competitive markets. frontline source: frontline, reproduced with permission
TRANSCRIPT
Competitive Markets
Frontline
Source: Frontline, Reproduced with permission
3(c) 1999-2007, I.P.L. Png & D.E. Lehman
Oil tanker market, 2005
Impact of Increasing oil prices Increasing China imports More stringent tanker standards
4(c) 1999-2007, I.P.L. Png & D.E. Lehman
Outline
perfect competition market equilibrium supply shift demand shift adjustment time
5(c) 1999-2007, I.P.L. Png & D.E. Lehman
Perfect competition
homogeneous product many buyers many sellers free entry and exit equal information
6(c) 1999-2007, I.P.L. Png & D.E. Lehman
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
7(c) 1999-2007, I.P.L. Png & D.E. Lehman
Perfect competition
Many small buyers Many small sellers
buyer/seller with market power can influence demand/supply
8(c) 1999-2007, I.P.L. Png & D.E. Lehman
Perfect competition
Free entry and exit No entry barriers to potential
competitors No exit barriers to existing sellers
9(c) 1999-2007, I.P.L. Png & D.E. Lehman
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
10(c) 1999-2007, I.P.L. Png & D.E. Lehman
Outline
perfect competition market equilibrium supply shift demand shift adjustment time
11(c) 1999-2007, I.P.L. Png & D.E. Lehman
Market equilibrium
Definition: Price at which quantity demanded equals quantity supplied
When market out of equilibrium, market forces push price towards equilibrium
Market equilibrium
13(c) 1999-2007, I.P.L. Png & D.E. Lehman
Market equilibrium
Excess supply = excess of quantity supplied over quantity demanded triggers price decrease
Excess demand = excess of quantity demanded over quantity supplied triggers price increase
14(c) 1999-2007, I.P.L. Png & D.E. Lehman
Outline
perfect competition market equilibrium supply shift demand shift adjustment time
15(c) 1999-2007, I.P.L. Png & D.E. Lehman
Supply shift
Supply shifts down (right) new equilibrium with lower price and larger quantity
Supply shifts up (left) new equilibrium with higher price and smaller quantity
New equilibrium depends on elasticities of demand and supply
Supply shift
Supply shift: Price elasticities of demand and supply
18(c) 1999-2007, I.P.L. Png & D.E. Lehman
Supply shift: Price impact
Price change no more than dollar amount of the supply shift
Price change smaller if demand is more elastic than
supply larger if supply is more elastic than
demand
Foie gras vis-à-vis butter
If Euro becomes 10% more expensive, compare effect on prices of foie gras French butter
Promoting retail sales
Wholesale price cut Consumer coupons
21(c) 1999-2007, I.P.L. Png & D.E. Lehman
Outline
perfect competition market equilibrium supply shift demand shift adjustment time
22(c) 1999-2007, I.P.L. Png & D.E. Lehman
Demand shift
Demand shifts down (right) new equilibrium with lower price and lower quantity
Demand shifts up (left) new equilibrium with higher price and larger quantity
New equilibrium depends on elasticities of demand and supply
Demand shift
24(c) 1999-2007, I.P.L. Png & D.E. Lehman
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
25(c) 1999-2007, I.P.L. Png & D.E. Lehman
Valentine’s Day
Nearing Valentine’s Day, price of roses always rises much more than the price of greeting cards. Why?
26(c) 1999-2007, I.P.L. Png & D.E. Lehman
Outline
perfect competition market equilibrium supply shift demand shift adjustment time
Market and individual equilibrium
28(c) 1999-2007, I.P.L. Png & D.E. Lehman
Adjustment time
Short run demand + supply short run equilibrium
Long run demand + supply long run equilibrium
Demand increase: Short-run market equilibrium
Demand increase:Long-run market equilibrium
Demand increase
Demand reduction
33(c) 1999-2007, I.P.L. Png & D.E. Lehman
Short vis-à-vis long-run impact
If demand/supply shifts, Market price is more volatile in the short
run than long run Market quantity is more flexible over the
long run than short run
34(c) 1999-2007, I.P.L. Png & D.E. Lehman
Summary
perfect competition market equilibrium supply shift demand shift adjustment time
35(c) 1999-2007, I.P.L. Png & D.E. Lehman
Numerical example
Suppose Demand equation is D=30-0.1p Supply equation is S=4+0.05p-f Question: what is the market
equilibrium price and quantity?
36(c) 1999-2007, I.P.L. Png & D.E. Lehman
Answer: In equilibrium, D=S Therefore, 30-0.1p=4+0.05p-f If f=4
Then p=200 So, D=S=30-0.1*200=10
37(c) 1999-2007, I.P.L. Png & D.E. Lehman
How about supply shift?
S=4+0.05p-f If there is a decline in the input price, so
f drops from 4 to 3.40 Then S=0.6+0.05 Question: what is the new equilibrium
price and quantity? D=S30-0.1p=0.6+0.05p Therefore, p=196, S=D=10.4