Markets and Competitive Equilibrium

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Markets and Competitive Equilibrium

• Lecture 5

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In This Lecture

• Market Equilibrium and the Forces Moving the
  Market Toward Equilibrium
• The Hypothesis of a Single Price
• Changes in Demand and Supply
• Case Study--Gasoline Prices
• Case Study--Scalping ND Football Tickets

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Demand and Supply Review

• Demand
• Given a price, how much will be demanded?
• Given a quantity, what is the maximum amount
  would the demanders be willing to pay?
• Supply
• Given a price, how much will be supplied?
• Given a quantity supplied, what is the minimum
  price per unit would be acceptable to the
  suppliers?
• Is PH an Equilibrium Price?

PH
QD
QS
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Too High of a Price Results in Excess Supply

• At the price, PH, there is more of the good being
  supplied than demanded
• Consequently, these suppliers who cant sell at
  PH will offer their output at a slightly lower
  price -- have a sale.
• The sale will take away purchases from
  competitors who will be forced to lower their
  prices to maintain sales
• Price will fall!

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Too Low of a Price Results in Excess Demand

• At the price, PL, there is more of the good being
  demanded than supplied
• Consequently, supplies will sell out and still
  have customers wanting to buy product at PL.
• Price will rise!

PL
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Equilibrium Price

• At PE, the quantity demanded is equal to the
  quantity supplied
• At this price, everyones wishes are being met --
  no one has incentive or desire to do something
  different
• If nothing else changed, we would expect the
  price and amount of donuts produced and sold to
  be constant over time

PE
QEQSQD
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Social Function of Prices

• Prices coordinate decisions between sellers and
  buyers
• Will everyone be on the same page?

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Single Price

• In a significant number of situations,
  individuals are charged different amounts for the
  same good (car purchases). Yet we would expect
  there to be a single price in a competitive
  market. Why?
• IF everyone knew the rate (price) that others
  were trading, why would they every pay more than
  others were paying? Why would sellers accept
  less? If they did then the multiple prices could
  not be an equilibrium since they would want to do
  something else.
• We are assuming perfect information on the part
  of buyers and sellers of the goods.

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Alternatives to Price Rationing

• Prices ration scarce goods to those who are
  willing and able to pay.
• What other rationing mechanisms are there?
• Can these alternatives produce outcomes equal in
  efficiency?

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Increase in Demand

• Increase in Demand
• At existing price, Po, there is excess demand --
  customers want more of the good
• Both price and the quantity supplied rise, a
  movement along the supply curve
• New Equilibrium
• Higher equilibrium price
• Higher equilibrium quantity

P1
Q1
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Decrease in Demand

• Decrease in Demand
• At existing price, Po, there is excess supply --
  there are goods on the shelf -- sale!
• Both price and the quantity supplied fall, a
  movement along the supply curve
• New Equilibrium
• Lower equilibrium price
• Lower equilibrium quantity

P1
Q1
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Decrease in Supply

• Decrease in Supply
• At existing price, Po, there is excess demand --
  customers want more
• Price rises and quantity demanded falls, movement
  along the demand curve
• New Equilibrium
• Higher equilibrium price
• Lower equilibrium quantity

P1
Q1
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Increase in Supply

• Increase in Supply
• At existing price, Po, there is excess supply --
  inventories rise -- sales
• Price falls and quantity demanded increases,
  movement along the demand curve
• New Equilibrium
• Lower equilibrium price
• Higher equilibrium quantity

P1
Q1
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Nominal Gasoline Prices
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Real Gasoline Prices
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Why has the price of gas risen?

• Increase in the price of crude oil (supply
  consideration)
• Decrease in oil reserves?
• Instability in oil producing regions
• No increase in the refinery capacity (supply
  considerations)
• Increase in the demand for gasoline
• Economic Growth in China and other developing
  nations
• Our own growth

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Monthly Gas Prices (1992-1996)
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Explaining Monthly Changes

• Summer Vacations -- Drive More (Demand Shift)
• In May, refineries shut down for maintenance and
  shift over to seasonal blends (Supply Shift)

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Seasonal Changes
DS
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Variation in Gas Prices over the Week

• Why does the price of gas rise during the
  weekend?
• a. Demand considerations
• Supply considerations
• Are the increases justified? That is, are they
  fair to the consumer?

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ND Football Ticket Policy

• What is NDs pricing strategy?
• Tickets sales account for 90 of athletic budget
• Opposed to filling the stadium with season ticket
  holders unfair to alums who live far away
• 4,000 season ticket holders account for 15,000
  seats
• Uses a lottery to fill remaining seats
• Refundable Application fee per game
• 5 yrs
• 100 all other graduating classes
• Application fees are sent to Development Office

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ND Football Ticket Policy

• What are the determinants of NDs printed ticket
  prices?
• Explicit philosophy Do NOT let ticket prices
  reach market price
• Uniform price regardless of location
• What is NDs resale policy?
• Resale above the printed ticket price is illegal
  and subject to penalty
• Resale is unethical. The football game is our
  product. Others should not profit.

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The Secondary Market for ND Football Tickets

• Why is ticket scalping inevitable?
• Hint Why are ticket available for resale? Who
  are the sellers
• Who are the buyers in the secondary market?
• Is the secondary market competitive?
• Does the secondary market improve the allocative
  efficiency of the market for ND football tickets?

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Notre Dame Ticket Scalping

• What we learned from interviews with scalpers
• Scalpers are both buy and sell
• Their strategy is to buy low and sell high
• There are two categories of scalpers
• Corporate brokers (PJ Tickets, Victory Tickets)
• Amateurs (High school buddies)
• Corporate brokers buy from ticket holders hoping
  to make a profit
• Amateurs buy from ticket holders hoping to get
  their money back.

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Notre Dame Ticket Scalping

• Amateurs
• Their profit margin goal is 15 per sale
• Take turns like car dealers. The lowest price is
  quoted by the up guy.
• The reduce risk, they hold no more than 10
  tickets at a time
• Each amateur sells 50 to 100 tickets a game and
  pocket 750 TO 1,500 in profits.
• Guesstimate of the number of tickets scalped per
  game 3,000

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Assignment for Next Lecture

• Do Homework 4 on Homework Assignment by
  Wednesday at 5 pm
• Read Chapter 4
• Topics Next Time
• The Market Strikes Back (Its difficult to
  control the market)