M ARKET Managerial Economics Jack Wu

TANKER S ERVICE MARKET, 2005 Impact of Increasing oil prices Increasing China imports More stringent tanker standards

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

D IFFERENTIATED OR H OMOGENEOUS 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

N O M ARKET P OWER 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

N O BARRIERS Free entry and exit No entry barriers to potential competitors No exit barriers to existing sellers

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

S YMMETRIC OR A SYMMETRIC I NFORMATION 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

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

S UPPLY S HIFT : P RICE I MPACT 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

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 = %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.

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.

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.