Tài liệu Microeconomics for MBAs 6 doc

• An increase in supply is an increase in the quantity producers are willing and able to offer at each and every price.. • A decrease in supply is a decrease in the quantity producers a

• Change in the profitability of producing other goods

• Change in the scarcity (and prices) of various productive resources Many other factors, such as weather, can also affect production costs A change in any of these

determinants of supply can either increase or decrease supply

• An increase in supply is an increase in the quantity producers are willing and able to

offer at each and every price It is represented graphically by a rightward, or outward, shift in the supply curve

• A decrease in supply is a decrease in the quantity producers are willing and able to

offer at each and every price It is represented graphically by a leftward, or inward, shift in the supply curve

TABLE 2.2 Market Supply of Tomatoes

Price-Quantity

Combinations Price per Bushel Number of Bushels

FIGURE 2.3 Supply of Tomatoes

Supply, the assumed relationship between price

and quantity produced, can be represented by a

curve that slopes up toward the right Here, as the

price rises from zero to $11, the number of bushels

of tomatoes offered for sale during the course of a

week rises from zero to 110,000

In Figure 2.4, an increase in supply is represented by the shift from S1to S2 Producers

are willing to produce a larger quantity at each price Q3 instead of Q2 at price P2, for

example They will also accept a lower price for each quantity P1 instead of P2 for quantity

Q2 Conversely, the decrease in supply represented by the shift from S1 to S3 means that

producers will offer less at each price Q1 instead of Q2 at price P2 They must also have a

higher price for each quantity P3 instead of P2 for quantity Q2

A few examples will illustrate the impact of changes in the determinants of supply If firms learn how to produce more goods with the same or fewer resources, the cost of producing any given quantity will fall Because of the technological improvement, firms will be able to offer

a larger quantity at any given price or the same quantity at a lower price The supply will

increase, shifting the supply curve outward to the right

Similarly, if the profitability of producing oranges increases relative to grapefruit,

grapefruit producers will shift their resources to oranges The supply of oranges will increase, shifting the supply curve to the right Finally, if lumber (or labor or equipment) becomes

scarcer, its price will rise, increasing the cost of new housing and reducing the supply The supply curve will shift inward to the left

FIGURE 2.4 Shifts in the Supply Curve

A rightward, or outward, shift in the supply curve, from S1

to S2, represents an increase in supply A leftward, or

inward, shift in the supply curve, from S1 to S3, represents

a decrease in supply.

Market Equilibrium

Supply and demand represent the two sides of the market—sellers and buyers By plotting the supply and demand curves together, as in Figure 2.5 we can predict how buyers and sellers will

be inconsistent, and a market surplus or shortage of tomatoes will result

Market Surpluses

Suppose that the price of a bushel of tomatoes is $9, or P2 in Figure 2.5 At this price the quantity demanded by consumers is 20,000 bushels, much less than the quantity offered by

producers, 90,000 There is a market surplus, or excess supply, of 70,000 bushels A market surplus is the amount by which the quantity supplied exceeds the quantity demanded at any

given price Graphically, an excess quantity supplied occurs at any price above the intersection

of the supply and demand curves

FIGURE 2.5 Market Surplus

If a price is higher than the intersection of the supply

and demand curves, a market surplus—a greater

quantity supplied, Q3, than demanded, Q1—results

Competitive pressure will push the price down to the

equilibrium price P1, the price at which the quantity

supplied equals the quantity d emanded (Q2)

What will happen in this situation? Producers who cannot sell their tomatoes will have to

compete by offering to sell at a lower price, forcing other producers to follow suit As the

competitive process forces the price down, the quantity consumers are willing to buy will

expand, while the quantity producers are willing to sell will decrease The result will be a

contraction of the surplus, until it is finally eliminated at a price of $5.50 or P1 (at the intersection

of the two curves) At that price, producers will be selling all they want to; they will see no

reason to lower prices further Similarly, consumers will see no reason to pay more; they will be buying all they want This point, where the wants of buyers and sellers intersect, is called the equilibrium price

• The equilibrium price is the price toward which a competitive market will move,

and at which it will remain once there, everything else held constant It is the price

at which the market “clears”—that is, at which the quantity demanded by

consumers is matched exactly by the quantity offered by producers At the

equilibrium price, the quantities desired by buyers and sellers are also equal This is the equilibrium quantity

