Mba1014 supply and demand 010513

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Market Supply, Demand, Equilibrium

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Mba1014 supply and demand 010513

  1. 1. Go Global !Go Global !Managerial Economics :Managerial Economics :Supply & DemandByStephen OngStephen OngVisiting Fellow, Birmingham City UniversityVisiting Fellow, Birmingham City UniversityVisiting Professor, College of Management,Visiting Professor, College of Management,Shenzhen UniversityShenzhen UniversityMay 2013May 2013
  2. 2. AgendaAgenda1.1. Market DemandMarket Demand2.2. Market SupplyMarket Supply3.3. Market EquilibriumMarket Equilibrium
  3. 3. Learning ObjectivesLearning ObjectivesTo define supply, demand, and equilibriumTo define supply, demand, and equilibriumpricepriceTo identify non-price determinants of supplyTo identify non-price determinants of supplyand demandand demandTo distinguish between short-run rationingTo distinguish between short-run rationingfunction and long-run guiding function offunction and long-run guiding function ofpricepriceTo predict how changing world economicTo predict how changing world economicconditions affect market price andconditions affect market price andproductionproductionTo illustrate how supply and demand can beTo illustrate how supply and demand can beused to improve management decisionsused to improve management decisions
  4. 4. 11Market DemandMarket Demand
  5. 5. Market demandMarket demandDemand for a good or service isDemand for a good or service isdefined asdefined as quantitiesquantities that peoplethat peopleare ready (willing and able) to buyare ready (willing and able) to buyat variousat various pricesprices within some givenwithin some giventime periodtime period Other factors besides price areOther factors besides price areheld constantheld constant
  6. 6. Market demandMarket demandMarket demand is the sum ofMarket demand is the sum ofall the individual demandsall the individual demandsExampleExample: demand for pizza: demand for pizza
  7. 7. Market demandMarket demandTheThe inverseinverserelationshiprelationshipbetween pricebetween priceand theand thequantityquantitydemanded of ademanded of agood or servicegood or serviceis called theis called theLaw of DemandLaw of Demand
  8. 8. Market demandMarket demandChanges in price result in changesChanges in price result in changesin the quantity demandedin the quantity demanded This is shown as movementThis is shown as movement alongalongthe demand curvethe demand curveChanges in non-price factors resultChanges in non-price factors resultin changes in demandin changes in demand This is shown as aThis is shown as a shiftshift in thein thedemand curvedemand curve
  9. 9. Market demandMarket demandNonprice determinants ofNonprice determinants ofdemanddemand tastes and preferencestastes and preferences incomeincome prices of related productsprices of related products future expectationsfuture expectations number of buyersnumber of buyers
  10. 10. Consumer Tastes & PreferencesConsumer Tastes & PreferencesEffect on DemandEffect on DemandVideo : Domino’s Pizza TurnVideo : Domino’s Pizza TurnAroundAroundhttp://www.youtube.com/watchhttp://www.youtube.com/watch?
  11. 11. 22Market SupplyMarket Supply
  12. 12. Market supplyMarket supplyThe supply of a good or service isThe supply of a good or service isdefined asdefined as quantitiesquantities that peoplethat peopleare ready to sell at variousare ready to sell at various pricespriceswithin some given time periodwithin some given time period Other factors besides price heldOther factors besides price heldconstantconstant
  13. 13. Market supplyMarket supplyChanges in price result inChanges in price result inchanges in the quantity suppliedchanges in the quantity supplied shown as movementshown as movementalongalong the supply curvethe supply curve Changes in non-price determinantsChanges in non-price determinantsresult in changes in supplyresult in changes in supply shown as ashown as a shiftshift in the supplyin the supplycurvecurve
  14. 14. Market supplyMarket supplyNonprice determinants of supplyNonprice determinants of supplycosts and technologycosts and technologyprices of other goods or servicesprices of other goods or servicesoffered by the selleroffered by the sellerfuture expectationsfuture expectationsnumber of sellersnumber of sellersweather conditionsweather conditions
  15. 15. 33Market EquilibriumMarket Equilibrium
