MARKET BOUNDARIES

1
MARKET BOUNDARIES

• BUYER POINT OF VIEW No potential seller exists
  outside of the market boundaries (within a
  reasonable price range)
• SELLER POINT OF VIEW No potential buyer exists
  outside of the market boundaries (within a
  reasonable price range)
• BOTH POINTS OF VIEW MUST HOLD
• CROSS PRICE ELASTICITY measures

2
MARKET BOUNDARIES
X represents buyers
O represents sellers
X
X
O
O
X
X
X
O
3
CROSS-PRICE ELASTICITY
Qx-Qx QxQx Py-Py PyPy
PERCENTAGE CHANGE IN QUANTITY (X) PERCENTAGE
CHANGE IN PRICE OF ANOTHER GOOD (Y)


E
X,Y
4
CROSS-PRICE ELASTICITY

• Exylt0gt x and y are complements
• Exygt0 gt x and y are substitutes (or in same
  market)
• Exy 0 gt x and y are unrelated

5
MARKET BOUNDARIES
N represents a new firm
U represents your firm
X represents buyers
O represents sellers
X
X
O
O
X
U
X
N
X
O
Cross Price Elasticity w.r.t. New Firm?
6
MARKET BOUNDARIES
N represents a new firm
U represents your firm
X represents buyers
O represents sellers
X
X
O
N
O
X
U
X
X
O
Cross Price Elasticity w.r.t. New Firm?
Positive , Negative, or Zero
7
Percentage Change
8
Percentage Change
9
MARKET DEMAND FOR CARS
Price (1000/car)
Price (1000/car)
Price (1000/car)
30
15
7 9 4 5
11 14
U.S quantity (mill/yr) Foreign Q (mill/yr)
Market Demand