M ARKET MBA 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

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. ”