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

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Supply

And

Demand

Supply

And

Demand

Pertemuan - 3Moh. Sigit Taruna 2009-Pengantar Ekonomi I

Pertemuan - 3Moh. Sigit Taruna 2009-Pengantar Ekonomi I

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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:

)(PQQ Ss

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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:

(P)QQ DD

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The Market Mechanism

Quantity

D

S

The curves intersect atequilibrium, or market-

clearing, price. At P0 thequantity supplied is equalto the quantity demanded

at Q0 .

P0

Q0

Price($ per unit)

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• The market price is above equilibrium– 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.

A SurplusA Surplus

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D

S

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 Quantity

Price($ per unit)

P2

Q3

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• 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.

ShortageShortage

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D

S

Q1 Q2

P2

Shortage

Quantity

Price($ per unit)

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

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Supply and Demand• Non-price Determining Variables of Supply

– Costs of Production• Labor

• Capital

• Raw Materials

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Supply and Demand

• The cost of raw materials falls

– At P1, produce Q2


– Supply curve shifts right to S’

– More produced at any price on S’ than on S

P S

Change in SupplyChange in Supply

Q

P1

P2

Q1Q0

S’

Q2

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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.

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S’

Q2

• Raw material prices fall

– S shifts to S’

– Surplus @ P1 of Q1, Q2

– Equilibrium @ P3, Q3

P

Q

SD

P3

Q3Q1

P1

Changes In Market Equilibrium

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Supply and Demand• Non-price Determining Variables of

Demand– Income– Consumer Tastes– Price of Related Goods

• Substitutes• Complements

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DP

QQ1

P2

Q0

P1

D’

Q2

Change in DemandChange in Demand

Supply and Demand

• Income Increases– At P1, produce Q2


– Demand Curve shifts right

– More purchased at any price on D’ than on D

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D’ SD

Q3

P3

Q2

• Income Increases

– Demand shifts to D1

– Shortage @ P1 of Q1, Q2

– Equilibrium @ P3, Q3

P

QQ1

P1


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D’ S’• 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

Q

S

P2

Q2

D

P1

Q1


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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 - 6Moh. Sigit Taruna 2009

Pertemuan - 6Moh. Sigit Taruna 2009

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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%

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Price Elasticity of Demand

• A popular measure of elasticity isA popular measure of elasticity is price elasticity of demand price elasticity of demand measures how responsive measures how responsive consumers are to changes in the consumers are to changes in the price of a product.price of a product.

• The value of demand elasticity is always negative, but it is stated in absolute terms.

P rice e las tic ity o f d em an d =P ercen tag e ch an g e in q u an tity d em an d ed

P ercen tag e ch an g e in p rice

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Elasticities of Supply and Demand

• Income elasticity of demand measures the percentage change in quantity demanded resulting from a one percent change in income.

Other Demand ElasticitiesOther Demand Elasticities

I

Q

Q

I

I/I

Q/Q EI

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Price Elasticity of Demand

PX

QX

MRX

1PE

1PE

1PE Elastis Uniter

Inelastis

Elastis

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Perfectly Elastic andPerfectly 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.

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• 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.

Elasticities of SupplyElasticities of Supply

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• We can refer to elasticity of supply with respect to interest rates, wage rates, and the cost of raw materials.

Elasticities of SupplyElasticities of Supply

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• 1981 Supply Curve for Wheat– QS = 1,800 + 240P

• 1981 Demand Curve for Wheat– QD = 3,550 - 266P

The Market for WheatThe Market for Wheat

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• Equilibrium: Q S = Q D

PP 266550,3240800,1

750,1506 P

bushelP /46.3

bushels million 630,2)46.3)(240(800,1 Q


Chapter 2: The Basics of Supply and Demand Slide 26

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Inelastic 35.0)266(630,2

46.3

P

Q

Q

PE DD

P

Inelastic 32.0)240(630,2

46.3

P

Q

Q

PE SS

P


Chapter 2: The Basics of Supply and Demand Slide 27

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• Assume the price of wheat is $4.00/bushel

486,2)00.4)(266(550,3 DQ

43.0)266(486,2

00.4D

PE


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1981 1,800 + 240P 3,550 - 266P 1,800+240P = 3,550-266P506P = 1750

P1981 = $3.46/bushel

1998 1,944 + 207P 3,244 - 283P 1,944+207P = 3,244-283P P1998 = $2.65/bushel

Supply (Qs) Demand (QD) Equilibrium Price (Qs = QD)

Changes in the Market: 1981-1998The Market for WheatThe Market for Wheat

www.sigittaruna.wordpress.com

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Short-Run Versus Long-Run Elasticities

• Price elasticity of demand varies with the amount of time consumers have to respond to a price.

DemandDemand

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• 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)


DemandDemand

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Gasoline: Short-Run andLong-Run Demand Curves

DSR

DLR

People tend to drive smaller and more fuel efficient

cars in the long-run

Gasoline

Quantity

Price

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DSR

DLR

People may putoff immediate

consumption, buteventually older cars

must be replaced.

Automobiles

Automobiles: Short-Run andLong-Run Demand Curves

Quantity

Price

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• 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


SupplySupply

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SSR

Primary Copper: Short-Run and Long-Run Supply Curves

Primary Copper: Short-Run and Long-Run Supply Curves

Quantity

Price


SLR

Due to limitedcapacity, firmsare limited by

output constraintsin the short-run.

In the long-run, theycan expand.

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SSR

Secondary Copper: Short-Run and Long-Run Supply Curves

Secondary Copper: Short-Run and Long-Run Supply Curves

Quantity

Price


SLR

Price increasesprovide an incentive

to convert scrapcopper into new supply.

In the long-run, thisstock of scrap copper

begins to fall.

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D

S

P0

Q0 Quantity

Price

P1

Short-Run1) Supply is completely inelastic2) Demand is relatively inelastic3) Very large change in price

A freeze or drought decreases the supply

of coffee

S’

Q1


CoffeeCoffee

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S’

D

S

P0

Q0

P2

Q2

Intermediate-Run1) Supply and demand are more elastic2) Price falls back to P2.3) Quantity falls to Q2


Quantity

Price

CoffeeCoffee

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D

SP0

Q0

Long-Run1) Supply is extremely elastic.2) Price falls back to P0.3) Quantity increase to Q0.


CoffeeCoffee

Quantity

Price

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• 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.

Understanding and Predicting the Effects of Changing Market Conditions

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• Available Data– Equilibrium Price, P*– Equilibrium Quantity, Q*– Price elasticity of supply, ES, and demand,

ED.


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Demand: Q = a - bP

a/bSupply: Q = c + dP

-c/d

P*

Q*

ED = -bP*/Q*ES = dP*/Q*


Quantity

Price

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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.

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D

Effects of Price Controls

Quantity

Price

P0

Q0

S

Pmax

Excess demand

If price is regulated tobe no higher than Pmax,quantity supplied falls

to Q1 and quantitydemanded increases toQ2. A shortage results

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Price Controls andNatural 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.

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