  16. 16. Market equilibriumMarket equilibriumEquilibrium priceEquilibrium price: the price that: the price thatequates the quantity demandedequates the quantity demandedwith the quantity suppliedwith the quantity suppliedEquilibrium quantityEquilibrium quantity: the amount: the amountthat people are willing to buy andthat people are willing to buy andsellers are willing to offer at thesellers are willing to offer at theequilibrium price levelequilibrium price level
  17. 17. Market equilibriumMarket equilibrium Shortage:Shortage: a market situation in whicha market situation in whichthe quantity demanded exceeds thethe quantity demanded exceeds thequantity suppliedquantity supplied shortage occurs at a priceshortage occurs at a price belowbelow thetheequilibrium levelequilibrium level Surplus:Surplus: a market situation in whicha market situation in whichthe quantity supplied exceeds thethe quantity supplied exceeds thequantity demandedquantity demanded surplus occurs at a pricesurplus occurs at a price aboveabove thetheequilibrium levelequilibrium level
  18. 18. Market equilibriumMarket equilibrium
  19. 19. From 1970 to 2010,From 1970 to 2010,the real price of eggs fell by 55 %the real price of eggs fell by 55 %•The mechanization of poultry farmsThe mechanization of poultry farmssharply reduced the cost of producingsharply reduced the cost of producingeggs,eggs, shifting the supply curveshifting the supply curvedownward.downward.•TheThe demand curve for eggs shifted todemand curve for eggs shifted tothe leftthe left as a more health-consciousas a more health-consciouspopulation tended to avoid eggs.population tended to avoid eggs.THE PRICE OF EGGS & COLLEGE EDUCATIONTHE PRICE OF EGGS & COLLEGE EDUCATION
  20. 20. • while the real price of a collegewhile the real price of a collegeeducation rose by 82 %.education rose by 82 %.• As for college, increases in the costs ofAs for college, increases in the costs ofequipping and maintaining modernequipping and maintaining modernclassrooms, laboratories, and libraries,classrooms, laboratories, and libraries,along with increases in faculty salaries,along with increases in faculty salaries,pushedpushed the supply curve up.the supply curve up.• TheThe demand curve shifted to the rightdemand curve shifted to the right as aas alarger percentage of a growing number oflarger percentage of a growing number ofhigh school graduates decided that ahigh school graduates decided that acollege education was essential.college education was essential.THE PRICE OF A COLLEGE EDUCATIONTHE PRICE OF A COLLEGE EDUCATION
  21. 21. (a) MARKET FOR EGGS(a) The supply curve for eggsshifted downward as productioncosts fell; the demand curveshifted to the left as consumerpreferences changed. As a result,the real price of eggs fell sharplyand egg consumption rose.(b) The supply curve for a college educationshifted up as the costs of equipment,maintenance, and staffing rose. The demandcurve shifted to the right as a growingnumber of high school graduates desired acollege education. As a result, both price andenrollments rose sharply.(b) MARKET FOR COLLEGE EDUCATIONTHE PRICE OF EGGS & COLLEGE EDUCATIONTHE PRICE OF EGGS & COLLEGE EDUCATION
  22. 22. Comparative statics analysisComparative statics analysisComparative statics is aform of sensitivity (or what-if) analysis Commonly used method ineconomic analysis
  23. 23. Comparative statics analysisComparative statics analysisProcess of comparative staticsProcess of comparative staticsanalysis:analysis:state all thestate all the assumptionsassumptions needed toneeded toconstruct the modelconstruct the modelbegin by assuming that the model isbegin by assuming that the model isinin equilibriumequilibriumintroduce a change in the model, sointroduce a change in the model, soa condition ofa condition of disequilibriumdisequilibrium isiscreatedcreatedfind the new point of equilibriumfind the new point of equilibriumcompare thecompare the new equilibriumnew equilibriumpointpoint with the original onewith the original one
  24. 24. Comparative statics: exampleComparative statics: exampleStep 1Step 1 assume all factorsassume all factorsexcept the price ofexcept the price ofpizza are constantpizza are constant buyers’ demand andbuyers’ demand andsellers’ supply aresellers’ supply arerepresented by linesrepresented by linesshownshown
  25. 25. Comparative statics: exampleComparative statics: exampleStep 2Step 2begin thebegin theanalysis inanalysis inequilibrium asequilibrium asshown by Qshown by Q11and Pand P11
