MARKET
COMPETITIVE MARKETS
TANKER SERVICE MARKET, 2005
Impact of Increasing oil prices Increasing China imports More stringent tanker standards
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
DIFFERENTIATED OR HOMOGENEOUS
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
NO MARKET POWER Many small buyers Many small sellers Both buyers and sellers have no
market powers. Both buyers and sellers are price
takers. Note: buyer/seller with market power can
influence market conditions
NO BARRIERS Free entry and exit
No entry barriers to potential competitors No exit barriers to existing sellers
FREE ENTRY?Japanese Beer Market, pre-’94:
Ministry of Finance
production licenses for minimum of 2 million liters a year
sales licenses limited to small family-owned stores
SYMMETRIC OR ASYMMETRIC INFORMATION
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
MARKET EQUILIBRIUM, IPrice 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 demandedtriggers price decrease
excess demand = excess of qty demanded over qty supplied triggers price increase
SUPPLY SHIFT, Isupply 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
SUPPLY SHIFT: PRICE IMPACT
price change no more than amount of the supply shift
price change smaller if demand is more elastic than supply
larger if supply is more elastic than demand
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, Idemand 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 DAYNearing 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?
demandprice elasticity -.23
income elasticity 0.39
supplyprice 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
0
2021
100
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