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IMBA Managerial Economics Jack Wu
Market IMBA Managerial Economics Jack Wu
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Competitive Markets Basis for managerial economics -- model of competitive markets combines demand with supply in Chapter 6 (Economic Efficiency), show that competitive markets provide desirable outcome benchmark for analyses of market power and imperfect markets Demand-supply framework is core of managerial economics --- can address business issues goods and services consumer as well as industrial products domestic and international markets.
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tanker Service market, 2005 Impact of Increasing oil prices
Increasing China imports More stringent tanker standards To understand market impact, must consider both demand and supply.
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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
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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
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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 Market where some buyers have market power different buyers pay different prices; buyers with market power get lower prices; not possible to construct a market demand curve. Similarly, where some sellers have market power
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No barriers Free entry and exit
No entry barriers to potential competitors No exit barriers to existing sellers
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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
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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 Medical treatment: patients have less information than doctors not all doctors equally informed about current medical technology and regulations Market for medical treatment is less competitive. Similarly, market for legal advice is less competitive.
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Market Equilibrium, I Price at which quantity demanded equals quantity supplied when market out of equilibrium, market forces push price towards equilibrium
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MARKET EQUILIBRIUM, II a excess supply supply Price ($ per ton-mile)
22 b 20 equilibrium c demand 8 10 11 Quantity (Million ton-miles a year)
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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
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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
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SUPPLY SHIFT, II a original supply Price ($ per ton-mile) b 60 cents
20 new supply 19.60 d demand 60 cents c e 10 10.4 Quantity (Million ton-miles a year)
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Price Elasticities of Demand
Extremely inelastic demand Extremely elastic demand demand original supply original supply b Price ($ per ton-mile) 60 cents 60 cents new supply 20 Price ($ per ton-mile) 20 b demand new supply 19.40 60 cents 60 cents c c e e 10 10 10.6 Quantity (Million ton-miles a year) Quantity (Million ton-miles a year)
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PRICE ELASTICITIES OF SUPPLY
Extremely inelastic supply Extremely elastic supply original and new supply a a original supply b 20 b 20 Price ($ per ton-mile) Price ($ per ton-mile) 60 cents 60 cents 19.40 new supply demand demand 10 10 11 Quantity (Million ton-miles a year) Quantity (Million ton-miles a year)
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Supply Shift: Price Impact
price change no more than amount of the supply shift price change smaller if demand is more elastic than supply larger if supply is more elastic than demand
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PROMOTING RETAIL SALES
retail supply after wholesale price cut a Price ($ per unit) 1.50 b retail demand 1 Q Quantity (Million units a year)
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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
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DEMAND SHIFT, II supply a 1 million f b Price ($ per ton-mile) 20
new demand 1 million original demand c 10 10.8 Quantity (Million ton-miles a year)
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Tanker services, 2005 Increasing oil prices Increasing China imports
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
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Valentine’s Day Nearing Valentine’s Day, price of roses always rises much more than the price of greeting cards. Why?
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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
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Calculating Equilibrium, II
% change in qty demanded = %p x 3 % change in qty supplied = %p equate and solve: %p = 1.38% % change in qty = 0.87%
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SHORT-RUN MARKET EQUILIBRIUM
(a) Individual seller (b) Market short-run marginal cost short-run supply short-run average variable cost 1 million c 22 Price ($per ton-mile) 22 Price ($ per ton-mile) 20 20 a price short-run demand 100 105 10 12 Quantity (Thousand ton-miles a year) Quantity (Thousand ton-miles a year)
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LONG-RUN MARKET EQUILIBRIUM
(a) Individual seller (b) Market new long-run average cost long-run marginal cost long-run supply 1 million d Price ($per ton-mile) Price ($ per ton-mile) 21 21 20 20 a original long- run average cost long-run demand 100 10 13 Quantity (Thousand ton-miles a year) Quantity (Thousand ton-miles a year)
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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
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Demand increase This figure combines short-run with long-run analysis at market level
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Demand reduction This figure combines short-run with long-run analysis at market level
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Pricing and Freight Cost, I
cost and freight ex-works pricing How does pricing policy affect sales?
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PRICING AND FREIGHT COST, II
CF supply 25 cents 25 cents ex-works supply a Price ($ per pound) 1.50 b CF demand ex-works demand 1 Quantity (Million pounds a year)
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Retailing: Why coupons?
alternative -- cutting wholesale prices “With coupons, prevent retailers from getting part of price cut.”
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DISCUSSION QUESTION Industry researchers R.S. Platou predicted that, between 2003 and 2004, oil prices would fall by 5%, production of oil by OPEC and the former Soviet Union would increase, and deliveries of new tankers would exceed scrappage of older vessels.
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DISCUSSION QUESTION (a)Uisng suitable diagrams, explain how each of the following would affect the market for tanker services: (i) fall in oil prices; (ii) increase in production by OPEC and the former Soviet Union; (iii) new tanker deliveries; and (iv) scrappage of older vessels. (b)Suppose that the net effect is to increase tanker rates. Illustrate the net effect on a single diagram. Explain the impact on the quantity of tanker services used.
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