d 5
Respond to the post of at least two peers, using 100 words minimum each.
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Understanding Markets and Industry Changes
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©
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CHAPTER
A market has a product, geographic, and time dimension. Define the market before using supply–demand analysis.
Market demand describes buyer behavior; market supply describes seller behavior in a competitive market.
If price changes, quantity demanded increases or decreases (represented by a movement along the demand curve).
If a factor other than price (like income) changes, we say that demand curve increases or decreases (a shift of demand curve).
Supply curves describe the behavior of sellers and tell you how much will be sold at a given price.
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Market equilibrium is the price at which quantity supplied equals quantity demanded. If price is above the equilibrium price, there are too many sellers, forcing price down, and vice versa.
Prices are a primary way that market participants communicate with one another. High prices tell consumers to consume less, and suppliers to supply more, and vice-versa.
Making a market is costly, and competition between market makers forces the bid–ask spread down to the costs of making a market. If the costs of making a market are large, then the equilibrium price may be better viewed as a spread rather than a single price.
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continued
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Y2K and Generator Sales
From 1
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90-98, sales of portable generators grew 2% yearly.
In 1999, public anticipation of Y2K power outages increased demand for generators
AMP invested to increase capacity in anticipation of this demand growth – they vertically integrated their company to increase capacity and reduce variable costs
Demand grew as expected – Industry shipments increased by 8
7
%. Prices also increased by an average of 21%
The following year – a bust! Demand fell, and AMP’s Y2K strategy to increase production led it to bankruptcy in 2000.
Lesson: AMP could have anticipated this.
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Which Industry or Market?
Setting a single price for a single product of a single firm is referred to as a “monopoly” model of pricing
This chapter focuses on the “market” setting, showing how prices are determined in an industry where many sellers and many buyers come together (still a single price for a single product)
Caution: Do not use demand and supply analysis for an individual firm
Example: You would talk about changes to the “smart phone” industry, not the “demand and supply of iPhones because there is only one seller of iPhones
The behavior of sellers is determined by a “supply” curve
The behavior of buyers is determined by a “demand” curve
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Which Industry or Market? (cont.)
Before you begin analyzing an industry, you must consider what you want to learn from analysis
Usually this yields a particular market definition
Each market (or industry) has a time, product, and geographic dimension
For example: The yearly market for portable generators in the U.S.
Time: annual
Product: portable generators
Geography: US
When analyzing a problem, or investment opportunity, first define the time, product and geographic dimensions of the market in question
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Shifts in the Demand Curve
Movement along the demand curve, i.e. a change in price leads to a change in the “quantity demanded”
Shifts in demand curve can occur for multiple reasons
Uncontrollable factor – something that affects demand
that a company cannot control
Income, weather, interest rates, and prices of substitute and complementary products owned by other companies.
Controllable factor – something that affects demand
that a company can control
Price, advertising, warranties, product quality, distribution speed, service quality, and prices of substitute or complementary products also owned by the company
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Microsoft
In the late 1970s, Microsoft developed DOS, an operating system
to control IBM computers
The price for DOS depended on the price and availability of computers that could run it and the applications that ran under
it as well as the price of DOS itself
To increase demand for DOS Microsoft:
Licensed its operating system to other computer manufacturers so
that competition would reduce price of a crucial complement
Developed its own versions of complimentary software
Kept the price of DOS low, to increase share to encourage
complementary software development
Discussion: How did Microsoft control demand using these factors? How did competitors (Apple, for example) operate differently?
HINT: this was Steve Jobs’s biggest mistake
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Demand Increase
At a given price, more quantity demanded = shift of the demand curve
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Supply Curves
Definition: Supply curves describe the behavior of a group of sellers and tell you how much will be sold at a given price
Supply curves slope upward g the higher the price, the higher the quantity supplied
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Market Equilibrium
Definition: Market equilibrium is the price at which quantity supplied equals quantity demanded
At the equilibrium price, there is no pressure for the price to change because the number of sellers equals the number of buyers (quantity demanded = quantity supplied)
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Market Equilibrium (cont.)
