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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
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MARKETIMBA Managerial EconomicsJack Wu
PERFECT COMPETITION homogeneous product many buyers many sellers price takers free entry and exit equal information
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
INFORMATIONMarket with differences in information not as competitive as one where all buyers and sellers have equal information
medical treatment legal advice
MARKET EQUILIBRIUM, IPrice 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)
Pric
e ($
per
ton-
mile
)
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
19.6020
10 10.4
original supply
new supply
demand60 cents
60 cents
c e
b
d
Quantity (Million ton-miles a year)
Pric
e ($
per
ton-
mile
) 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)
Pric
e ($
per
ton-
mile
)
Pric
e ($
per
ton-
mile
)
e e
PRICE ELASTICITIES OF DEMAND
0
20
10
demand
a
b
original and new supply
0 10 11
19.4020 60 cents 60 cents
a
b original supply
new supply
demand
Pric
e ($
per
ton-
mile
)
Pric
e ($
per
ton-
mile
)
Quantity (Million ton-miles a year) Quantity (Million ton-miles a year)
Extremely inelastic supply Extremely elastic supply
PRICE ELASTICITIES OF SUPPLY
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
0
1.50
1
retail supply
a
Quantity (Million units a year)
Price
($ p
er u
nit)
after wholesale price cut
retail demandb
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)
Pric
e ($
per
ton-
mile
)DEMAND SHIFT, II
TANKER SERVICES, 1999 OPEC production cutback
reduced demand for tanker services raised tanker operating cost on balance, reduced tanker rates
rates for older tankers fell more than for newer vessels
VALENTINE’S DAYNearing Valentine’s Day, price of roses always rises much more than the price of greeting cards. Why?
CALCULATING EQUILIBRIUM, IHow 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, II1. % change in qty demanded = -0.23 %p
+ 0.39 x 32. % change in qty supplied = 0.62 %p3. 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
2022
10
12
short-rundemand
short-runsupply
1 million
a
c
Pric
e ($
per
ton-
mile
)
Pric
e ($
per
ton-
mile
)
(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
Pric
e ($
per
ton-
mile
)
Pric
e ($
per
ton-
mile
)
(a) Individual seller (b) Market
LONG-RUN MARKET EQUILIBRIUM
SHORT/LONG-RUN IMPACTIf 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
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)
Pric
e ($
per
pou
nd)
ex-works supply
CF demand
ex-works demand
b
25 cents25 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 1 Manufacturers of paper products are major
buyers of waste paper. They use a combination of wood pulp and waste paper to produce paper products. The supply of waste paper comes from households and businesses. An issue in environmental policy is the effectiveness of price incentives in encouraging recycling of waste paper. The price elasticity of the demand for waste paper has been estimated to be -0.07, while the price elasticity of the supply has been estimated to be 0.
DISCUSSION QUESTION 1:CONTINUED Consider a government policy that reduces the
price of wastepaper to manufacturers by 5%. How would this affect the quantity demanded?
Consider a government policy that increases the price of wastepaper to sellers by 5%. How would this affect the quantity supplied?
Are price incentives an effective way of increasing the recycling of wastepaper?
DISCUSSION QUESTION 2 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.
DISCUSSION QUESTION 2:CONTINUED (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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