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# Supply And Demand - PowerPoint PPT Presentation

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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And

Demand

Pertemuan - 3

Moh. SigitTaruna 2009-Pengantar Ekonomi I

• 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 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 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

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.

(\$ 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.

(\$ 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

• Non-price Determining Variables of Supply

• Costs of Production

• Labor

• Capital

• Raw Materials

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

• 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.

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

• Non-price Determining Variables of Demand

• Income

• Consumer Tastes

• Price of Related Goods

• Substitutes

• Complements

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’

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’

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 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

• 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%

• 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.

Other Demand Elasticities

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

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.

Perfectly Elastic andPerfectly Inelastic Demand Curves

Elasticities of Supply and Demand demand is

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 demand is

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 demand is

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 demand is

The Market for Wheat

• Equilibrium: Q S = Q D

Chapter 2: The Basics of Supply and Demand

Slide 26

Elasticities of Supply and Demand demand is

The Market for Wheat

Chapter 2: The Basics of Supply and Demand

Slide 27

Elasticities of Supply and Demand demand is

The Market for Wheat

• Assume the price of wheat is \$4.00/bushel

Changes in the Market: 1981-1998 demand is

The Market for Wheat

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

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

Short-Run Versus demand is Long-Run Elasticities

Demand

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

Short-Run Versus demand is 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)

D demand is SR

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

D demand is LR

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 demand is 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

S demand is SR

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

S demand is LR

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’ demand is

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’ demand is

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 demand is

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

• 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.

• Available Data

• Equilibrium Price, P*

• Equilibrium Quantity, Q*

• Price elasticity of supply, ES, and demand, ED.

Supply: ConditionsQ = 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

• If the government decides that the equilibrium price is too high, they may establish a maximum allowable ceiling price.

S Conditions

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 ConditionsNatural 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.