Supply and demand
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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

Supply

And

Demand

Pertemuan - 3

Moh. SigitTaruna 2009-Pengantar Ekonomi I


The market mechanism

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 mechanism1

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:


The market mechanism2

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

The Market Mechanism

Price

($ per unit)

Quantity


The market mechanism3

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.


The market mechanism4

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


The market mechanism5

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.


The market mechanism6

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

The Market Mechanism


Supply and demand1

Supply and Demand

  • Non-price Determining Variables of Supply

    • Costs of Production

      • Labor

      • Capital

      • Raw Materials


Supply and demand2

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

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

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 demand3

Supply and Demand

  • Non-price Determining Variables of Demand

    • Income

    • Consumer Tastes

    • Price of Related Goods

      • Substitutes

      • Complements


Supply and demand4

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


Changes in market equilibrium1

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


Changes in market equilibrium2

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

  • 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

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

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

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 demand1

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.

Perfectly Elastic andPerfectly Inelastic Demand Curves


Elasticities of supply and demand1

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 demand2

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 demand3

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 demand4

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 demand5

Elasticities of Supply and Demand

The Market for Wheat

Chapter 2: The Basics of Supply and Demand

Slide 27


Elasticities of supply and demand6

Elasticities of Supply and Demand

The Market for Wheat

  • Assume the price of wheat is $4.00/bushel


Changes in the market 1981 1998

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)


Supply and demand

www.sigittaruna.wordpress.com


Short run versus long run elasticities

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 elasticities1

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)


Gasoline short run and long run demand curves

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


Automobiles short run and long run demand curves

DLR

Price

People may put

off immediate

consumption, but

eventually older cars

must be replaced.

DSR

Quantity

Automobiles: Short-Run andLong-Run Demand Curves

Automobiles


Short run versus long run elasticities2

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


Short run versus long run elasticities3

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


Short run versus long run elasticities4

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


Short run versus long run elasticities5

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


Short run versus long run elasticities6

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


Short run versus long run elasticities7

Price

Long-Run

1) Supply is extremely elastic.

2) Price falls back to P0.

3) Quantity increase to Q0.

S

P0

D

Quantity

Q0

Short-Run Versus Long-Run Elasticities

Coffee


Understanding and predicting the effects of changing market conditions

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 conditions1

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.


Understanding and predicting the effects of changing market conditions2

Supply: Q = c + dP

a/b

ED = -bP*/Q*

ES = dP*/Q*

P*

-c/d

Demand: Q = a - bP

Q*

Understanding and Predicting the Effects of Changing Market Conditions

Price

Quantity


Effects of government intervention price controls

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.


Effects of price controls

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

Effects of Price Controls

Price

Quantity


Price controls and natural gas shortages

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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