M ARKET IMBA NCCU Managerial Economics Jack Wu

C ASE : TANKER S ERVICE MARKET, 2005 Impact of Increasing oil prices Increasing China imports More stringent tanker standards

C HARACTERISTICS OF P ERFECTLY C OMPETITIVE M ARKET 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

D IFFERENTIATED OR H OMOGENEOUS ? 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

N O M ARKET P OWER 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

N O BARRIERS Free entry and exit No entry barriers to potential competitors No exit barriers to existing sellers

F REE E NTRY ? 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

S YMMETRIC OR A SYMMETRIC I NFORMATION 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

M ARKET E QUILIBRIUM, I Price at which quantity demanded equals quantity supplied when market out of equilibrium, market forces push price towards equilibrium

supply demand a b c equilibrium excess supply Quantity (Million ton-miles a year) Price ($ per ton-mile) MARKET EQUILIBRIUM, II

M ARKET E QUILIBRIUM, 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

S UPPLY S HIFT, 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

original supply new supply demand 60 cents ce b d Quantity (Million ton-miles a year) Price ($ per ton-mile) a SUPPLY SHIFT, II

original supply new supply demand 60 cents c b new supply original supply demand 60 cents b c Extremely inelastic demandExtremely elastic demand Quantity (Million ton-miles a year) Price ($ per ton-mile) ee P RICE E LASTICITIES OF D EMAND

demand a b original and new supply cents a b original supply new supply demand Price ($ per ton-mile) Quantity (Million ton-miles a year) Extremely inelastic supplyExtremely elastic supply PRICE ELASTICITIES OF SUPPLY

retail supply a Quantity (Million units a year) Price ($ per unit) after wholesale price cut retail demand b PROMOTING RETAIL SALES Q

D EMAND S HIFT, 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

supply new demand original demand 1 million a f b c Quantity (Million ton-miles a year) Price ($ per ton-mile) DEMAND SHIFT, II

T ANKER 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

V ALENTINE S D AY Nearing Valentine s Day, price of roses always rises much more than the price of greeting cards. Why?

C ALCULATING E QUILIBRIUM, 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

C ALCULATING E QUILIBRIUM, II 1. % change in qty demanded = -0.23* p % x 3% 2. % change in qty supplied = 0.62* p % 3. equate and solve: p % = 1.38% 4. % change in qty = 0.87%

price short-run average variable cost short-run marginal cost Quantity (Thousand ton-miles a year) short-run demand short-run supply 1 million a c Price ($per ton-mile) (a) Individual seller(b) Market SHORT-RUN MARKET EQUILIBRIUM

original long- run average cost new long-run average cost long-run marginal cost Quantity (Thousand ton-miles a year) long-run demand long-run supply 1 million a d Price ($per ton-mile) (a) Individual seller(b) Market LONG-RUN MARKET EQUILIBRIUM

S HORT /L ONG -R UN I MPACT 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

D EMAND INCREASE

D EMAND REDUCTION

P RICING AND F REIGHT C OST, I cost and freight ex-works pricing How does pricing policy affect sales?

CF supply a Quantity (Million pounds a year) Price ($ per pound) ex-works supply CF demand ex-works demand b 25 cents PRICING AND FREIGHT COST, II

R ETAILING : W HY 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: consumers incomes decrease due to economic recession (B)Event two: the price of imported coffee bean rises. (C)Event one and Event two