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Market. MBA NCCU Managerial Economics Jack Wu. Case: tanker Service market , 2005. Impact of Increasing oil prices Increasing China imports More stringent tanker standards. Characteristics of Perfectly Competitive Market. homogeneous (identical) product many small buyers

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market

Market

MBA NCCU

Managerial Economics

Jack Wu

case tanker service market 2005
Case: tanker Service market, 2005
  • Impact of
    • Increasing oil prices
    • Increasing China imports
    • More stringent tanker standards
characteristics of perfectly competitive market
Characteristics of 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
differentiated or homogeneous
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
no market power
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
no barriers
No barriers
  • Free entry and exit
    • No entry barriers to potential competitors
    • No exit barriers to existing sellers
free entry
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
symmetric or asymmetric information
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
market equilibrium i
Market Equilibrium, I

Price at which quantity demanded equals quantity supplied

  • when market out of equilibrium, market forces push price towards equilibrium
market equilibrium ii
MARKET EQUILIBRIUM, II

a

excess supply

supply

Price ($ per ton-mile)

22

b

20

equilibrium

c

demand

0

8

10

11

Quantity (Million ton-miles a year)

market equilibrium iii
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 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
supply shift ii
SUPPLY SHIFT, II

a

original supply

Price ($ per ton-mile)

b

60 cents

20

new supply

19.60

d

demand

60 cents

c

e

0

10

10.4

Quantity (Million ton-miles a year)

price elasticities of demand
Price Elasticities of Demand

Extremely inelastic demand

Extremely elastic demand

demand

original supply

original supply

b

60 cents

Price ($ per ton-mile)

60 cents

new supply

Price ($ per ton-mile)

20

20

b

demand

new supply

19.40

60 cents

60 cents

c

c

e

e

0

10

10

10.6

0

Quantity (Million ton-miles a year)

Quantity (Million ton-miles a year)

price elasticities of supply
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

0

10

0

10

11

Quantity (Million ton-miles a year)

Quantity (Million ton-miles a year)

promoting retail sales
PROMOTING RETAIL SALES

retail supply

after wholesale price cut

a

1.50

Price ($ per unit)

b

retail demand

1

Q

0

Quantity (Million units a year)

demand shift i
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
demand shift ii
DEMAND SHIFT, II

supply

a

1 million

f

b

Price ($ per ton-mile)

20

new demand

1 million

original demand

c

10

10.8

0

Quantity (Million ton-miles a year)

tanker services 2005
Tanker 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
valentine s day
Valentine’s Day

Nearing Valentine’s Day, price of roses always rises much more than the price of greeting cards. Why?

calculating equilibrium i
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
calculating equilibrium ii
Calculating Equilibrium, II
  • % change in qty demanded = -0.23* p % + 0.39 x 3%
  • % change in qty supplied = 0.62* p %
  • equate and solve: p % = 1.38%
  • % change in qty = 0.87%
short run market equilibrium
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

0

0

10

12

100

105

Quantity (Thousand ton-miles a year)

Quantity (Thousand ton-miles a year)

long run market equilibrium
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

0

100

0

10

13

Quantity (Thousand ton-miles a year)

Quantity (Thousand ton-miles a year)

short long run impact
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
pricing and freight cost i
Pricing and Freight Cost, I
  • cost and freight
  • ex-works pricing
    • How does pricing policy affect sales?
pricing and freight cost ii
PRICING AND FREIGHT COST, II

CF supply

25 cents

25 cents

ex-works supply

a

1.50

Price ($ per pound)

b

CF demand

ex-works demand

1

0

Quantity (Million pounds a year)

retailing why coupons
Retailing: Why coupons?
  • alternative -- cutting wholesale prices
  • “With coupons, prevent retailers from getting part of price cut.”
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