MARKETMBA 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 many small sellers price takers (No influence on price) free entry and exit (No barriers) Both buyers and sellers share equal

(symmetric) information

MARKET EQUILIBRIUM, I

Price at which quantity demanded equals quantity supplied when market out of equilibrium, market forces push price towards equilibrium

0

20

22

8 10 11

supply

demand

a

b

c

equilibrium

excess supply

Quantity (Million ton-miles a year)

Pri

ce (

$ p

er

ton

-mil

e)

MARKET EQUILIBRIUM, II

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

0

19.60

20

10 10.4

original supply

new supply

demand60 cents

60 cents

c e

b

d

Quantity (Million ton-miles a year)

Pri

ce (

$ p

er

ton

-mil

e)

a

SUPPLY SHIFT, II

0 10

19.40

20

original supply

new supply

demand

60 cents

60 centsc

b

0 10 10.6

20 new supply

original supply

demand

60 cents

60 centsb

c

Extremely inelastic demand Extremely elastic demand

Quantity (Million ton-miles a year) Quantity (Million ton-miles a year)

Pri

ce (

$ p

er

ton

-mil

e)

Pri

ce (

$ p

er

ton

-mil

e)

e e

PRICE ELASTICITIES OF DEMAND

0

20

10

demand

a

b

original and new supply

0 10 11

19.40

20 60 cents 60 cents

a

b original supply

new supply

demand

Pri

ce (

$ p

er

ton

-mil

e)

Pri

ce (

$ p

er

ton

-mil

e)

Quantity (Million ton-miles a year) Quantity (Million ton-miles a year)

Extremely inelastic supply Extremely elastic supply

PRICE ELASTICITIES OF SUPPLY

0

1.50

1

retail supply

a

Quantity (Million units a year)

Pri

ce (

$ p

er

unit

)

after wholesale price cut

retail demand

b

PROMOTING RETAIL SALES

Q

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

0

20

10 10.8

supply

new demand

original demand

1 million

af

b

c

1 million

Quantity (Million ton-miles a year)

Pri

ce (

$ p

er

ton

-mil

e)

DEMAND SHIFT, II

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%

0

20

22

100105

price

short-runaveragevariable cost

short-runmarginal cost

Quantity (Thousand ton-miles a year) Quantity (Thousand ton-miles a year)

0

20

22

10

12

short-rundemand

short-runsupply

1 million

a

c

Pri

ce (

$p

er

ton

-mile)

Pri

ce (

$ p

er

ton

-mil

e)

(a) Individual seller (b) Market

SHORT-RUN MARKET EQUILIBRIUM

0

2021

100

original long-run averagecost

new long-runaverage cost

long-runmarginal cost

Quantity (Thousand ton-miles a year) Quantity (Thousand ton-miles a year)

0

2021

10

13

long-rundemand

long-runsupply1 million

a

d

Pri

ce (

$p

er

ton

-mile)

Pri

ce (

$ p

er

ton

-mil

e)

(a) Individual seller (b) Market

LONG-RUN MARKET EQUILIBRIUM

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?

0

1.50

1

CF supply

a

Quantity (Million pounds a year)

Pri

ce (

$ p

er

pou

nd

)

ex-works supply

CF demand

ex-works demand

b

25 cents

25 cents

PRICING AND FREIGHT COST, II

RETAILING: WHY COUPONS?

alternative -- cutting wholesale prices “With coupons, prevent retailers from getting

part of price cut.”