L09Oct09.306 - Lecture 9: Excess Supply & Demand...

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Lecture 9: Excess Supply & Demand Applications; Farm Retail Price Model FRE 306
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Real Life Applications 1 Broad range of applications for countries or firms that think they have considerable market power By understanding that ROW supply considerations are potentially important and that market shares are also, the concept of excess demand shows that elasticities are usually larger (absolute value) than expected Optimal (truly profit-maximizing) prices are lower than anticipated or practiced General result: actual market power less than what is assumed; firms or countries should not price too high (e.g. Ghana’s cocoa, Indonesia’s nutmeg) See next slide for illustration
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S D 2 D 1 P 0 P 1 Q 0 Q 1 Q 2 P Q D 1 = expected inelastic D curve; Q 1 = expected sales D 2 = actual elastic D curve (ED); Q 2 = actual sales
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Applications 2 Can analyze effects of government policies like tariffs or import quotas, or domestic support policies like fixed prices Tariff in importing country (B): shifts ED curve down by amount of the tariff . World price falls, price in country B rises, traded volume declines (Fig 2-3, pg 41, McCalla/Josling; see next slide) General result is that these protection policies increase
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This note was uploaded on 03/09/2010 for the course LFS FRE 306 taught by Professor Barichello during the Winter '09 term at The University of British Columbia.

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L09Oct09.306 - Lecture 9: Excess Supply & Demand...

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