  26. 26. Comparative statics: exampleComparative statics: exampleStep 3Step 3 assume that a newassume that a newstudy shows pizza tostudy shows pizza tobe the mostbe the mostnutritious of all fastnutritious of all fastfoodsfoods consumersconsumers increaseincreasetheir demandtheir demand forforpizza as a resultpizza as a result
  27. 27. Comparative statics: exampleComparative statics: exampleStep 4Step 4thethe shift inshift indemanddemand resultsresultsin a newin a newequilibrium priceequilibrium price(P(P22))and a newand a newequilibriumequilibriumquantity (Qquantity (Q22))
  28. 28. Comparative statics: exampleComparative statics: exampleStep 5Step 5comparing thecomparing thenewnewequilibriumequilibriumpointpoint with thewith theoriginal one, weoriginal one, wesee that bothsee that bothequilibrium priceequilibrium priceand quantity haveand quantity haveincreasedincreased
  29. 29. Comparative statics analysisComparative statics analysisThe short run is the period ofThe short run is the period oftime in which:time in which: sellers already in the market respond tosellers already in the market respond toa change in equilibrium price bya change in equilibrium price byadjustingadjusting variable inputsvariable inputs buyers already in the market respond tobuyers already in the market respond tochanges in equilibrium price by adjustingchanges in equilibrium price by adjustingthe quantity demanded for the good orthe quantity demanded for the good orserviceservice
  30. 30. Comparative statics analysisComparative statics analysisShort run changes show the rationingShort run changes show the rationingfunction of pricefunction of price The rationing function of price is theThe rationing function of price is thechange in market price to eliminate thechange in market price to eliminate theimbalance between quantities supplied andimbalance between quantities supplied anddemanded is the change in market price todemanded is the change in market price toeliminate the imbalance between quantitieseliminate the imbalance between quantitiessupplied and demandedsupplied and demanded
  31. 31. Short-run analysisShort-run analysisan increase inan increase indemanddemandcausescausesequilibriumequilibriumprice andprice andquantity to risequantity to rise
  32. 32. Short-run analysisShort-run analysisaa dedecrease increase indemanddemandcausescausesequilibriumequilibriumprice andprice andquantity to fallquantity to fall
  33. 33. Short-run analysisShort-run analysisanan inincrease increase insupplysupply causescausesequilibriumequilibriumprice to fallprice to fallandandequilibriumequilibriumquantity to risequantity to rise
  34. 34. Short-run analysisShort-run analysisaa dedecrease increase insupplysupply causescausesequilibriumequilibriumprice to riseprice to riseandandequilibriumequilibriumquantity to fallquantity to fall
  35. 35. WAGE INEQUALITYWAGE INEQUALITY IN USAIN USA Over the past two decades, the wages of skilled high-incomeOver the past two decades, the wages of skilled high-incomeworkers have grown substantially, while the wages of unskilledworkers have grown substantially, while the wages of unskilledlow-income workers have fallen slightly.low-income workers have fallen slightly. From 1978 to 2009, people in the top 20 percent of theFrom 1978 to 2009, people in the top 20 percent of theincome distribution experienced an increase in theirincome distribution experienced an increase in theiraverage real (inflation-adjusted) pretax householdaverage real (inflation-adjusted) pretax householdincome ofincome of 45%45%, while those in the bottom 20, while those in the bottom 20percent saw their average real pretax income increasepercent saw their average real pretax income increaseby onlyby only 4%4% While the supply of unskilled workers—people with limitedWhile the supply of unskilled workers—people with limitededucations—has grown substantially, the demand for them haseducations—has grown substantially, the demand for them hasrisen only slightly.risen only slightly. On the other hand, while the supply of skilled workers—e.g.,On the other hand, while the supply of skilled workers—e.g.,engineers, scientists, managers, and economists—has grownengineers, scientists, managers, and economists—has grownslowly, the demand has risen dramatically, pushing wages up.slowly, the demand has risen dramatically, pushing wages up.
