1. Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh

2. 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.

3. 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.

4. Markets For the moment, forget individual businesses Think about the all suppliers - the “industry”

5. The market process A market is a process of interaction between buyers and sellers Both sides matter.

6. 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

7. 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.

8. 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

9. 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

10. 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.

11. Equilibrium Price and Quantity Traded Price of product Quantity demanded/supplied of product per time period Q1Q1 P1P1 S D

12. Excess demand, excess supply and price adjustments Price of good X Quantity demanded/supplied of good X per time period Q1Q1 P1P1 S D P2P2 Excess supply QDQD Qs

13. Does this work for desktop PC’s? Price of PC Quantity demanded/supplied of PCs per time period Q1Q1 P1P1 S D

14. CHANGES IN MARKET PRICE ARISE FROM Anything that changes the conditions of demand or Anything that changes the conditions of supply

15. An increase in demand Price of good X Quantity demanded/supplied of good X per time period Q1Q1 P1P1 S D1D1 D2D2 Q2Q3 P2P2

16. 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

17. 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

18. $10 D S, pre-war S, post-war 1990: The Gulf war and its effect on the price of crude oil 52 Million barrels/day

19. $10 $40 D S, pre-war S, post-war 1990: The Gulf war and its effect on the price of crude oil 5248 Mill b/day

20. The market for heroin Price Quantity per period P1P1 Q1Q1 Supply Demand

21. The market for heroin Price Quantity per period P1P1 Q1Q1 Q2Q2 P2P2 Supply Demand

22. The market for heroin Price Quantity per period P1P1 Q1Q1 P2P2 Supply Demand New Supply

23. A private health service Price Quantity per period P1P1 Q1Q1 Market supply Demand

24. A publicly provided health service Price Quantity per period P1P1 Q1Q1 Q2Q2 P2P2 Imputed market supply Demand Q*

25. A health service dilemma: more supply adds to demand Price Quantity per period P1P1 Q1Q1 Q2Q2 P2P2 Imputed market supply Demand New demand Q3Q3

26. Reading and further issues Perman and Scouller, Business Economics, Chapter 2

27. 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).

28. Chapter 9 Applying the Competitive Model

29. Figure 9.1 Consumer Surplus

30. Figure 9.1a Consumer Surplus

31. Figure 9.1b Consumer Surplus

32. Figure 9.2 Fall in Consumer Surplus From Roses as Price Rises

33. Table 9.1 Effect of a 10% Increase in Price on Consumer Surplus (Revenue and Consumer Surplus in Billions of 1999 Dollars)

34. Page 278 Solved Problem 9.1

35. Figure 9.3 Producer Surplus

36. Figure 9.3a Producer Surplus

37. Figure 9.3b Producer Surplus

38. Page 281 Solved Problem 9.2

39. Figure 9.4 Why Reducing Output from the Competitive Level Lowers Welfare

40. Figure 9.5 Why Increasing Output from the Competitive Level Lowers Welfare

41. Figure 9.6 Effect of a Restriction on the Number of Cabs

42. Figure 9.7 Welfare Effects of a Specific Tax on Roses

43. Figure 9.8 Welfare Effects of a Per-Unit Subsidy on Roses

44. Figure 9.9 Effect of Pricing Supports in Soybeans

45. Page 298 Solved Problem 9.3

46. Page 300 Solved Problem 9.4

47. Figure 9.10 Loss from Eliminating Free Trade

48. Figure 9.11 Effect of a Tariff (or Quota)

49. Table 9.2 Welfare Cost of Trade Barriers (millions of 1999 Dollars)