• The equilibrium quantity is the output (or sales) level toward which the market

will move, and at which it will remain once there, everything else held constant

In sum, a surplus emerges when the price asked is above the equilibrium price It will

be eliminated, through competition among sellers, when the price drops to the equilibrium price

Market Shortages

Suppose the price asked is below the equilibrium price, as in Figure 2.6 At the relatively low

price of $1, or P1, buyers want to purchase 100,000 bushels—substantially more than the

10,000 bushels producers are willing to offer The result is a market shortage A market shortage is the amount by which the quantity demanded exceeds the quantity supplied at any

given price Graphically, it is the shortfall that occurs any price below the intersection of the supply and demand curves

As with a market surplus, competition will correct the discrepancy between buyers’ and sellers’ plans Buyers who want tomatoes but are unable to get them at a price of $1 will bid higher prices, as at an auction As the price rises, a larger quantity will be supplied because suppliers will be better able to cover their increasing production costs At the same time the quantity demanded will contract as buyers seek substitutes that are now relatively less expensive

compared with tomatoes At the equilibrium price of $5.50, or P2, the market shortage will be eliminated Buyers will have no reason to bid prices up further, for they will be getting all the tomatoes the want at that price Sellers will have no reason to expand production further; they will be selling all they want to at that price The equilibrium price will remain the same until some force shifts the position of either the supply or the demand curve If such a shift occurs, the price will moves toward a new equilibrium at the new intersection of the supply and demand curves

FIGURE 2.6 Market Shortages

A price that is below the intersection of the supply

and demand curves will create a shortage—a greater

quantity demanded, Q3 than supplied Q1

Competitive pressure will push the price up to the

equilibrium price P2, the price at which the quantity

supplied equals the quantity demanded

The Effect of Changes in Demand and Supply

Figure 2.7 shows the effects of shifts in demand and supply on the equilibrium price and

quantity In panel (a), an increase in demand from D1 to D2 raises the equilibrium price from

P1to P2 and quantity from Q2 to Q1 Panel (b) shows the reverse effects of a decrease in demand

An increase in supply from S1 to S2 panel (c) has a different effect The equilibrium

quantity rises from Q1 to Q2, but the equilibrium price falls from P2 to P1 A decrease in supply

from S1to S2 panel (d) causes the opposite effect: the equilibrium quantity falls from Q2 to

Q1, and the equilibrium price rises from P1 to P2

FIGURE 2.7 The Effects of Changes in Supply and Demand

An increase in demand—panel (a) raises both the equilibrium price and the equilibrium

quantity A decrease in demand panel (b) has the opposite effect: a decrease in the

equilibrium price and quantity An increase in supply panel (c)—causes the equilibrium

quantity to rise but the equilibrium price to fall A decrease in supply panel (d) has the

opposite effect: a rise in the equilibrium price and a fall in the equilibrium quantity

Price Ceilings and Price Floors

Political leaders have occasionally objected to the prices charged in open, competitive markets and have mandated the prices at which goods must be sold That is, the government has

enforced price ceilings and price floors A price ceiling is a government-determined price above which a specified good cannot be sold A price floor is a government-determined price

below which a specified good cannot be sold Supply and demand graphs can illustrate the consequences of price ceilings and floors For example, some cities impose ceilings on the rents (or prices) for apartments Such a ceiling must be below the equilibrium price—somewhere

below P1 in Figure 2.8(a) (If the ceiling were above equilibrium, it would be above the market price and would serve no purpose.) As the graph shows, such a price control creates a market

shortage The number of people wanting apartments, Q2, is greater than the number of

apartments available, Q1 Because of the shortage, landlords will be less concerned about maintaining their units, for they will be able to rent them in any case