  36. 36. Income Inequality
  37. 37. Long run analysisLong run analysisThe long run is the period ofThe long run is the period oftime in which:time in which: new sellersnew sellers may enter a market existing sellers may exitexit from amarket existing sellers may adjust fixedfactors of productionfactors of production buyers may react to a change inequilibrium price by changing theirtastes and preferencestastes and preferences
  38. 38. Long run analysisLong run analysisLong run changes show theLong run changes show theallocating function of priceallocating function of priceThe guiding or allocating function ofThe guiding or allocating function ofprice is the movement of resourcesprice is the movement of resourcesinto or out of markets in response to ainto or out of markets in response to achange in the equilibrium pricechange in the equilibrium price
  39. 39. Long-run analysisLong-run analysis initial change:initial change: dedecreasecreasein demand from Din demand from D11 to Dto D22 result: reduction inresult: reduction inequilibrium price andequilibrium price andquantity (to Pquantity (to P22,Q,Q22)) follow-on adjustment:follow-on adjustment:movement ofmovement ofresources out of theresources out of themarketmarketleftward shift in theleftward shift in thesupply curve to Ssupply curve to S22 equilibrium priceequilibrium priceand quantity (toand quantity (toPP33,Q,Q33))
  40. 40. Long-run analysisLong-run analysis initial change:initial change:inincrease in demandcrease in demandfrom Dfrom D11 to Dto D22 result: increase inresult: increase inequilibrium price andequilibrium price andquantity (to Pquantity (to P22,Q,Q22)) follow-on adjustment:follow-on adjustment: movement ofmovement ofresources into theresources into themarketmarket rightward shift in therightward shift in thesupply curve to Ssupply curve to S22 equilibrium price andequilibrium price andquantity (to Pquantity (to P33,Q,Q33))
  41. 41. Supply, demand, and price:Supply, demand, and price:the managerial challengethe managerial challenge in the extreme case, the forces of supply andin the extreme case, the forces of supply anddemand are the sole determinants of thedemand are the sole determinants of themarket price, not any single firmmarket price, not any single firm this type of market is ‘perfectthis type of market is ‘perfectcompetition’competition’ in many cases, individual firms can exertin many cases, individual firms can exertmarket powermarket power over price because ofover price because oftheir:their: dominant sizedominant size ability to differentiate their productability to differentiate their productthrough advertising, brand name,through advertising, brand name,features, or servicesfeatures, or services
  42. 42. Supply, demand, and price:Supply, demand, and price:the managerial challengethe managerial challengeEg.Eg.: COFFEE: COFFEE ‘‘buy lowbuy low, sell, sellhigh’high’ 2000:over2000:overproduction led toproduction led toprice fallsprice falls 2004: prices2004: pricesmoved up againmoved up again Starbucks effectsStarbucks effects
  43. 43. Supply, demand, and price:Supply, demand, and price:the managerial challengethe managerial challengeEg.Eg.: Air Travel: Air Travel ‘‘buy high,buy high, sell low’sell low’ industry de-industry de-regulated in lateregulated in late1970s1970s tight competitiontight competition post 9/11, a low-post 9/11, a low-cost structure iscost structure isneededneeded
  44. 44. Global applicationGlobal applicationEg.Eg.: COPPER market: COPPER market abundant metalabundant metal strategic itemstrategic item nominal pricesnominal pricesrisingrising improved miningimproved miningtechnologytechnology closure ofclosure ofuneconomic minesuneconomic mines
  45. 45. THE LONG-RUN BEHAVIOUR OF NATURALTHE LONG-RUN BEHAVIOUR OF NATURALRESOURCE PRICESRESOURCE PRICESCONSUMPTIONCONSUMPTIONAND PRICE OFAND PRICE OFCOPPERCOPPERAlthough annualAlthough annualconsumption ofconsumption ofcopper hascopper hasincreased aboutincreased abouta hundredfold,a hundredfold,the realthe real(inflation-(inflation-adjusted) priceadjusted) pricehas not changedhas not changedmuch.much.
