Transcript Lecture4review marke..

Lecture 4: market and
equilibrium
Advanced Micro Theory
MSc.EnviNatResEcon.
1/2006
Charit Tingsabadh
Review of Economics Session 1
Markets and market processes
To create value, organisations need to understand their
environment
Two levels of environment:
• The contextual environment (remote/macro).
• The transactional environment.
Markets are part of the
organisation’s transactional
environment
We look at markets in a broad, abstract way.
Analysis applies to commercial and not-for-profit
organisations.
But remember that events and processes in the contextual
environment impact the organisation through market
forces.
Markets
For the moment, forget individual businesses
Think about the all suppliers - the “industry”
The market process
• A market is a process of interaction between
buyers and sellers
• Both sides matter.
Objectives of market participants
• Consumers (demanders) seek to maximise value from the
satisfaction of their wants and needs
• Producers (suppliers) seek to maximise added value
Demand and supply analysis
We can analyse markets using the notions of
Market demand
and
Market supply
These turn out to give us a tremendously powerful way of
marshalling our thoughts.
Market demand for a product
… depends on customers’ willingness to pay it.
This, in turn, depends on
• tastes or preferences
• price relative to other products
• consumers’ income
Market supply of a good
… depends on the how many businesses are willing and able
to sell products at various prices.
This, in turn, depends on
• input/raw material prices
• the state of technology
• the price of the good relative to the prices of other goods
MARKET EQUILIBRIUM
A market is in equilibrium when supply and demand are
balanced, so that the price has no tendency to change from
its current level.
Equilibrium Price and Quantity Traded
Price of
product
S
P1
D
Q1
Quantity demanded/supplied
of product per time period
Excess demand, excess supply and price
adjustments
Price of
good X
S
Excess supply
P2
P1
D
QD
Q1
Qs
Quantity demanded/supplied
of good X per time period
Does this work for desktop PC’s?
Price of
PC
S
P1
D
Q1
Quantity demanded/supplied
of PCs per time period
CHANGES IN MARKET PRICE
ARISE FROM
Anything that changes the conditions of demand
or
Anything that changes the conditions of supply
An increase in demand
D2
Price of
good X
D1
S
P2
P1
Q1
Q2
Q3
Quantity demanded/supplied
of good X per time period
LET US TRY TO DEDUCE WHAT
HAPPENS TO MARKET PRICE IN THE
FOLLOWING CASES:
• The product has a successful advertising campaign (by all
competitors together)
• The economy has an exchange rate appreciation
• Wage costs rise
• Technological progress takes place
Applications of market analysis
• The market for crude oil and supply side interruptions.
• The market for heroin: supply side and demand side
interventions
• The UK National Health Service and waiting lists
1990: The Gulf war and
its effect on the price
of crude oil
S, post-war
S, pre-war
$10
D
52
Million barrels/day
1990: The Gulf war and
its effect on the price
of crude oil
S, post-war
S, pre-war
$40
$10
D
48 52
Mill b/day
Price
Supply
P1
Demand
Q1
The market for heroin
Quantity
per period
Price
Supply
P2
P1
Demand
Q2 Q1
The market for heroin
Quantity
per period
Price
Supply
P2
New
Supply
P1
Demand
Q1
The market for heroin
Quantity
per period
Price
Market
supply
P1
Demand
Q1
A private health service
Quantity
per
period
Price
Imputed market
supply
P1
P2
Demand
Q1 Q2
Q*
A publicly provided health service
Quantity
per
period
Price
Imputed market
supply
P1
New demand
P2
Demand
Q1
Q2 Q
3
Quantity per period
A health service dilemma: more supply adds to demand
Reading and further issues
Perman and Scouller, Business Economics, Chapter 2
Task 1
• Select one business that one organisation of which you are aware is
involved in.
• What market does this business operate in?
Answer these questions for the market as a whole, not a single business
• Using PEST analysis, identify any important changes in external
conditions that might affect market supply or demand.
• Which, if any, of these changes affect demand conditions in that market?
• Which, if any, of these changes affect supply conditions in that market?
• Using a supply and demand sketch diagram, illustrate how these changes
might affect market demand and supply (this analysis need only be
qualitative).
Chapter 9
Applying the Competitive Model
Figure 9.1
Consumer
Surplus
Figure 9.1a Consumer Surplus
Figure 9.1b Consumer Surplus
Figure 9.2 Fall in Consumer
Surplus From Roses as Price
Rises
Table 9.1 Effect of a 10% Increase in
Price on Consumer Surplus (Revenue
and Consumer Surplus in Billions of
1999 Dollars)
Page 278 Solved Problem 9.1
Figure 9.3 Producer Surplus
Figure 9.3a Producer Surplus
Figure 9.3b Producer Surplus
Page 281 Solved Problem 9.2
Figure 9.4 Why Reducing Output
from the Competitive Level Lowers
Welfare
Figure 9.5 Why Increasing Output
from the Competitive Level Lowers
Welfare
Figure 9.6 Effect of a
Restriction on the Number of
Cabs
Figure 9.7 Welfare Effects of a
Specific Tax on Roses
Figure 9.8 Welfare Effects of a
Per-Unit Subsidy on Roses
Figure 9.9
Effect of Pricing Supports in
Soybeans
Page 298 Solved Problem 9.3
Page 300 Solved Problem 9.4
Figure 9.10
Loss from Eliminating Free Trade
Figure 9.11
Effect of a Tariff (or Quota)
Table 9.2 Welfare Cost of Trade
Barriers (millions of 1999 Dollars)
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