If the government imposes a price floor on a commodity like milk, for example—the price must be above the equilibrium price, P1 in Figure 2.8b (A price floor below P1 would be irrelevant, because the market would clear at a higher level on its own.) The result of such a

price edict is a market surplus Producers want to sell more milk, Q2, than consumers are willing to buy, Q1 Some producers those caught holding the surplus (Q2 Q1) will be unable to sell all they want to sell Eventually someone must bear the cost of destroying or storing the surplus and in fact the government holds vast quantities of its past efforts to

support an equilibrium price for those products

FIGURE 2.8 Price Ceilings and Floors

A price ceiling Pc—panel (a)—will create a market shortage equal to Q2 - Q1 A

price floor Pf panel (b) will create a market surplus equal to Q2- Q1

The Efficiency of the Competitive Market Model

Early in this chapter we asked how Fred Lieberman knows what prices to charge for the goods

he sells The answer is now apparent: he adjusts his prices until his customers buy the quantities that he wants to sell If he cannot sell all the fruits and vegetables he has, he lowers his price to attract customers and cuts back on his orders for those goods If he runs short, he knows he can raise his prices and increase his orders His customers then adjust their purchases

accordingly Similar actions by other producers and customers all over the city move the market for produce toward equilibrium The information provided by the orders, reorders, and cancellations from stores like Lieberman’s eventually reaches the suppliers of goods and then the suppliers of resources Similarly wholesale prices give Fred Lieberman information on suppliers’ costs of production and the relative scarcity and productivity of resources

The use of the competitive market system to determine what and how much to produce has two advantages First, it is tolerably accurate Much of the time the amount produced in a competitive market system tends to equal the amount consumers want—no more, no less Second, the market system maximizes output

In Figure 2.9(a), note that all price-quantity combinations acceptable to consumers lie either on or below the market demand curve, in the shaded area (If consumers are willing to

pay P2 for Q1 then they should also be willing to pay less for that quantity—for example, P1.) Furthermore, all price-quantity combinations acceptable to producers lie either on or above the

supply curve, in the shaded area shown in Figure 2.9(b) (If producers are willing to accept P1

for quantity Q1, then they should also be willing to accept a higher price—for example, P2) When supply and demand curves are combined in Figure 2.9(c), we see that all price-quantity combinations acceptable to both consumers and producers lie in the darkest shaded triangular

area From all those acceptable output levels, the competitive market produces Q1, the

maximum output level that can be produced given what producers and consumers are willing and able to do In this respect, the competitive market can be said to be efficient, or to allocate

resources efficiently Efficiency is the maximization of output through careful allocation of

resources, given the constraints of supply (producers’ costs) and demand (consumers’

preferences) The achievement of efficiency means that consumers’ or producers’ welfare will

be reduced by an expansion or contraction of output

The market system exploits all possible trades between buyers and sellers Up to the equilibrium quantity, buyers will pay more than suppliers require (those points on the demand

curve lie above the supply curve) Beyond Q1, buyers will not pay as much as suppliers need to produce more (those points on the supply curve lie above the demand curve) Again, in this regard the market can be called efficient

FIGURE 2.9 The Efficiency of the Competitive Market

Only those price-quantity combinations on or below the demand curve—panel (a)—are

acceptable to buyers Only those price-quantity combinations on or above the supply

curve panel (b) are acceptable to producers Those price-quantity combinations that

are acceptable to both buyers and producers are shown in the darkest shaded area of

panel (c) The competitive market is efficient in the sense that it results in output Q1, the

maximum output level acceptable to both buyers and producers

Nonprice Competition

Markets in which suppliers compete solely in terms of price are relatively rare Table salt is a relatively uniform commodity sold in a market in which price is an important competitive tool Even producers of salt, however, compete in terms of real or imagined quality differences and the reputation and recognition of brand names In most industries, competition is through a wide range of product features, such as quality or appearance, design, and durability In general, competitors can be expected to choose the mix of features that gives them the greatest profit

In fact, price competition is not always the best method of competition, not only

because price reductions mean lower average revenues, but also because the reductions can be costly to communicate to consumers Advertising is expensive, and consumers may not notice price reductions as readily as they do improvements in quality Quality changes, furthermore, are not as readily duplicated as price changes Consumers’ preferences for quality over price should be reflected in the profitability of making such improvements If consumers prefer a top-of-the-line calculator to a cheaper basic model, then producing the more sophisticated model could, depending on the cost of the extra features, be more profitable than producing the basic model and communicating its lower price to consumers

If all consumers had exactly the same preferences—size, color, and so on—producers would presumably make uniform products and compete through price alone For most

products, however, people’s preferences differ To keep the analysis manageable, we will explore nonprice competition in terms of just one feature—product size Suppose that in the market for television sets, consumer preferences are distributed along the continuum shown in Figure 2.10 The curve is bell shaped, indicating that most consumers are clustered in the middle of the distribution and want a middle-sized television Fewer consumers want a giant screen or a mini-television