  46. 46. • After reaching a level of aboutAfter reaching a level of about$1.00 per pound in 1980, the price$1.00 per pound in 1980, the priceof copper fell sharply to about 60of copper fell sharply to about 60cents per pound in 1986.cents per pound in 1986.• Worldwide recessions in 1980Worldwide recessions in 1980and 1982and 1982 contributed to thecontributed to thedecline of copper prices.decline of copper prices.THE BEHAVIOUR OF COPPER PRICESTHE BEHAVIOUR OF COPPER PRICES
  47. 47. Why did the price increase so sharply afterWhy did the price increase so sharply after2003?2003?• First, theFirst, the demanddemand for copper fromfor copper fromChina and other Asian countriesChina and other Asian countriesbegan increasing dramatically.began increasing dramatically.• Second, because prices had droppedSecond, because prices had droppedso much from 1996 through 2003,so much from 1996 through 2003,producers closed unprofitable minesproducers closed unprofitable minesandand cut productioncut production..What would a decline in demand do to theWhat would a decline in demand do to theprice of copper?price of copper?THE BEHAVIOUR OF COPPER PRICESTHE BEHAVIOUR OF COPPER PRICES
  48. 48. THE BEHAVIOUR OF COPPER PRICESTHE BEHAVIOUR OF COPPER PRICESCopper prices are shown in both nominal (no adjustment for inflation)Copper prices are shown in both nominal (no adjustment for inflation)and real (inflation-adjusted) terms. In real terms, copper prices declinedand real (inflation-adjusted) terms. In real terms, copper prices declinedsteeply from the early 1970s through the mid-1980s as demand fell. Insteeply from the early 1970s through the mid-1980s as demand fell. In1988–1990, copper prices rose in response to supply disruptions1988–1990, copper prices rose in response to supply disruptionscaused by strikes in Peru and Canada but later fell after the strikescaused by strikes in Peru and Canada but later fell after the strikesended. Prices declined during the 1996–2002 period but then increasedended. Prices declined during the 1996–2002 period but then increasedsharply starting in 2005.sharply starting in 2005.COPPER PRICES, 1965–2011COPPER PRICES, 1965–2011
  49. 49. COPPERCOPPERSUPPLY ANDSUPPLY ANDDEMANDDEMANDThe shift in theThe shift in thedemand curvedemand curvecorrespondingcorrespondingto a 20%to a 20%decline indecline indemand leadsdemand leadsto a 10.7%to a 10.7%decline indecline inpriceprice..THE BEHAVIOUR OF COPPER PRICESTHE BEHAVIOUR OF COPPER PRICES
  50. 50. THE LONG-RUN BEHAVIOUR OF NATURALTHE LONG-RUN BEHAVIOUR OF NATURALRESOURCE PRICESRESOURCE PRICESLONG-RUN MOVEMENTS OF SUPPLY AND DEMAND FOR MINERAL RESOURCESAlthough demand for most resources has increased dramatically overAlthough demand for most resources has increased dramatically overthe past century, prices have fallen or risen only slightly in realthe past century, prices have fallen or risen only slightly in real(inflation-adjusted) terms because(inflation-adjusted) terms because cost reductionscost reductions have shifted thehave shifted thesupply curve to the right just as dramatically.supply curve to the right just as dramatically.
  51. 51. SUPPLY AND DEMAND FOR NEW YORK CITY OFFICE SPACESUPPLY AND DEMAND FOR NEW YORK CITY OFFICE SPACEFollowing 9/11 the supply curve shifted to theFollowing 9/11 the supply curve shifted to theleft, but the demand curve also shifted to theleft, but the demand curve also shifted to theleft, so that the average rental price fell.left, so that the average rental price fell.THE EFFECTS OF 9/11 ON THE SUPPLY ANDTHE EFFECTS OF 9/11 ON THE SUPPLY ANDDEMAND FOR NEW YORK CITY OFFICE SPACEDEMAND FOR NEW YORK CITY OFFICE SPACE
  52. 52. ConclusionConclusion“The key is to make things asThe key is to make things assimple as possible, but notsimple as possible, but notone bit simpler”one bit simpler”Albert EinsteinAlbert Einstein
  53. 53. Casestudy : TESCOCasestudy : TESCO1.1. Read and prepare theRead and prepare theCasestudy on TESCOCasestudy on TESCO(Johnson, Whittington &(Johnson, Whittington &Scholes (2011)) forScholes (2011)) fordiscussion and presentationdiscussion and presentationnext week.next week.2.2. Identify and evaluate theIdentify and evaluate thechallenges facing TESCO’schallenges facing TESCO’sglobal expansion byglobal expansion byconducting Externalconducting ExternalEnvironment analysisEnvironment analysis(PESTEL);and Industry(PESTEL);and Industry(5+1 Forces) analysis.(5+1 Forces) analysis.
  54. 54. Core ReadingCore Reading• Keat, Paul G. and Young, Philip KY (2009)Managerial Economics, 6thedition, Pearson• Samuelson, William F. and Marks, Stephen G.(2010) Managerial Economics, 6thedition, JohnWiley• Pindyck, Robert S. and Rubinfeld, Daniel L.(2013)Microeconomics, 8thedition, Pearson• Samuelson, P.A. and Nordhaus, W. D.Samuelson, P.A. and Nordhaus, W. D.(2010)(2010)“Economics”“Economics” Irwin/McGraw-Hill, 19Irwin/McGraw-Hill, 19ththEditionEdition• Porter, Michael E. (2004)Porter, Michael E. (2004)“Competitive Strategy –“Competitive Strategy –Techniques for Analyzing Industries and Competitors”Techniques for Analyzing Industries and Competitors”Free PressFree Press
  55. 55. Questions?Questions?

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