lecture 4: market and equilibrium advanced micro theory msc.envinatresecon. 1/2006 charit tingsabadh
TRANSCRIPT
Lecture 4: market and equilibrium
Advanced Micro TheoryMSc.EnviNatResEcon.
1/2006Charit 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 ofproduct
Quantity demanded/suppliedof product per time period
Q1
P1
S
D
Excess demand, excess supply and price adjustments
Price ofgood X
Quantity demanded/suppliedof good X per time period
Q1
P1
S
D
P2
Excess supply
QD Qs
Does this work for desktop PC’s?
Price ofPC
Quantity demanded/suppliedof PCs per time period
Q1
P1
S
D
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
Price ofgood X
Quantity demanded/suppliedof good X per time period
Q1
P1
S
D1
D2
Q2 Q3
P2
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
$10
D
S, pre-warS, post-war
1990: The Gulf war and its effect on the price of crude oil
52Million barrels/day
$10
$40
D
S, pre-warS, post-war
1990: The Gulf war and its effect on the price of crude oil
5248 Mill b/day
The market for heroin
Price
Quantity per period
P1
Q1
Supply
Demand
The market for heroin
Price
Quantity per period
P1
Q1Q2
P2
Supply
Demand
The market for heroin
Price
Quantity per period
P1
Q1
P2
Supply
Demand
NewSupply
A private health service
Price
Quantity per period
P1
Q1
Market supply
Demand
A publicly provided health service
Price
Quantity per period
P1
Q1Q2
P2
Imputed market supply
Demand
Q*
A health service dilemma: more supply adds to demand
Price
Quantity per period
P1
Q1Q2
P2
Imputed market supply
Demand
New demand
Q3
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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