Week 4 and 5 Elasticity and Market Structures PDF

Elasticity & Market Structures Business Economics - Level 5 ESSENTIAL READING: Sloman (2016) Chapter 3 and Chapter 5 IMPORTANT: For educational use on the above modules only. Use of this presentation is strictly restricted to students enrolled on the above modules at the University of West London....

Elasticity & Market Structures Business Economics - Level 5 ESSENTIAL READING: Sloman (2016) Chapter 3 and Chapter 5 IMPORTANT: For educational use on the above modules only. Use of this presentation is strictly restricted to students enrolled on the above modules at the University of West London. Learning Outcomes  Demand Responsiveness and Changing Market Conditions  Price Elasticity of Demand  Price responsiveness and Business Decisions  Responses to change in Income  Market Structures  Perfect competitive  Monopoly  Oligopoly Market Conditions and Business Strategy Intro Questions ◼ How much less do people buy when prices go up? ◼ How does consumer responses shape business strategy? ◼ How much of the quantity supplied respond to price? Business Strategy: How to Increase Sales? ◼ What factors determine sales directly? ◼ Revenue= Price x Quantity Sold ◼ Position 1: To increase the quantity that can be sold a producer lowers price. ◼ What impact will this have on quantity demanded, ceteris paribus? Business Strategy: How to Increase Sales? ◼ What factors determine sales directly? ◼ Revenue= Price x Quantity Sold ◼ To increase the quantity that can be sold a producer lowers price. ◼ What impact will this have on quantity demanded, ceteris paribus. Measuring Responsiveness of Demand ◼ The price elasticity of demand measures how responsive buyers are to price changes. Method 1 : % Change in quantity demanded PED = % Change in price Example- Application 1 ◼ In 2019, Uber cut the price of a ride in New York by 15%. It found that the quantity of rides demanded rose by 30%. What is the absolute value of the price elasticity of demand for Uber Rides? Calculate Price Elasticity of Demand Calculate ◼ % Δ in Price = - 15% ◼ % Δ in Demand = + 30% ◼ Ped = |-2|= 2 (Elastic) When Buyers are very responsive to price, economist describe their demand as Elastic  Price Elasticity of Demand Relatively Elastic Demand Relatively Inelastic Demand PED > 1 PED < 1 Elasticity and Business Strategy ◼ How would Uber use the “elastic” response to increase revenue? ◼ Further reduction in price or not? Extreme Market Demand Responses ◼ Perfectly Elastic ◼ Demand curve is horizontal ◼ Price elasticity is infinite ◼ Perfectly Inelastic ◼ Demand curve is vertical ◼ Price elasticity is zero How would the two extreme responses affects Business Decision? Economic Guidance for Business ◼ If demand is elastic ◼ Lowering prices will raise total revenue ◼ If demand is inelastic ◼ Raising prices will raise total revenue Economic Guidance for Business Economic Guidance for Business  Lowering Price: Effect on Revenue Elastic Demand Inelastic Demand  Application Questions: Drought and corn production ◼ Drought is a terrible ◼ Example: In 2012, thing- plants die, the Midwest drought livestock go hungry etc causes the following ◼ Why corn farmers are ◼ Corn crop fall by happy during droughts? 13% ◼ Price rose by 33% ◼ Farmers sold the ◼ When demand is 13% less quantity of inelastic, reduction in corn crop at a higher supply increases revenue price Determinants of Elasticity ◼ Number and closeness of substitute goods ◼ Proportion of income spent on good ◼ The time period taken to adjust consumption ◼ Competitiveness of the Market ◼ More competitive the market – greater the elasticity for any individual supplier Market Structures and Business Strategy Week 5 Lectures ◼ Market Structures Four Types of Competitive Structures ◼ Perfect Competition ◼ Monopoly ◼ Monopolistic Competition ◼ Oligopoly Perfect Competition ◼ Firms are price takers – no individual firm has the power to set the price ◼ Large number of suppliers ◼ Freedom of entry and exit ◼ Producers and consumers have perfect knowledge of the market. ◼ No perfect examples ◼ Agriculture comes closest to it. DEMAND CURVE SHAPE ◼ Perfect competition demand curve Monopoly ◼ A single large firm dominates the market. ◼ E.g. Microsoft; Celebrity brands ◼ Anti-trust laws try to prevent formation of monopolies through mergers and acquisitions Monopoly  Business Strategy and imperfect Competition ◼ Market power allows independent pricing strategies ◼ Less competition leads to more market control ◼ Successful product differentiation ◼ More bargaining power ◼ Consumer choices are determine by other business decisions Monopolistic Competition ◼ A large number of competitors ◼ Freedom of entry and exit ◼ Downward sloping demand curve ◼ Product differentiation ◼ Examples: retail service sector, takeaway food, hairdressers, bars. Monopolistic Competition Branding  Oligopoly ◼ A few large firms. ◼ Example: Supermarkets & Banks ◼ Each firm has a significant share of the total market. ◼ Each firm faces a downward sloping demand curve for its product. ◼ Firms are price makers. ◼ Use of non-price competition. ◼ E.g. quality of service The Problem with Market Power ◼ Think about the pharmaceutical industry ◼ Antiretroviral drugs for AIDS ◼ Covid-19 vaccines ◼ How does market power leads to worse outcomes?