Transcript Demand shift - NCNU Moodle 課程

Chapter 5
Market Equilibrium
Tanker service industry :
Frontline

Frontline: a large independent crude carrier

Market conditions during the financial crises
 Demand for oil transportation fell
 Declining freight rates
 Falling utilization
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Tanker service industry :
Frontline

Decisions
 Entire company
Continue in business or shut down
 If continue, scale of operation

 For

each ship
Operate or sell ships
 The
demand for oil transportation and the
supply for tanker services
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Learning objectives




Appreciate the impact of excess supply on the market
price.
Appreciate the impact of excess demand on the market
price.
Apply the price elasticities of demand and supply to
predict the impact of shifts in supply on market price and
production.
Apply the price elasticities of demand and supply to
predict the impact of shifts in demand on market price
and production.
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Outline

Perfect competition
 Market equilibrium
 Supply shift
 Demand shift
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Perfect competition

Homogeneous product
 All firms sell an identical good.
 Many buyers and sellers
 Buyers and sellers can’t individually influence the
market price
 Free entry and exit
 No entry and exit barriers
 Equal (symmetric) information
 Buyers and sellers have all the relevant information
about the market, e.g., price, quality.
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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
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Perfect competition

Many small buyers
 Many small sellers
 Buyer/seller with market power can influence
demand/supply
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Perfect competition

Free entry and exit
 entry
barriers to potential competitors
 absolute cost advantage ;
e.g., better technology, patent.
 economies of scale; large capital expenditures
e.g., semiconductor, TFT LCD, steel, etc.
hard to raise capital, large potential loss
 exit barriers to existing sellers

commitment to regulator; e.g., telephone service provider
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Perfect competition
 Information
about market conditions, e.g., price,
available substitutes, technologies.
 When buyers and sellers have symmetric
information, then competition is more intense.
 Compare
 Photocopying service
 Medical treatment


sellers (doctors) vs buyers (patients)
Legal service
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The behavior of a single firm

Profit maximization
 q  R q  C q
first order condition
  q  R  q  C  q 


0
q
q
q
thus MR  MC
for a price taking firm P  MR
 P  MC
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Outline

Perfect competition
 Market equilibrium
 Supply shift
 Demand shift
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Market equilibrium
 Definition:
Price at which quantity demanded
equals quantity supplied
 When market out of equilibrium, market forces
push price towards equilibrium
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Market equilibrium
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Market equilibrium

Excess supply = excess of quantity supplied
over quantity demanded
 Triggers price decrease
 Business implication: (Short run) Shrink
production and (long run) exit
 Excess demand = excess of quantity
demanded over quantity supplied
 Triggers price increase
 Business opportunity: (Short run) Increase
production and (long run) enter the industry
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Outline

Perfect competition
 Market equilibrium
 Supply shift
 Demand shift
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Supply shift

Supply shift (cost): down/up
 Represents change in cost at all quantities of
production
 Supply shift (quantity): right/left
 Represents change in quantity of production
at all prices
 New equilibrium depends on elasticities of
demand and supply
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Supply shift (cost)
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Supply shift
(cost):
Price elasticities
of demand and
supply
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Supply shift (cost)

Price change no more than dollar amount of the
supply shift
 Price change greater if
 Demand is more inelastic
 Supply is more elastic
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French products:
Foie gras vis-à-vis butter
 Two
major French agricultural exports
 foie gras
 French butter
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French products:
Foie gras vis-à-vis butter
 If
Euro becomes 10% more expensive, compare
the effect on prices of
 foie gras
 French butter

The demand for foie gras is less elastic (fewer
substitutes)
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Outline

Introduction
 Perfect competition
 Market equilibrium
 Supply shift
 Demand shift
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Demand shift

Demand shift (willingness to pay): down/up
 Represents change in willingness to pay
(marginal benefit) at all quantities of
consumption
 Demand shift (quantity): right/left
 Represents change in quantity demanded at
all prices
 New equilibrium depends on elasticities of
demand and supply
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Demand shift (quantity)
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Demand shift (quantity)

Price change no more than dollar amount of the
demand shift
 Price change greater if
 Demand is more inelastic
 Supply is more inelastic
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Valentine’s Day

Price of roses always rises much more than the
price of greeting cards. Why?

Which one is more elastic in supply?

Greeting cards can be stored, but roses are
perishable
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Key takeaways






If the market price exceeds equilibrium, there will be
excess supply and the price will tend to fall.
If the market price falls below equilibrium, there will be
excess demand and the price will tend to rise.
A shift in supply will affect the market price and quantity
to an extent that depends on the elasticities of both
demand and supply.
A shift in demand will affect the market price and
quantity to an extent that depends on the elasticities of
both demand and supply.
A shift in demand will lead to a larger change in price in
the short run than long run.
A shift in demand will lead to a smaller change in
production in the short run than long run.
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