impacts of supply and demand shifts
TRANSCRIPT
LESE204
Depart
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Food a
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Impacts of supply and demand shifts
LESE204
Depart
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1. Impacts of Supply shift
P
Q
D
Elastic Demand
P
Q
D
Inelastic demand
Same size of shift
SS’S S’
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2. Impacts of Demand shift
P
Q
D
Elastic Supply
P
Q
D
Inelastic demand
Same size of shift
D’
D
D’
SS
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3. Impacts of Supply and Demand shifts
P
Q
D
Pork Market
P
Q
Beef Market
D
D’
S
S
Source: Norwood and Lusk, Ch 3.
Environmental regulation on pork producers
S’
ep
ep’
ep’’
eb
eb’
Partial equilibrium: ep ep’
General equilibrium: ep ep’’ in pork market,
eb eb’ in beef market
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Depart
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Supply in a competitive market
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Assumptions and implications
■ Assumptions
- Many buyers and sellers.
- Product is homogeneous (identical).
- Perfect information is provided
- No transaction costs.
-Free entry and exit.
■ Implications
Firms (suppliers) are price takers
iiiiai FCQCQP )(
)( iia QmcP
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Representative firm’s decision
$
Q
AC
AVC
MC
Pa = MR
Q*
AC
Pa
Profit = (P - AC) Q*
operating loss / profit determining the short-run supply
LESE204
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Imperfect competition
LESE204
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1. Addressing the issues
Market?
-Single supplier & numerous consumers
- A few suppliers & numerous consumers
- Numerous suppliers & single buyer
- Numerous suppliers & a few buyers
- Single supplier & single buyer
- A few suppliers & A few buyers
The extent of competition is a key point
Sellers BuyersCompetition
among sellersCompetition
among buyersCompetition
The competition generally depends on the number of sellers or buyers
LESE204
Depart
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ics 1. Addressing the issues
- Competition among players and channels
Farmers Wholesalers
Food company
Retailers
Super chains
Big Marts
Food company
Middle men
(Wholesalers)
Big Marts
assemblers
assemblers
Retailers
C
O
N
S
U
M
E
R
SFarmers
Farmers
Farmers
Farmers
Farmers
Farmers
Farmers
cooperatives
There also exist competition among players at a same stage of marketing channel. (Pfa > ? < Pfc )
Competition among channels exist. (Pf1 > ? < Pf2 / Pr1 > ? < Pr2 )
Retailers
Pf1
Pr1
Pf2
Pr2
Pfa
Pfc
C
O
M
P
E
T
I
T
I
O
N
C
O
M
P
E
T
I
T
I
O
N
LESE204
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1. Addressing the issues
Definition of marketing
an integrated process through
which
companies (player)
create value for customers
and (function)
build strong customer relationships
(tool)
in order to capture value from
customers in return.
Several ways of capturing the value
- Advertising
- New product
- Cost Reducing
- New technology
Tools that enable the players to win at the
competition
LESE204
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2. Monopoly
Main reason that causes monopoly is barriers to entry
- Exclusive right to use a key resource.
- Exclusive right to produce some good
- Costs of production make a single producer more efficient than a large number of
producers Natural monopoly
P
Q
AC(average cost)
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2. Monopoly
■ Demand Curve that is faced by monopolistWhole market demand is the one that monopolist faces
However, in a competitive market, an individual supplier faces a horizontal demand
curve
P
Q
D
P
Q
S
D
P*
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2. Monopoly
■ Profit Maximization Whole market demand is the one that monopolist faces
MR = MC
However, in a competitive market, an individual supplier faces a horizontal demand
curve
P = MC
P
QD
iiiii FCQCQQP )()(
iiiii FCQCPQ )(
MR
AC
MC
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2. Monopoly
Marginal revenue and marginal cost
Q = 10-1/2 P TR : PQ = 20Q -2Q*Q
MR= 20-4Q
Cost C(Q) = 2Q+Q*Q + 10 MC = 2+2Q
Total Profits = 20*3+2*3*3 – (2*3+3*3 +10) = 17
P
Q
20
10
10
5
16
4
14
8
2 3 6 8
Marginal Revenue
Eq,p = - 16
Eq,p = -
Eq,p = - 2.3
Eq,p = - 1
Eq,p = - 0.67
Eq,p = - 0.25
Eq,p = 0
Q
20
10
10
5
16
4
14
8
2 3 6 8
Eq,p = - 16
Eq,p = -
Eq,p = - 2.3
Eq,p = - 1
Eq,p = - 0.67
Eq,p = - 0.25
Eq,p = 0
MR
MC
2
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2. Monopoly
■ Profit Maximization
Foc:
MR MCPrice-cost margin(Lerner-index)
0 ≤ L ≤ 1 : if L > 0 existence of market power
At the monopoly price, Eq,p ≤ -1
iiiii FCQCQQP )()(
0)()(
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QPQmcQP
)()()(
LESE204
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2. Monopoly
■ Price discrimination: charging different customers different prices
<Examples of Price Discrimination>
Movie tickets
Airline prices
Discount coupons
Quantity discounts
1. first degree price discrimination:
price varies by customer's willingness
2. second degree price discrimination:price varies by quantity sold. Larger quantities are available at a lower unit price.
