lecture 4: market and equilibrium advanced micro theory msc.envinatresecon. 1/2006 charit tingsabadh
TRANSCRIPT
![Page 1: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/1.jpg)
Lecture 4: market and equilibrium
Advanced Micro TheoryMSc.EnviNatResEcon.
1/2006Charit Tingsabadh
![Page 2: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/2.jpg)
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.
![Page 3: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/3.jpg)
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.
![Page 4: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/4.jpg)
Markets
For the moment, forget individual businesses
Think about the all suppliers - the “industry”
![Page 5: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/5.jpg)
The market process
• A market is a process of interaction between buyers and sellers
• Both sides matter.
![Page 6: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/6.jpg)
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
![Page 7: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/7.jpg)
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.
![Page 8: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/8.jpg)
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
![Page 9: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/9.jpg)
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
![Page 10: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/10.jpg)
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.
![Page 11: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/11.jpg)
Equilibrium Price and Quantity Traded
Price ofproduct
Quantity demanded/suppliedof product per time period
Q1
P1
S
D
![Page 12: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/12.jpg)
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
![Page 13: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/13.jpg)
Does this work for desktop PC’s?
Price ofPC
Quantity demanded/suppliedof PCs per time period
Q1
P1
S
D
![Page 14: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/14.jpg)
CHANGES IN MARKET PRICE
ARISE FROM
Anything that changes the conditions of demand
or
Anything that changes the conditions of supply
![Page 15: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/15.jpg)
An increase in demand
Price ofgood X
Quantity demanded/suppliedof good X per time period
Q1
P1
S
D1
D2
Q2 Q3
P2
![Page 16: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/16.jpg)
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
![Page 17: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/17.jpg)
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
![Page 18: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/18.jpg)
$10
D
S, pre-warS, post-war
1990: The Gulf war and its effect on the price of crude oil
52Million barrels/day
![Page 19: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/19.jpg)
$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
![Page 20: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/20.jpg)
The market for heroin
Price
Quantity per period
P1
Q1
Supply
Demand
![Page 21: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/21.jpg)
The market for heroin
Price
Quantity per period
P1
Q1Q2
P2
Supply
Demand
![Page 22: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/22.jpg)
The market for heroin
Price
Quantity per period
P1
Q1
P2
Supply
Demand
NewSupply
![Page 23: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/23.jpg)
A private health service
Price
Quantity per period
P1
Q1
Market supply
Demand
![Page 24: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/24.jpg)
A publicly provided health service
Price
Quantity per period
P1
Q1Q2
P2
Imputed market supply
Demand
Q*
![Page 25: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/25.jpg)
A health service dilemma: more supply adds to demand
Price
Quantity per period
P1
Q1Q2
P2
Imputed market supply
Demand
New demand
Q3
![Page 26: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/26.jpg)
Reading and further issues
Perman and Scouller, Business Economics, Chapter 2
![Page 27: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/27.jpg)
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).
![Page 28: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/28.jpg)
Chapter 9
Applying the Competitive Model
![Page 29: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/29.jpg)
Figure 9.1 Consumer
Surplus
![Page 30: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/30.jpg)
Figure 9.1a Consumer Surplus
![Page 31: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/31.jpg)
Figure 9.1b Consumer Surplus
![Page 32: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/32.jpg)
Figure 9.2 Fall in Consumer Surplus From Roses as Price
Rises
![Page 33: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/33.jpg)
Table 9.1 Effect of a 10% Increase in Price on Consumer Surplus (Revenue and Consumer Surplus in Billions of
1999 Dollars)
![Page 34: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/34.jpg)
Page 278 Solved Problem 9.1
![Page 35: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/35.jpg)
Figure 9.3 Producer Surplus
![Page 36: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/36.jpg)
Figure 9.3a Producer Surplus
![Page 37: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/37.jpg)
Figure 9.3b Producer Surplus
![Page 38: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/38.jpg)
Page 281 Solved Problem 9.2
![Page 39: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/39.jpg)
Figure 9.4 Why Reducing Output from the Competitive Level Lowers
Welfare
![Page 40: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/40.jpg)
Figure 9.5 Why Increasing Output from the Competitive Level Lowers
Welfare
![Page 41: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/41.jpg)
Figure 9.6 Effect of a Restriction on the Number of
Cabs
![Page 42: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/42.jpg)
Figure 9.7 Welfare Effects of a Specific Tax on Roses
![Page 43: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/43.jpg)
Figure 9.8 Welfare Effects of a Per-Unit Subsidy on Roses
![Page 44: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/44.jpg)
Figure 9.9 Effect of Pricing Supports in
Soybeans
![Page 45: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/45.jpg)
Page 298 Solved Problem 9.3
![Page 46: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/46.jpg)
Page 300 Solved Problem 9.4
![Page 47: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/47.jpg)
Figure 9.10 Loss from Eliminating Free Trade
![Page 48: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/48.jpg)
Figure 9.11 Effect of a Tariff (or Quota)
![Page 49: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/49.jpg)
Table 9.2 Welfare Cost of Trade Barriers (millions of 1999 Dollars)
![Page 50: Lecture 4: market and equilibrium Advanced Micro Theory MSc.EnviNatResEcon. 1/2006 Charit Tingsabadh](https://reader036.vdocuments.site/reader036/viewer/2022062422/56649f355503460f94c53af5/html5/thumbnails/50.jpg)
Adobe Acrobat 7.0 Document