Quản trị kinh doanh - Chapter 2: Demand and supply analysis

Chapter 21Demand and Supply AnalysisCopyright (c)2014 John Wiley & Sons, Inc.2Chapter Two OverviewMotivation – U.S. corn marketsCompetitive Markets DefinedThe Market Demand CurveThe Market Supply CurveEquilibrium6. Characterizing Demand and Supply – Elasticity7. Back of the Envelope TechniquesChapter TwoCopyright (c)2014 John Wiley & Sons, Inc.3MotivationsExample: U.S. Corn MarketHistorical price:$2.00 per bushelWhy do prices vary so much? Changes in Supply and Demand conditions affects pattern of pricesPrices fell below $2.00 per bushel2003-2004:2004-2005:Prices rose to $3.00 per bushel Chapter Two2006-2008:Prices rose above $5.00 per bushel2008-2009:Prices fell to $3.90 per bushelCopyright (c)2014 John Wiley & Sons, Inc.4MotivationsExample: U.S. Corn MarketChapter Two 2002-2003 Decrease in supply due to drought in the corn-growing states 2004-2005 Unexpectedly large U.S. corn crops 2006-2008 Changes in U.S. government policy Bubble years Increase in production costs due to oil price increases and rains and flooding wiped out corn crop 2008-2009 Weather conditions back to normal Economic CrisisCopyright (c)2014 John Wiley & Sons, Inc.5Defined:Competitive MarketsCompetitive Markets are those with sellers and buyers that are small and numerous enough that they take the market price as given when they decide how much to buy and sell.Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.6The Market Demand FunctionThe Market Demand Function tells us that the quantity of a good all consumers in the market are willing to buy is a function of various factors.Defined:Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.7Market Demand Derived Demand The part of demand for a good that is derived from the production and sale of other goods. Direct Demand The part of demand for a good that comes from the desire of buyers to directly consume the good itself.Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.8The Market Demand CurveThe Market Demand Curve plots the aggregate quantity of a good that consumers are willing to buy at different prices, holding constant other demand drivers such as prices of other goods, consumer income, quality.Defined:Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.9The Law of Demand The Law of Demand states that the quantity of a good demanded decreases when the price of this good increases.Defined:Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.10Demand Curve RuleA move along the demand curve for a good can only be triggered by a change in the price of that good. Any change in another factor that affects the consumers’ willingness to pay for the good results in a shift in the demand curve for the good.Defined:Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.11Shifts of the Demand CurveThe Demand Curve shifts when factors other than own price change If the change increases the willingness of consumers to acquire the good, the demand curve shifts right If the change decreases the willingness of consumers to acquire the good, the demand curve shifts leftChapter TwoCopyright (c)2014 John Wiley & Sons, Inc.12The Demand for CarsChapter TwoCopyright (c)2014 John Wiley & Sons, Inc.13The Demand for CarsWe always graph P on vertical axis and Q on horizontal axis, but we write demand as Q as a function of P If P is written as function of Q, it is called the inverse demand.Note: Markets defined by commodity, geography, time.Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.14Market SupplyThe Market Supply Function:The Market Supply Curve:Tells us that the quantity of a good supplied by all producers in the market depends on various factorsPlots the aggregate quantity of a good that producers are willing to sell at different prices.Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.15Supply Curve for WheatChapter TwoCopyright (c)2014 John Wiley & Sons, Inc.16The Law of SupplyThe Law of Supply states that the quantity of a good offered increases when the price of this good increases.Defined:Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.17Supply Curve RuleA move along the supply curve for a good can only be triggered by a change in the price of that good. Any change in another factor that affects the producers’ willingness to offer for the good results in a shift in the supply curve for the good.Defined:Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.18The Law of SupplyThe Supply Curve shifts when factors other than own price change If the change increases the willingness of producers to offer the good at the same price, the supply curve shifts right If the change decreases the willingness of producers to offer the good at the same price, the supply curve shifts leftChapter TwoCopyright (c)2014 John Wiley & Sons, Inc.19Market Equilibrium Market Equilibrium is a price such that, at this price, the quantities demanded and supplied are the same. is a point at which there is no tendency for the market price to change as long as exogenous variables remain unchanged.Demand and supply curves intersect at equilibriumDemandSupplyChapter TwoCopyright (c)2014 John Wiley & Sons, Inc.20Example: Market Equilibrium for Cranberries Qd = 500 – 4p Qs = -100 + 2p p = price of cranberries (dollars per barrel) Q = demand or supply in millions of barrels per yearThe equilibrium price of cranberries is calculated by equating demand to supply:Qd = Qs or500 – 4p = -100 + 2p solvingp* = $100Plug equilibrium price into either demand or supply to get equilibrium quantity:Q* = 500 – 4(100) = 100 unitsChapter TwoCopyright (c)2014 John Wiley & Sons, Inc.21Market Equilibrium for CranberriesQ* = 100Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.22Excess Demand/SupplyExcess Demand: A situation in which the quantity demanded at a given price exceeds the quantity supplied.Excess Supply: A situation in which the quantity supplied at a given price exceeds the quantity demanded.If there is no excess supply or excess demand, there is no pressure for prices to change and thus there is equilibrium.When a change in an exogenous variable causes the demand curve or the supply curve to shift, the equilibrium shifts as well.Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.23Excess Demand/SupplyChapter TwoQuantity (billions of bushels per year)Price (dollars per bushel)E3.004.005.0089111314DSExcess supply when price is $5Excess demand when price is $3Copyright (c)2014 John Wiley & Sons, Inc.24Shifts in Demand, Supply UnchangedDemand Increases: P QDemand Decreases: P Q Copyright (c)2014 John Wiley & Sons, Inc.25Shifts in Supply, Demand UnchangedSupply Increases: P  QSupply Decreases: P  Q Copyright (c)2014 John Wiley & Sons, Inc.26Shifts in Demand and SupplyCopyright (c)2014 John Wiley & Sons, Inc.27Price ElasticityThe Price Elasticity of Demand is the percentage change in quantity demanded brought about by a one-percent change in the price of the good. Q,P= (Q/Q) = (Q/p)(p/Q) (p/p)Defined:Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.28 Slope is the ratio of absolute changes in quantity and price. (= Q/P). Elasticity is the ratio of relative (or percentage) changes in quantity and price.Price ElasticityElasticity is not slope Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.29Price Elasticity When a one percent change in price leads to a greater than one-percent change in quantity demanded, the demand curve is elastic. (Q,P Q,P > -1) When a one-percent change in price leads to an exactly one-percent change in quantity demanded, the demand curve is unit elastic. (Q,P = -1)Key Characteristics:Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.30Elasticity – Linear Demand CurveQd = a – bPRe-writing, we have: P = a/b – (1/b)PElasticity is:Chapter TwoεQ,P = (ΔQ/ ΔP)(P/Q) = -b(P/Q)Elasticity falls from 0 to - along the linear demand curve, but slope is constant.Example: Calculate elasticity when P = 30 and Qd = 400 – 10PAnswer: εQ,P = -3 “elastic”Where: a and b are positive constants p is price b is the slope a/b is the choke priceCopyright (c)2014 John Wiley & Sons, Inc.31Elasticity – Linear Demand Curve0PQa/2aa/2ba/b•Q,P = -1Inelastic regionElastic regionQ,P = -Q,P = 0Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.32Constant Elasticity vs. Linear Demand CurveQuantityPrice0QP•Observed price and quantityConstant elasticity demand curveLinear demand curveChapter TwoLinear Demand Curve:Qd = a -bPεQ,P = (ΔQ/ ΔP)(P/Q) = -b(P/Q) Constant Elasticity Demand Curve:Qd = aP-bεQ,P = -bCopyright (c)2014 John Wiley & Sons, Inc.33Price Elasticity and Total RevenueChapter TwoTotal Revenue (TR) = P*QWhen P Q and when P QDemand is elastic Fall in Q > Rise in P TR fallsDemand is inelasticFall in Q < Rise in P TR fallsCopyright (c)2014 John Wiley & Sons, Inc.34Chapter TwoDeterminants of Price Elasticity of DemandAvailability of SubstitutesMore substitutes → more price elasticGoods which have price inelastic at the market level, like cigarettes, can be highly price elastic at the brand levelNecessities versus LuxuriesNecessities → less price elasticImportance in Buyer’s BudgetMore important → more price elasticTime HorizonLong-run → more price elasticCopyright (c)2014 John Wiley & Sons, Inc.35Chapter TwoElasticity in the Long-run versus the Short-runLong-run demand curve – demand curve when consumers can fully adjust their purchase decisions to changes in priceShort-run demand curve – demand curve when consumers can fully adjust their purchase decisions to changes in priceLong-run supply curve – supply curve when sellers can fully adjust their supply decisions to changes in priceShort-run supply curve – supply curve when sellers can fully adjust their supply decisions to changes in priceCopyright (c)2014 John Wiley & Sons, Inc.36Durable GoodsThe Durable Good is a good that provides valuable services over a long time (usually many years).Demand for non-durables is less elastic in the short run when consumers can only partially adapt their behavior. Demand for durables is more elastic in the short run because consumers can delay purchase.Defined:Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.37Other ElasticitiesChapter TwoCopyright (c)2014 John Wiley & Sons, Inc.38Elasticities & the Cola WarsSource: Gasmi, Laffont and Vuong, "Econometric Analysis of Collusive Behavior in a Soft Drink Market," Journal of Economics and Management Strategy 1 (Summer, 1992) 278-311.Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.39Estimating Demand & Supply EstimatingElasticityChapter TwoCopyright (c)2014 John Wiley & Sons, Inc.40Estimating Demand & Supply Example:U.S. Boilers1990Chapter TwoCopyright (c)2014 John Wiley & Sons, Inc.41Estimating Demand & Supply From Past ShiftsChapter TwoWe can “identify” the slope of supply by a shift in demandWe can “identify” the slope of demand by a shift in supplyThis technique only works if one or the other of the curves stays constantCopyright (c)2014 John Wiley & Sons, Inc.42Chapter Two Main PointsChapter Two Market Demand Function and Curve Market Supply Function and Curve Equilibrium Measures of Elasticity Back-of-the-Envelope CalculationsCopyright (c)2014 John Wiley & Sons, Inc.