3. Third degree price discrimination:price varies by attributes (according to market segments)
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2. Monopoly
■ first degree price discrimination:
Pm
Q
D
MC
MR
P
QmQc
Consumer surplus under Pm
Variable profits of monopolist
under Pm
additional profits of monopolist
under perfect price discrimination
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2. Monopoly
■ Second degree price discrimination:
Pm
Q
D
AC
MR
P
Qm
Q1
MC
P1
P2
P3
Q3Q2
< +
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2. Monopoly
■ Third degree price discrimination
Foc:
)()()( QCQQPQQP bbaa
0)(])([
0)(])([
bb
bb
b
aa
aa
a
Q
QC
Q
QQP
Q
Q
QC
Q
QQP
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MCMRa
QQQ ba
MCMRb
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2. Monopoly
■ Third degree price discriminationMarket segmentation
The term is used when consumers with identical product and/or service
needs are divided up into groups so they can be charged different prices.
Market segment meets all of the following criteria:
- it is distinct from other segments (different segments have different
needs),
- it is homogeneous within the segment (exhibits common needs);
- it responds similarly to a market stimulus,
- it can be reached by a market intervention. (source: Wikipedia)
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2. Monopoly
Pm1
■ Third degree Price discrimination
Market 1 Market 2 Aggregate demand
D1MR1
D2MR2
Da
MRa
MC
Pm2
In a market where demand is more elastic, charge a lower price
LESE204
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3. Monopolistic Competition
■Monopolistic competition
- Many firms sell the products that are not identical (but similar products are sold
by competing firms).
Product differentiation:
Individual firm faces a downward-sloping demand curve,
- Free Entry or Exit: Firms can enter or exit the market.
Firms enter the market until economic profits are zero.
LESE204
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3. Monopolistic Competition
■Monopoly v.s. Monopolistic competition
Lm > Lc
Monopoly Monopolistic competition
Market power
(L = (P-mc)/P)
Lm > 0 L c> 0
Perception of the
demand
Market demand =
perceived demand
Perceived demand =
some portion of the whole
market demand
(downward slopping)
Entry and Exit No additional entry Free
Existence of
Other brand
No Many demand is more
elastic than monopoly
LESE204
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3. Monopolistic Competition
■ Short run – firm gets the profits
P
Q
MC
D: faced by individual firm
AC
MR
Profit
encourage new firms to enter
the market
reduce the demand of
existing firms
demand curves of
existing firms shift to the left
Optimal quantity of incumbent
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3. Monopolistic Competition
■ long run – firm gets no profits
P
Q
MC
D: faced by individual firm
AC
MR
Profit
new firms will enter
until the profits of existing firms become zero
Optimal quantity of incumbent
D’
MR’
LESE204
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3. Monopolistic Competition
■ long run – firm gets no profits
P
Q
MC
AC
MR
D’
MR’
Excess Profits exist
P* > MC
P*
Over capacity
Q* < Qc
Qc: quantity produced at efficient scale
Qc
Q*
Pc
ACMC
= MR
Qc
LESE204
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3. Monopolistic Competition
■ Social welfare of monopolistic competition
deadweight loss of monopoly pricing in monopolistic competition
exists because of the markup of price over marginal cost.
P
Q
MC
AC
MR
D’
MR’
P*
Qc
Q*
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3. Monopolistic Competition■Ways to differentiate
1. Advertise
In a monopolistic competition, each firm has an incentive to advertise
Effects of advertisement
i) Increase the competition by offering many kinds of brands or prices
ii) Give a signal to the consumers that the firm provides a higher
quality of product
“Brand” name (in the context of signaling)
offers consumers the information about the quality
gives an incentive firms to maintain high quality
LESE204
Depart
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Food a
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3. Monopolistic Competition
■Ways to differentiate
1. Advertise
How much advertisement is optimal?
Marginal revenue from advertising = Marginal cost for advertising
advertising-to-sales ratio = the ratio of the advertising elasticity of
demand to the own-price elasticity of demand.
: Steiner-Dorfman condition
At larger advertising elasticity, greater advertising-to-sales ratio
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LESE204
Depart
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3. Monopolistic Competition
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foc:
Under perfect competition, p-mc =0 no incentive to advertise
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Depart
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3. Monopolistic Competition