Moh. Sigit Taruna 2009-Pengantar Ekonomi I Supply And Demand Pertemuan - 3 Moh. Sigit Taruna 2009-Pengantar Ekonomi I 1

The Market Mechanism The Supply Curve The supply curve shows how much of a good producers are willing to sell at a given price, holding constant other factors that might affect quantity supplied This price-quantity relationship can be shown by the equation: 5

The Market Mechanism The Demand Curve The demand curve shows how much of a good consumers are willing to buy as the price per unit changes holding non-price factors constant. This price-quantity relationship can be shown by the equation: 8

The Market Mechanism S P0 D Q0 Price ($ per unit) The curves intersect at equilibrium, or market- clearing, price. At P0 the quantity supplied is equal to the quantity demanded at Q0 . P0 Q0 Quantity 12

The Market Mechanism The market price is above equilibrium A Surplus There is excess supply Producers lower prices Quantity demanded increases and quantity supplied decreases The market continues to adjust until the equilibrium price is reached. 19

The Market Mechanism Surplus S D Q1 P1 Q2 P2 Q3 Price ($ per unit) Quantity Price ($ per unit) S D Q1 Assume the price is P1 , then: 1) Qs : Q2 > Qd : Q1 2) Excess supply is Q1:Q2. 3) Producers lower price. 4) Quantity supplied decreases and quantity demanded increases. 5) Equilibrium at P2Q3 P1 Surplus Q2 P2 Q3 17

The Market Mechanism Shortage The market price is below equilibrium: There is a shortage Producers raise prices Quantity demanded decreases and quantity supplied increases The market continues to adjust until the new equilibrium price is reached. 24

The Market Mechanism S Shortage D Q3 P3 Q1 Q2 P2 Price ($ per unit) Quantity Price ($ per unit) S D Assume the price is P2 , then: 1) Qd : Q2 > Qs : Q1 2) Shortage is Q1:Q2. 3) Producers raise price. 4) Quantity supplied increases and quantity demanded decreases. 5) Equilibrium at P3, Q3 Q3 P3 Q1 Q2 P2 Shortage 22

Supply and Demand Non-price Determining Variables of Supply Costs of Production Labor Capital Raw Materials 27

Supply and Demand The cost of raw materials falls Change in Supply At P1, produce Q2 At P2, produce Q1 Supply curve shifts right to S’ More produced at any price on S’ than on S P S S’ Q2 P1 P2 Q1 Q0 Q 31

Changes In Market Equilibrium (Supply Curve) Jika biaya turun, harga (P) dan jumlah (Q) tidak selalu konstan Akan terjadi perubahan, jika supply curve yang baru mencapai ekuilibrium dengan demand curve Supply curve akan menggeser, maka harga pasar akan jatuh dan jumlah produksi naik Maka biaya yang rendah menghasilkan harga yang lebih rendah dan penjualan meningkat.

Changes In Market Equilibrium Raw material prices fall S shifts to S’ Surplus @ P1 of Q1, Q2 Equilibrium @ P3, Q3 P S D S’ Q2 Q1 P1 P3 Q3 Q 34

Supply and Demand Non-price Determining Variables of Demand Income Consumer Tastes Price of Related Goods Substitutes Complements 36

Supply and Demand Income Increases Change in Demand P D D’ Q2 At P1, produce Q2 At P2, produce Q1 Demand Curve shifts right More purchased at any price on D’ than on D Q1 P2 Q0 P1 Q 41

Changes In Market Equilibrium Income Increases Demand shifts to D1 Shortage @ P1 of Q1, Q2 Equilibrium @ P3, Q3 P S D D’ Q3 P3 Q2 Q1 P1 Q 44

Changes In Market Equilibrium Income Increases & raw material prices fall The increase in D is greater than the increase in S Equilibrium price and quantity increase to P2, Q2 P S S’ D D’ P2 Q2 P1 Q1 Q 49

Elasticity Elasticity is a general concept that can be used to quantify the response in one variable when another variable changes. Seberapa besar perubahan jumlah yang diminta sebagai akibat dari perubahan harga Pertemuan - 6 Moh. Sigit Taruna 2009

Permintaan Elastis dan Inelastis Elastis : bila jumlah yang diminta sangat peka terhadap perubahan harga Inelastis : bila jumlah yang diminta kurang peka terhadap perubahan harga Price elastic demand : perubahan harga sebesar 1% menyebabkan perubahan jumlah yang diminta lebih dari 1% Price inelastic demand :perubahan harga sebesar 1% menyebabkan perubahan jumlah yang diminta kurang dari 1%

Price Elasticity of Demand A popular measure of elasticity is price elasticity of demand measures how responsive consumers are to changes in the price of a product. The value of demand elasticity is always negative, but it is stated in absolute terms.

Elasticities of Supply and Demand Other Demand Elasticities Income elasticity of demand measures the percentage change in quantity demanded resulting from a one percent change in income. 79

Price Elasticity of Demand PX Elastis Elastis Uniter Inelastis QX MRX

Perfectly Elastic and Perfectly Inelastic Demand Curves When demand does not respond at all to a change in price, demand is perfectly inelastic. Demand is perfectly elastic when quantity demanded drops to zero at the slightest increase in price.