Proposition: In a competitive equilibrium there are no unconsummated wealth-creating transactions
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RIDDLE: How many economists does it take to change a light bulb?
ANSWER: None. The market will do it.
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Using Supply and Demand
Supply and demand curves can be used to describe changes that occur at the industry level
Here, initial equilibrium is $8. After a demand shift, the new equilibrium is $10
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Market Equilibrium Analysis
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Using Supply and Demand (cont.)
Again: the mechanism driving price to the new equilibrium is competition
At the old price of $8, there is excess demand (9-5=4 more buyers than sellers), which puts upward pressure
on price until it settles at the new $10 equilibrium
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Portable Generator Market Revisited
Return to the electric generator industry:
1997– Stable industry sales with intense competition
(2% avg. sales growth)
1997– Industry anticipates record demand will occur in 1999
1998 – Massive capital expenses throughout industry on vertical integration projects
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AB demand (anticipation) and supply (investment) increased
BC price dropped but quantity stayed above the 1998 level
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Using Supply and Demand (cont.)
Example: model the Increase in quantity of mobile phones and the decline in the price over the past decade
Use a graph to explain two points
Shift of the supply curve – that’s it!
Shows the increase in supply (Q0Q1) and the decrease in price (P0P1)
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Prices Convey Information
Prices are a primary way that market participants communicate with one another
Buyers signal their willingness to pay
Sellers signal their willingness to sell with prices
Price information especially important in financial markets
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Prices Convey Information (cont.)
Example: Gas pipeline burst between Tucson and Phoenix
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Prices Convey Information (cont.)
Tucson-Phoenix pipeline break reduced supply
to Phoenix which raised price in Phoenix.
High prices in Phoenix conveyed information to sellers so they diverted tanker trucks from Tucson to Phoenix.
There was a limit to how many tanker trucks could
fill up at the “rack” in Tuscon, so some Tuscon
tanker trucks were displaced by the tanker trucks going to Phoenix.
The results was a reduction of supply in Tucson, resulting in a price increase in Tuscon.
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Market Making
A “market maker” makes a market – by buying low and selling high.
A single (monopoly) market maker does not want to have too much or hold too much inventory g She has to pick prices that equalize quantity supplied and demanded.
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Market Makers (cont.)
If the market maker bought and sold at the competitive price ($8), she would earn zero profit
To earn more, she must buy low and sell high and can do that with varying numbers of transactions
She should either buy at $6/sell at $10, or buy at $5/sell at $11 since both earn a profit of $12
Competition between market makers will force the bid-ask spread down to the cost of making a market
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Optimal Spread in Market Making
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Title?
Video enhancement products are state-of-the-art graphics systems that capture, analyze, enhance, and edit all major video formats without altering underlying footage
In 1998, this market consisted of a small number of companies, and demand was relatively light due to the extremely high price of the technology (prices ranged between $45,000 and $80,000)
In 2000, Intergraph entered the market at a price of $25,000, attempting to quickly capture a major share of the market. Intergraph produced a product at a substantially lower cost than the competition
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Title continued?
What happened?
Entry caused an increase in supply and a strong downward pressure on price (average pricing fell to around $40,000)
A number of firms exited and prices rose back to around $45,000
Later, the events of 9/11/01 caused demand to spike
What happened?
In the short run, average prices shot up.
Higher prices eventually attracted more entrants, increasing supply. Pricing fell back down to an average level of around $30,000
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1)Dhruv
Economics is governed by forces of demand and supply. The week’s readings focused on changes in demand within the industry and how these tend to impact demand and supply for individual firms. The discussion also focused on how the prices change over time because of changes in demand or supply.
The most common observation that has been seen is that increase in demand with same supply leads to an increase in the prices. This was observed in the current pandemic wherein the prices of certain essential goods notched up because the supply remained consistent and demand shot up (Sauter, Kienast, Bolliger, Winter & Pazúr, 2019). Therefore as per the demand supply curve, the equilibrium price was set in a higher range. Therefore this requires that firms must engage themselves in increasing the supply to meet the demand so that the price does not increase. The problem with increasing prices is that it becomes affordable to a much smaller segment of people. The demand is impacted by many controllable and uncontrollable factors. The controllable factors of demand allow companies to change demand as per certain internal factors like price, advertising, quality of product etc. (Froeb, McCann, Shor & Ward, 2018). For example, if company improves product quality at same price, the product will be bought by a much wider segment of people.
