demand
a
b
c
equilibrium
excess supply
Quantity (Million ton-miles a year)
Pri
ce (
$ p
er
ton
-mil
e)
MARKET EQUILIBRIUM, II
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
0
19.60
20
10 10.4
original supply
new supply
demand60 cents
60 cents
c e
b
d
Quantity (Million ton-miles a year)
Pri
ce (
$ p
er
ton
-mil
e)
a
SUPPLY SHIFT, II
0 10
19.40
20
original supply
new supply
demand
60 cents
60 centsc
b
0 10 10.6
20 new supply
original supply
demand
60 cents
60 centsb
c
Extremely inelastic demand Extremely elastic demand
Quantity (Million ton-miles a year) Quantity (Million ton-miles a year)
Pri
ce (
$ p
er
ton
-mil
e)
Pri
ce (
$ p
er
ton
-mil
e)
e e
PRICE ELASTICITIES OF DEMAND
0
20
10
demand
a
b
original and new supply
0 10 11
19.40
20 60 cents 60 cents
a
b original supply
new supply
demand
Pri
ce (
$ p
er
ton
-mil
e)
Pri
ce (
$ p
er
ton
-mil
e)
Quantity (Million ton-miles a year) Quantity (Million ton-miles a year)
Extremely inelastic supply Extremely elastic supply
PRICE ELASTICITIES OF SUPPLY
0
1.50
1
retail supply
a
Quantity (Million units a year)
Pri
ce (
$ p
er
unit
)
after wholesale price cut
retail demand
b
PROMOTING RETAIL SALES
Q
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
0
20
10 10.8
supply
new demand
original demand
1 million
af
b
c
1 million
Quantity (Million ton-miles a year)
Pri
ce (
$ p
er
ton
-mil
e)
DEMAND SHIFT, II
TANKER SERVICES, 2005
Increasing oil prices Higher costs for tanker services supply curve
up Increasing China imports
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. % change in qty demanded = -0.23* p % + 0.39 x 3%
2. % change in qty supplied = 0.62* p %3. equate and solve: p % = 1.38%4. % change in qty = 0.87%
0
20
22
100105
price
short-runaveragevariable cost
short-runmarginal cost
Quantity (Thousand ton-miles a year) Quantity (Thousand ton-miles a year)
0
20
22
10
12
short-rundemand
short-runsupply
1 million
a
c
Pri
ce (
$p
er
ton
-mile)
Pri
ce (
$ p
er
ton
-mil
e)
(a) Individual seller (b) Market
SHORT-RUN MARKET EQUILIBRIUM
0
2021
100
original long-run averagecost
new long-runaverage cost
long-runmarginal cost
Quantity (Thousand ton-miles a year) Quantity (Thousand ton-miles a year)
0
2021
10
13
long-rundemand
long-runsupply1 million
a
d
Pri
ce (
$p
er
ton
-mile)
Pri
ce (
$ p
er
ton
-mil
e)
(a) Individual seller (b) Market
LONG-RUN MARKET EQUILIBRIUM
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?
0
1.50
1
CF supply
a
Quantity (Million pounds a year)
Pri
ce (
$ p
er
pou
nd
)
ex-works supply
CF demand
ex-works demand
b
25 cents
25 cents
PRICING AND FREIGHT COST, II
RETAILING: WHY COUPONS?
alternative -- cutting wholesale prices “With coupons, prevent retailers from getting
part of price cut.”
DISCUSSION QUESTION
Please analyze the impacts of the following events on the equilibrium price and equilibrium quantity in the coffee market.
(A)Event one: consumer’s incomes decrease due to economic recession
(B)Event two: the price of imported coffee bean rises.
(C)Event one and Event two