Elasticities of Supply and Demand Price elasticity of supply measures the percentage change in quantity supplied resulting from a 1 percent change in price. The elasticity is usually positive because price and quantity supplied are directly related. 84

Elasticities of Supply and Demand We can refer to elasticity of supply with respect to interest rates, wage rates, and the cost of raw materials. 84

Elasticities of Supply and Demand The Market for Wheat 1981 Supply Curve for Wheat QS = 1,800 + 240P 1981 Demand Curve for Wheat QD = 3,550 - 266P

Elasticities of Supply and Demand The Market for Wheat Equilibrium: Q S = Q D Chapter 2: The Basics of Supply and Demand Slide 26

Elasticities of Supply and Demand The Market for Wheat Chapter 2: The Basics of Supply and Demand Slide 27

Elasticities of Supply and Demand The Market for Wheat Assume the price of wheat is $4.00/bushel

Changes in the Market: 1981-1998 The Market for Wheat Supply (Qs) Demand (QD) Equilibrium Price (Qs = QD) 1981 1,800 + 240P 3,550 - 266P 1,800+240P = 3,550-266P 506P = 1750 P1981 = $3.46/bushel 1998 1,944 + 207P 3,244 - 283P 1,944+207P = 3,244-283P P1998 = $2.65/bushel 66

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Short-Run Versus Long-Run Elasticities Demand Price elasticity of demand varies with the amount of time consumers have to respond to a price. 85

Short-Run Versus Long-Run Elasticities Demand Most goods and services: Short-run elasticity is less than long-run elasticity. (e.g. gasoline, Drs.) Other Goods (durables): Short-run elasticity is greater than long-run elasticity (e.g. automobiles) 86

Gasoline: Short-Run and Long-Run Demand Curves DSR Quantity Price DLR People tend to drive smaller and more fuel efficient cars in the long-run Gasoline 87

Automobiles: Short-Run and Long-Run Demand Curves DLR People may put off immediate consumption, but eventually older cars must be replaced. Quantity Price DSR Automobiles 88

Short-Run Versus Long-Run Elasticities Supply Most goods and services: Long-run price elasticity of supply is greater than short-run price elasticity of supply. Other Goods (durables, recyclables): Long-run price elasticity of supply is less than short-run price elasticity of supply 96

Short-Run Versus Long-Run Elasticities Primary Copper: Short-Run and Long-Run Supply Curves SSR Quantity Price SLR Due to limited capacity, firms are limited by output constraints in the short-run. In the long-run, they can expand. 98

Short-Run Versus Long-Run Elasticities Secondary Copper: Short-Run and Long-Run Supply Curves SLR Price increases provide an incentive to convert scrap copper into new supply. In the long-run, this stock of scrap copper begins to fall. SSR Quantity Price 98

Short-Run Versus Long-Run Elasticities Coffee S P0 A freeze or drought decreases the supply of coffee S’ Q1 Price D P1 Short-Run 1) Supply is completely inelastic 2) Demand is relatively inelastic 3) Very large change in price Q0 Quantity 101

Short-Run Versus Long-Run Elasticities Coffee S’ S Quantity Price D P2 Q2 Intermediate-Run 1) Supply and demand are more elastic 2) Price falls back to P2. 3) Quantity falls to Q2 P0 Q0 104

Short-Run Versus Long-Run Elasticities Coffee Quantity Price S P0 Q0 Long-Run 1) Supply is extremely elastic. 2) Price falls back to P0. 3) Quantity increase to Q0. D 105

Understanding and Predicting the Effects of Changing Market Conditions First, we must learn how to “fit” linear demand and supply curves to market data. Then we can determine numerically how a change in a variable will cause supply or demand to shift and thereby affect the market price and quantity. 106

Understanding and Predicting the Effects of Changing Market Conditions Available Data Equilibrium Price, P* Equilibrium Quantity, Q* Price elasticity of supply, ES, and demand, ED. 107

Understanding and Predicting the Effects of Changing Market Conditions Price Supply: Q = c + dP -c/d Demand: Q = a - bP a/b P* Q* ED = -bP*/Q* ES = dP*/Q* Quantity 108

Effects of Government Intervention --Price Controls If the government decides that the equilibrium price is too high, they may establish a maximum allowable ceiling price. 140

Effects of Price Controls Q0 S D Pmax Excess demand If price is regulated to be no higher than Pmax, quantity supplied falls to Q1 and quantity demanded increases to Q2. A shortage results Quantity 141

Price Controls and Natural Gas Shortages In 1954, the federal government began regulating the wellhead price of natural gas. In 1962, the ceiling prices that were imposed became binding and shortages resulted. Price controls created an excess demand of 7 trillion cubic feet. Price regulation was a major component of U.S. energy policy in the 1960s and 1970s, and it continued to influence the natural gas markets in the 1980s. 143