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					LECTURE FIVE:
COMPETITIVE MARKET
IPEM Tohoku University
Managerial Economics
Lecturer: Jack Wu
Period 1 and 2/ February 16
 PERFECT COMPETITION
 homogeneous product
 many buyers

 many sellers

 price takers

 free entry and exit

 equal information
PERFECT COMPETITION
 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
PERFECT COMPETITION
 Many small buyers
 Many small sellers
       buyer/seller with market power can influence
        demand/supply
PERFECT COMPETITION
   Free entry and exit
     No entry barriers to potential competitors
     No exit barriers to existing sellers
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
PERFECT COMPETITION
   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
Price at which quantity demanded equals quantity
supplied
 when market out of equilibrium, market forces
push price towards equilibrium
MARKET EQUILIBRIUM, II

  Price ($ per ton-mile)



                                a

                                           excess supply      supply
                           22
                                                 b
                           20                                 equilibrium


                                c                            demand
                            0              8     10    11


                                    Quantity (Million ton-miles a year)
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
SUPPLY SHIFT, II
 Price ($ per ton-mile)

                                  a


                                                                       original supply

                            20                             b         60 cents
                          19.60                                        new supply
                                                                 d
                                                                        demand
                                           60
                                  c        cents
                                            e
                            0                             10 10.4


                                      Quantity (Million ton-miles a year)
                         PRICE ELASTICITIES OF DEMAND



                                     Extremely inelastic demand                                              Extremely elastic demand
Price ($ per ton-mile)




                                                                       Price ($ per ton-mile)
                                            demand

                                                    original supply                                                      original supply

                                                b                                                                    60
                                                     60 cents                                                                  new supply
                          20                                                                    20                  bcents
                                                                                                                             demand
                                                    new supply
                         19.40
                                         60 cents                                                            60 cents
                                 c                                                                   c
                                     e                                                                   e
                            0                 10                                                 0                 10    10.6

                                 Quantity (Million ton-miles a year)                                 Quantity (Million ton-miles a year)
                         PRICE ELASTICITIES OF SUPPLY


                                  Extremely inelastic supply                                          Extremely elastic supply
Price ($ per ton-mile)




                                                                Price ($ per ton-mile)
                                     original and new supply
                              a                                                                  a
                                                                                                                     original supply
                         20                   b                                            20               b
                                                                                                     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)
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
PROMOTING RETAIL SALES



                                                     retail supply
Price ($ per unit)




                                                          after wholesale price cut
                                            a
                     1.50
                                                 b
                                                              retail demand




                       0                   1    Q

                            Quantity (Million units a year)
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
Price ($ per ton-mile)




                                                            supply
                              a 1 million
                                                   f
                         20                    b
                                                                      new demand
                                                          1 million

                                                                original demand
                              c


                         0                   10    10.8

                                    Quantity (Million ton-miles a year)
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
Nearing Valentine’s Day, price of roses always
rises much more than the price of greeting cards.
Why?
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
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%
SHORT-RUN MARKET EQUILIBRIUM


                              (a) Individual seller                                        (b) Market
 Price ($per ton-mile)




                                                         Price ($ per ton-mile)
                               short-run                                                               short-run
                               marginal cost short-run                                                 supply
                                             average
                                                                                       1 million
                                             variable
                         22                  cost                                                  c
                                                                                  22
                         20                    price                              20       a


                                                                                                       short-run
                                                                                                       demand
                         0          100105                                        0         10 12

Quantity (Thousand ton-miles a year)                     Quantity (Thousand ton-miles a year)
LONG-RUN MARKET EQUILIBRIUM

                              (a) Individual seller                                        (b) Market
Price ($per ton-mile)




                                                          Price ($ per ton-mile)
                                           new long-
                             long-run      run                                                          long-run
                             marginal cost average                                                      supply
                                                                                        1 million
                                           cost                                                     d
                        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
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
DEMAND INCREASE
DEMAND REDUCTION
PRICING AND FREIGHT COST, I
   cost and freight
   ex-works pricing
     How  does pricing policy affect
      sales?
PRICING AND FREIGHT COST, II
Price ($ per pound)




                                                          CF supply
                             25 cents
                                               25 cents
                                                             ex-works supply
                                           a
                      1.50

                                           b                     CF demand

                                                              ex-works demand


                        0                 1

                             Quantity (Million pounds a year)
RETAILING: WHY COUPONS?
 alternative -- cutting wholesale prices
 “With coupons, prevent retailers from getting
  part of price cut.”

				
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posted:8/29/2012
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