1. M ARKET IMBA Managerial Economics Jack Wu

2. P ERFECT C OMPETITION homogeneous product many buyers many sellers price takers free entry and exit equal information

3. 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

4. I NFORMATION Market with differences in information not as competitive as one where all buyers and sellers have equal information medical treatment legal advice

5. M ARKET E QUILIBRIUM, I Price at which quantity demanded equals quantity supplied when market out of equilibrium, market forces push price towards equilibrium

6. 0 20 22 81011 supply demand a b c equilibrium excess supply Quantity (Million ton-miles a year) Price ($ per ton-mile) MARKET EQUILIBRIUM, II

7. 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

8. 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

9. 0 19.60 20 1010.4 original supply new supply demand 60 cents ce b d Quantity (Million ton-miles a year) Price ($ per ton-mile) a SUPPLY SHIFT, II

10. 010 19.40 20 original supply new supply demand 60 cents c b 0 1010.6 20 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

11. 0 20 10 demand a b original and new supply 01011 19.40 20 60 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

12. 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

13. 0 1.50 1 retail supply a Quantity (Million units a year) Price ($ per unit) after wholesale price cut retail demand b PROMOTING RETAIL SALES Q

14. 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

15. 0 20 1010.8 supply new demand original demand 1 million a f b c Quantity (Million ton-miles a year) Price ($ per ton-mile) DEMAND SHIFT, II

16. T ANKER S ERVICES, 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

17. V ALENTINE ’ S D AY Nearing Valentine ’ s Day, price of roses always rises much more than the price of greeting cards. Why?

18. 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

19. C ALCULATING E QUILIBRIUM, II 1. % change in qty demanded = -0.23 %p + 0.39 x 3 2. % change in qty supplied = 0.62 %p 3. equate and solve: %p = 1.38% 4. % change in qty = 0.87%

20. 0 20 22 100105 price short-run average variable cost short-run marginal cost Quantity (Thousand ton-miles a year) 0 20 22 1012 short-run demand short-run supply 1 million a c Price ($per ton-mile) (a) Individual seller(b) Market SHORT-RUN MARKET EQUILIBRIUM

21. 0 20 21 100 original long- run average cost new long-run average cost long-run marginal cost Quantity (Thousand ton-miles a year) 0 20 21 1013 long-run demand long-run supply 1 million a d Price ($per ton-mile) (a) Individual seller(b) Market LONG-RUN MARKET EQUILIBRIUM

22. 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

23. P RICING AND F REIGHT C OST, I cost and freight ex-works pricing How does pricing policy affect sales?

24. 0 1.50 1 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

25. R ETAILING : W HY COUPONS ? alternative -- cutting wholesale prices “ With coupons, prevent retailers from getting part of price cut. ”

26. 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.

27. 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?

28. 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.

29. 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.