Demand and Supply Model

And its application --II

Course outline

Managerial Microeconomics

Basic Model

Managerial perspective

Additional topics
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Lecture outline
Demand and Supply

Demand

supply

Market equilibrium

Law of demand

Law of supply

Producer surplus

efficiency

Consumer surplus

government

Paying vs. bearing

Comparative Statics analysis 3

3.1 Competitive Market efficiency

What is (socially) efficient resource allocation?

To _______ the most _____ goods at the _______ cost possible, and _______ to those who ______ them the most.

3.1 Competitive Market Efficiency

1.

Efficient __________

Q
2.

Efficient __________

q
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3.1 Competitive Market Efficiency

How do competitive markets find out

what are most valuable goods? Who can produce those goods at lowest cost? Who value the goods the most?

3.1 Importance of competition and markets

How do competitive markets achieve efficiency?

It provides right incentive for buyers and sellers. Freely floating prices contain valuable information Competition among sellers---survival of the most efficient. Competition among buyers---winning of the highest bidders (with highest valuations) Competition among goods---winning of the most valuable goods
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What are the major application of D-S model?

3.1 Application of D-S model--efficient competitive markets (1)

It answers the macro question: why planned economies do not work, while market economies prosper.

Planned economy: a. Lack of information b. Lack of incentives

What are the main roles of government in an economy?

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3.2 D-S model application (2)

D-S model identifies areas and directions of government intervention. 1. Protect private ownership. 2. Protect fair competition, restrict market power. 3. Intervene when there are externalities.

Control pollution Provides free education High-speed railway?

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3.2 D-S model application (2)

4. Provide public goods 5. There is no information asymmetry in perfect competitive marketsregulate when there exists significant information asymmetry.

Food and drug safety Stock market

6. Markets are not fair to people with less endowment social welfare program.

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Optional reading

Baye, chapter 14 page 507 to page 530.

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Question

1.
2.

The more elastic the supply, the

more likely the government is to tax the product. larger the amount of any tax imposed on the product born by suppliers. smaller the amount of any tax imposed on the product born by suppliers. more elastic is the demand

3.

4.

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3.3 D-S model application (3)paying vs. bearing

Pricing Issue A major issue for manufacturers of industrial goods such as cement is whether their prices should include the costs of shipment to the consumer. How would the market for cement be affected if manufacturers switched from pricing inclusive of freight to ex-works pricing?
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3.3 D-S model application (3)paying vs. bearing

Price ($ per pound)

25 cents 25 cents

CF supply a b ex-works supply

1.50

CF demand ex-works demand

1 Quantity (Million pounds a year)

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3.3 D-S model application (3)paying vs. bearing

Tax Governments all over the world depend on tax revenues to support public services. Some taxes are levied on consumers, others on businesses, and some are levied on both. For example, airport tax is levied on carriers in the U.S. but on passengers in Asia. What difference would it make if the U.S. government switched to the Asian system?

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3.3 D-S model application (3)paying vs. bearing

$10 804 e b supply

800
794 $10 h

demand

900

920

Quantity (Thousand tickets a year)

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3.3 D-S model application (3)paying vs. bearing

Assume that the carrots market in Hong Kong is perfectly competitive. Let QD=600-20P denote the market demand. QD is in million pounds a year. P is in dollar. Let QS=30P denote the market supply. What is the equilibrium price? If now the government imposes a tax on the sellers in the amount of $1 per pound carrots, what is the new price? What amount of the tax is borne by the sellers? If instead the government imposes a tax on the buyer in the amount of $1 per pound, what is the new price? What amount of the tax is borne by the buyers? Comment on the difference between the two scenarios.

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3.3 D-S model application (3)paying vs. bearing

Paying a price bearing that amount How much each party bears is independent of who pays. How much each party bears depends on the elasticity of demand and supply. In general, the more flexible (elastic) is the buyer/seller (demand/supply), the ____ the buyer/seller bears.
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D-S model and Economic methodology

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Topic Intended Learning Outcomes

2.1 Explain the law of demand and the law of supply, list factors influence demand and supply, and identify their application in business 2.2 Use equations and graphs to represent demand/supply and aggregate individual demand/supply to get market demand/supply. 2.3 Distinguish between normal and inferior good and identify its application in business. 2.4 Calculate consumer surplus/ producer surplus and identify its application in business.

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Topic Intended Learning Outcomes

2.5 Explain how a market reaches equilibrium and calculate/predict competitive market price and quantity. 2.6 Explain why competitive markets are efficient. 2.7 Explain and use the four main applications of D-S Model
a) b) c) d)

Validate the importance of competition and markets in resource allocation. Identify areas and directions of government regulation. Distinguish paying vs. bearing Analyze changes in markets*

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Preparing for next lecture

Read Chapter 3 up to page 95

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