There are certain uncontrollable factors as well that tend to impact demand. These factors are not in control of the firm and therefore the changes in demand cannot bring about sudden changes in the supply and this could lead to either increase or decrease in prices (Thomas & Maurice, 2017).
The main idea of economics is that the changing demands and supply must bring back the equilibrium prices. As long as the equilibrium price is not obtained, It could create opportunities for bid ask spread wherein the people buying at lower price points will be higher.
The current pandemic has led to tripling of demand for sanitizers. In the current situation, this is one of the uncontrollable factors of demand since it is a black swan event that was not predicted in advance. If the supply is not increased, it could lead to an increase in prices that could make the product less affordable for the company. Therefore, it is required that the firm must focus on increasing the supply so as to match the demand. This will make sure that the number of customers of the product do not go down (Thomas & Maurice, 2017). Further this also makes sure that the company stays relevant and is able to maintain its market share. If the supply is not increased to meet the demand, it may also allow entry of new players in the market that could further take away market share of the company.
References
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial Economics: A problem solving approach. Cengage Learning
Sauter, I., Kienast, F., Bolliger, J., Winter, B., & Pazúr, R. (2019). Changes in demand and supply of ecosystem services under scenarios of future land use in Vorarlberg, Austria. Journal of Mountain Science, 16(12), 2793-2809.
Thomas, C. R., & Maurice, S. C. (2017). Managerial economics. LEXINGTON BOOKS.
2)Chai
The economics of any country or any organization is driven by forces of demand and supply. It is through the combination of supply and demand that organizations are ale to settle an equilibrium prices at which the products are finally sold in the market. The demand is impacted by many factors. The factors that tend to impact demand are classified into controllable factors and uncontrollable factors. These factors are such that they can be divided into controllable factors and uncontrollable factors (Froeb, McCann, Shor & Ward, 2018). Controllable factors of demand are those that are in hands of the organization. These could include factors like price, advertising, product quality etc. There are certain uncontrollable factors that also tend to impact demand. These include factors like recession, the covid pandemic etc.
The changes in demand lead to two changes for the organization. Either changes in demand can lead to changes in the supply or they can lead to changes in the prices of the product being considered. The changes in prices lead to the establishment of a new equilibrium price. If the demand has gone down, the prices tend to go down to reach the new equilibrium price and vice versa. Supply changes also are accompanied by changes in the price. This leads to establishment of a new equilibrium for the company or economy that allows them to reach at new equilibrium price (Cho, 2019). gap between supply and demand creates opportunities for arbitrage and allows firms to understand the prices that need to be taken under consideration. These create opportunities for bid ask spread where in the firms can determine the amount of demand for a given supply under consideration.
The covid pandemic has brought all the economies to a halt. While it has given a boost to online shopping, it has led to a strong reduction in demand. Some of these may be short term changes while many of these may also be long term changes. The companies are trying to match the demand with increased supply. Because of pandemic, it has been seen that demand for sanitizers has gone up. Therefore it is recommended that J&J must increase their production of sanitizers (Xiao & Gao, 2017). The focus on maintaining high hygiene standards has been increasing. There may be certain firms that may tend to gain market share during this time in the sanitizer market. To continue increasing their market presence, they need to double the production capacity. The demand for sanitizers has not been ending and shall continue to increase for some time. If J&J does not make any move now, it could lead to firm getting negatively impacted in the sanitizer market, which may also impact the profits of the firm.
References
Cho, J. E. (2019). The Impact of Industry-level Competition on the Excess Stock Returns due to Changes in Cash Holdings. Journal of the Korea Academia-Industrial cooperation Society, 20(5), 163-169.
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial Economics: A problem solving approach. Cengage Learning
Xiao, X., & Gao, Y. (2017). An event study of the effects of regulatory changes on the food industry. China Agricultural Economic Review.