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

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Supply And Demand

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#### Presentation Transcript

Supply

And

Demand

Pertemuan - 3

Moh. SigitTaruna 2009-Pengantar Ekonomi I

### 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:

### 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:

S

The curves intersect at

equilibrium, or market-

clearing, price. At P0the

quantity supplied is equal

to the quantity demanded

at Q0 .

P0

D

Q0

Price

(\$ per unit)

Quantity

### The Market Mechanism

A Surplus

• 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.

Price

(\$ per unit)

S

Surplus

P1

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

P2

D

Quantity

Q1

Q3

Q2

### 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.

Price

(\$ per unit)

S

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

P3

P2

Shortage

D

Quantity

Q1

Q3

Q2

### Supply and Demand

• Non-price Determining Variables of Supply

• Costs of Production

• Labor

• Capital

• Raw Materials

S

S’

P1

P2

Q0

Q1

Q2

### Supply and Demand

Change in Supply

• The cost of raw materials falls

• 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

Q

### 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.

D

S

S’

P1

P3

Q1

Q3

Q2

### Changes In Market Equilibrium

• Raw material prices fall

• S shifts to S’

• Surplus @ P1 of Q1, Q2

• Equilibrium @ P3, Q3

P

Q

### Supply and Demand

• Non-price Determining Variables of Demand

• Income

• Consumer Tastes

• Price of Related Goods

• Substitutes

• Complements

D

D’

P2

P1

Q0

Q1

Q2

### Supply and Demand

Change in Demand

• Income Increases

• At P1, produce Q2

• At P2, produce Q1

• Demand Curve shifts right

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

P

Q

D

D’

S

P3

P1

Q2

Q1

Q3

### Changes In Market Equilibrium

• Income Increases

• Demand shifts to D1

• Shortage @ P1of Q1, Q2

• Equilibrium @ P3, Q3

P

Q

D

D’

S

S’

P2

P1

Q1

Q2

### 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

Q

### 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. SigitTaruna 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.

### Price Elasticity of Demand

PX

Elastis

Elastis Uniter

Inelastis

QX

MRX

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

Elasticities of Supply

• 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 Supply and Demand

Elasticities of Supply

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

### 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

19811,800 + 240P3,550 - 266P1,800+240P = 3,550-266P506P = 1750P1981 = \$3.46/bushel

19981,944 + 207P3,244 - 283P 1,944+207P = 3,244-283P P1998= \$2.65/bushel

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

www.sigittaruna.wordpress.com

### Short-Run Versus Long-Run Elasticities

Demand

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

### 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)

DSR

Price

People tend to

drive smaller and

more fuel efficient

cars in the long-run

DLR

Quantity

### Gasoline: Short-Run andLong-Run Demand Curves

Gasoline

DLR

Price

People may put

off immediate

consumption, but

eventually older cars

must be replaced.

DSR

Quantity

Automobiles

### 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

SSR

Price

SLR

Due to limited

capacity, firms

are limited by

output constraints

in the short-run.

In the long-run, they

can expand.

Quantity

### Short-Run Versus Long-Run Elasticities

Primary Copper: Short-Run and

Long-Run Supply Curves

SLR

SSR

Price

Price increases

provide an incentive

to convert scrap

copper into new supply.

In the long-run, this

stock of scrap copper

begins to fall.

Quantity

### Short-Run Versus Long-Run Elasticities

Secondary Copper: Short-Run and

Long-Run Supply Curves

S’

S

A freeze or drought

decreases the supply

of coffee

P1

P0

Short-Run

1) Supply is completely inelastic

2) Demand is relatively inelastic

3) Very large change in price

D

Q1

### Short-Run Versus Long-Run Elasticities

Coffee

Price

Quantity

Q0

S’

S

Price

P2

P0

Intermediate-Run

1) Supply and demand are

more elastic

2) Price falls back to P2.

3) Quantity falls to Q2

D

Quantity

Q2

Q0

### Short-Run Versus Long-Run Elasticities

Coffee

Price

Long-Run

1) Supply is extremely elastic.

2) Price falls back to P0.

3) Quantity increase to Q0.

S

P0

D

Quantity

Q0

Coffee

### 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.

### 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.

Supply: Q = c + dP

a/b

ED = -bP*/Q*

ES = dP*/Q*

P*

-c/d

Demand: Q = a - bP

Q*

Price

Quantity

### 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.

S

If price is regulated to

be no higher than Pmax,

quantity supplied falls

to Q1 and quantity

demanded increases to

Q2. A shortage results

P0

Pmax

D

Excess demand

Q0

Price

Quantity

### 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.