Everything else being equal, the first producer to enter the market, Terrific TV, will probably offer a product that falls somewhere in the middle of the distribution—for example, at the in Figure 2.10 In this way, Terrific TV offers a product that reflects the preferences of the largest number of people Furthermore, as long as there are no competitors, the firm can expect

to pick up customers to the left and right of center (Terrific TV’s product may not come very

close to satisfying the wants of consumers who prefer a very large or very small television, but it

is the only one available.) The more Terrific TV can meet the preferences of the greatest number

of consumers, everything else being equal, the higher the price it can charge and the greater the profit it can make (Because consumers value the product more highly, they will pay a higher price for it.)

The first few competitors that enter the market may also locate close to the center—in fact, several may virtually duplicate Terrific TV’s product These firms may conclude that they will enjoy a larger market by sharing the center with several competitors than by moving out into the wings of the distribution They are probably right Although they may be able to charge more for a giant screen or a mini-television that closely reflects some consumers’ preferences, there are fewer potential customers for those products

FIGURE 2.10 Consumer Preference in Television Size

Consumers differ in their wants, but most desire a medium-sized television Only

a few want very small or large televisions

To illustrate, assume that competitor Fabulous Focus locates at F, close to T It can then appeal to consumers on the left side of the curve because its product will reflect those consumers’ preferences more closely than does Terrific TV’s Terrific TV can still appeal to

consumers on the right half of the curve If Fabulous Focus had located at C, however, it would have direct appeal only to consumers to the left of C, as well as to a few between C and T Terrific TV would have appealed to more of the consumers on the left, between C and T, than

in the first case In short, Fabulous Focus has a larger potential market at F than at C

However, as more competitors move into the market, the center will become so

crowded that new competitors will find it advantageous to move away from the center, to C or

D At those points the market will not be as large as it is in the center, but competition will be

less intense If producers do not have to compete directly with as many competitors, they can charge higher prices How far out into the wings they move will depend on the tradeoffs they must make between the number of customers they can appeal to and the price they can charge

Like price reductions, the movement of competitors into the wings of the distribution benefits consumers whose tastes differ from those of the people in the middle These atypical consumers now have a product that comes closer to or even directly reflects their preferences

Our discussion has assumed free entry into the market If entry is restricted by

monopoly of a strategic resource or by government regulation, the variety of products offered will not be as great as in an open, competitive market If there are only two or three

competitors in a market, everything else being equal, we would expect them to cluster in the middle of a bell-shaped distribution That tendency has been seen in the past in the

broadcasting industry, when the number of television stations permitted in a given geographical area was strictly regulated by the Federal Communications Commission Not surprisingly, stations carried programs that appealed predominantly to a mass audience—that is, to the middle of the distribution of television watchers The Public Broadcasting System, PBS, was organized by the government partly to provide programs with less than mass appeal to satisfy viewers on the outer sections of the curve When cable television emerged and programs became more varied, the prior justification for PBS subsidies became more debatable

Even with free market entry, product variety depends on the cost of production and the prices people will pay for variations Magazine and newsstand operators would behave very much like past television managers if they could carry only two or three magazines They would

choose Newsweek or some other magazine that appeals to the largest number of people Most

motel operators, for instance, have room for only a very small newsstand, and so they tend to carry the mass-circulation weeklies and monthlies

For their own reasons, consumers may also prefer such a compromise Although they may desire a product that perfectly reflects their tastes, they may buy a product that is not perfectly suitable if they can get it at a lower price Producers can offer such a product at a lower price because of the economies of scale gained from selling to a large market For example, most students take pre-designed classes in large lecture halls instead of private

tutorials They do so largely because the mass lecture, although perhaps less effective, is substantially cheaper than tutorials In a market that is open to entry, producers will take advantage of such opportunities

If producers in one part of a distribution attempt to charge a higher price than

necessary, other producers can move into that segment of the market and push the price down;

or consumers can switch to other products In this way, an optimal variety of products will eventually emerge in a free, reasonably competitive market Thus the argument for a free market is an argument for the optimal product mix Without freedom of entry, we cannot tell whether it is possible to improve on the existing combination of products A free, competitive market gives rival firms a chance to better that combination The case for the free market becomes even stronger when we recognize that market conditions—and therefore the optimal product mix—are constantly changing