1 Labor Markets and Labor Unions CHAPTER 12 © 2003 South-Western/Thomson Learning.
Any Questions from Last Class?. Chapter 8 Understanding Markets and Industry Changes COPYRIGHT ©...
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Transcript of Any Questions from Last Class?. Chapter 8 Understanding Markets and Industry Changes COPYRIGHT ©...
Chapter 8Understanding Markets and Industry Changes
COPYRIGHT © 2008Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
Chapter 8 – Take Aways
A market has a product, geographic, and time dimension. Define the market before using supply–demand analysis.
Market demand describes buyer behavior; market supply describes seller behavior in a competitive market.
If price changes, quantity demanded increases or decreases (represented by a movement along the demand curve).
If a factor other than price (like income) changes, we say that demand curve increases or decreases (a shift of demand curve).
Chapter 8 – Take Aways
Supply curves describe the behavior of sellers and tell you how much will be sold at a given price.
Market equilibrium is the price at which quantity supplied equals quantity demanded. If price is above the equilibrium price, there are too many sellers, forcing price down, and vice versa.
Currency devaluation in a country increases demand for exports (supply to another country) and decreases demand for imports (demand for another country’s products).
Prices convey valuable information.
Making a market is costly, and competition between market makers forces the bid–ask spread down to the costs of making a market. If the costs of making a market are large, then the equilibrium price may be better viewed as a spread rather than a single price.
Review of Chapter 7
Increasing marginal costs Increasing returns to scale Learning curves Economies of Scope
Cost(Q1,Q2) <Cost(Q1)+Cost(Q2)
Bottom line: begin with a decision, not a cost
Anecdote: Y2K and Generator Sales 1990-98, sales of portable generators grew
2% yearly. In 1999, public anticipation of Y2K power
outages increased demand for generators Industry shipments increased by 87%. Prices also increased by an average of 21%.
Discussion: What will happen next?
Which Industry or Market?
Time, product, and geographic dimension Yearly market for portable generators in the
U.S. Time: LR vs. SR
Product
Geography
Which do you use? It depends on what you want to use it for
Shifts in the Demand Curve
Movement along the demand curve
“Quantity demanded” increased (in response to price change)
Shifts in demand curve
“Demand increased”
Uncontrollable factor
Controllable factor
Discussion: In early 80s, what strategy did Microsoft employ to increase demand for its DOS operating system?
Contrast to Apple
Demand Shift
At a given price, more quantity demanded
Price DemandNew
Demand12.00$ 1 511.00$ 2 610.00$ 3 79.00$ 4 88.00$ 5 97.00$ 6 106.00$ 7 115.00$ 8 124.00$ 9 13
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
0 2 4 6 8 10 12 14
Quantity
Pric
e
New Demand
Demand
Supply Curves Definition: Supply curves are functions that relate
the price of a product to the quantity supplied by sellers.
Discussion: Why do supply curves slope upwards?
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
0 2 4 6 8 10
Quantity
Pric
e
Market Equilibrium
Definition: Market equilibrium is the price at which quantity supplied equals quantity demanded.
At the equilibrium price, there is no pressure on price to change given the equality of quantity demanded and supplied.
Market Equilibrium (cont.) Proposition: In a
competitive equilibrium there are no unconsummated wealth-creating transactions.
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
0 2 4 6 8 10
Quantity
Pric
e
Supply
Demand
Price Demand Supply$12 1 9$11 2 8$10 3 7$9 4 6$8 5 5$7 6 4$6 7 3$5 8 2$4 9 1
Using Supply and Demand
$0
$5
$10
$15
0 5 10 15Quantity
Pric
e
Demand
Supply
NewDemand
Price Demand SupplyNew
Demand$12 1 9 5$11 2 8 6$10 3 7 7$9 4 6 8$8 5 5 9$7 6 4 10$6 7 3 11$5 8 2 12$4 9 1 13
Portable Generator Market 1997-1999
1997- Stable industry sales with intense competition (2% avg. sales growth)
1997- Industry anticipates record demand will occur in 1999
1998 – Massive capital expenses throughout industry on vertical integration projects
Portable Generator 1999 +
Demand shift due to fear of power grid failure caused by Y2K
Supply shift caused by manufacturer’s eagerness to capitalize on record demand for product
Manufacturers fail to anticipate reduced demand in 2000
Sales from 2000 pulled forward into 1999
Supply and Demand of Generators
0
200
400
600
800
1000
1200
1400
0 500 1000 1500 2000
Unit Sales (000's)
$/U
nit
(In
du
stry
Ave
rage
)
19981999
2000
1998Demand
1999Demand
1998Supply
1999Supply
BA
C
Using Supply and Demand (cont.) Discussion: “over the past decade, the price of
computers has fallen, while quantity has risen.”
Initial Supply
Final Supply
Q0 Q1
P1
P0
Using Supply and Demand (cont.) Discussion: Following a dramatic devaluation of the
Peso, what happens to your golf course in Tijuana?
Supply of Golf in Tijuana
Demand for Golf in Tijuana
Quantity
New Demand
Supply of Golf in San Diego
Demand for Golf in San Diego
New Demand
Dollars Pesos
Quantity
Prices Convey Information Prices are a primary way that market participants
communicate with one another Buyers signal their willingness to pay, and sellers
signal their willingness to sell with prices Discussion: Gas pipeline bursting between Tucson
and Phoenix Without high gasoline prices, consumers would consume
too much and suppliers would supply too little. Price information especially important in financial
markets
Market Makers
Market Makers
Discussion: Compute the optimal “spread”
Discussion: Competition forces spread down to the costs of market making, $2. What is bid-ask spread?
Bid Ask Quantity Profit$8 $8 5 $0$7 $9 4 $8$6 $10 3 $12$5 $11 2 $12$4 $12 1 $8
Competition among Market Makers
On May 26, WSJ & LA Times published results of Christie’s research On May 27, spreads collapsed Discussion: WHY?
Alternate Intro Anecdote Video enhancement products are state-of-the-art
graphics systems that capture, analyze, enhance, and edit all major video formats without altering underlying footage.
In 1998, this market consisted of a small number of companies, and demand was relatively light due to the extremely high price of the technology (prices ranged between $45,000 and $80,000)
In 2000, Intergraph entered the market at a price of $25,000, attempting to quickly capture a major share of the market. Intergraph produced a product at a substantially lower cost than the competition.
Alternate Into Anecdote (cont.) What happened??
Entry caused an increase in supply and a strong downward pressure on price (average pricing fell to around $40,000).
A number of firms exited and prices rose back to around $45,000.
Later, the events of 9/11/01 caused demand to spike.
What happened?? In the short run, average prices shot up. Higher prices eventually attracted more entrants,
increasing supply. Pricing fell back down to an average level of around $30,000.