Penawaran dan Permintaan

Kuliah 4 & 5

Isi kandungan
Demand and Supply
Demand and supply curves/theory price elasticity

The Basics of Supply and Demand

Supply and Demand

Supply and demand analysis can:
1. Help us understand and predict how world economic conditions affect market price and production 2. Analyze the impact of government price controls, minimum wages, price supports, and production incentives on the economy 3. Determine how taxes, subsidies, tariffs and import quotas affect consumers and producers

Supply and Demand

The Supply Curve
The relationship between the quantity of a good that producers are willing to sell and the price of the good. Measures quantity on the x-axis and price on the y-axis

= Q S (P)

The Supply Curve

Price ($ per unit)

S
The Supply Curve Graphically

P2 P1
The supply curve slopes upward demonstrating that at higher prices firms will increase output

Q1

Q2

Quantity

The Supply Curve

Other Variables Affecting Supply
Costs of Production
Labor Capital Raw Materials

Lower costs of production allow a firm to produce more at each price and vice versa

Change in Supply
The cost of raw materials falls
Produced Q1 at P1 and Q0 at P2 Now produce Q2 at P1 and Q1 at P2 Supply curve shifts right to S
P S S

P1 P2

Q0

Q1

Q2

The Supply Curve

Change in Quantity Supplied
Movement along the curve caused by a change in price

Change in Supply
Shift of the curve caused by a change in something other than price
Change in costs of production

Supply and Demand

The Demand Curve
The relationship between the quantity of a good that consumers are willing to buy and the price of the good. Measures quantity on the x-axis and price on the y-axis

Q D = Q D (P)

The Demand Curve

Price ($ per unit) The demand curve slopes downward demonstrating that consumers are willing to buy more at a lower price as the product becomes relatively cheaper.

P2 P1 D Q1 Q2 Quantity

The Demand Curve

Other Variables Affecting Demand
Income
Increases in income allow consumers to purchase more at all prices

Consumer Tastes Price of Related Goods

Substitutes Complements

Change in Demand
Income Increases
P D D

Purchased Q0, at P2 P2 and Q1 at P1 Now purchased Q1 at P2 and Q2 at P1 P1 Same for all prices Demand Curve shifts right
Q0 Q1 Q2 Q

The Demand Curve

Changes in quantity demanded
Movements along the demand curve caused by a change in price.

Changes in demand
A shift of the entire demand curve caused by something other than price.
Income Preferences

Elasticities of Supply and Demand

Not only are we concerned with what direction price and quantity will move when the market changes, but we are concerned about how much they change. Elasticity gives a way to measure by how much a variable will change with the change in another variable. Specifically, it gives the percentage change in one variable resulting from a one percent change in another.

Price Elasticity of Demand

Measures the sensitivity of quantity demanded to price changes.
It measures the percentage change in the quantity demanded of a good that results from a one percent change in price. D % Q E PD = % P

Price Elasticity of Demand

The percentage change in a variable is the absolute change in the variable divided by the original level of the variable. Therefore, elasticity can also be Q Q P Q writtenEas: D = =
P

P P

Q P

Price Elasticity of Demand

Usually a negative number
As price increases, quantity decreases As price decreases, quantity increases

When EP > 1, the good is price elastic

% Q > % P

When EP < 1, the good is price inelastic

% Q < % P

Price Elasticity of Demand

The primary determinant of price elasticity of demand is the availability of substitutes.
Many substitutes demand is price elastic
Can easily move to another good with price increases

Few substitutes demand is price inelastic

Price Elasticity of Demand

Looking at a linear demand curve, as we move along the curve Q/P will change Price elasticity of demand must therefore be measured at a particular point on the demand curve Elasticity will change along the demand curve in a particular way

Price Elasticity of Demand

Given a linear demand curve
Elasticity depends on slope and on the values of P and Q The top portion of demand curve is elastic
Price is high and quantity small

The bottom portion of demand curve is inelastic

Price is low and quantity high

Price Elasticity of Demand

Price 4

EP = -
Elastic

Demand Curve Q = 8 2P

Ep = -1 Inelastic

Ep = 0
4 8 Q

Price Elasticity of Demand

The steeper the demand curve becomes, the more inelastic the good. The flatter the demand curve becomes, the more elastic the good Two extreme cases of demand curves
Completely inelastic demand vertical Infinitely elastic demand - horizontal

Infinitely Elastic Demand

Price

EP =
P*

Quantity

Completely Inelastic Demand

Price

EP = 0

Q*

Quantity

Other Demand Elasticities

Income Elasticity of Demand
Measures how much quantity demanded changes with a change in income.

Q/Q EI = I/I

I Q = Q I

Other Demand Elasticities

Cross-Price Elasticity of Demand
Measures the percentage change in the quantity demanded of one good that results from a one percent change in the price of another good.

E Q b Pm

Qb Qb Pm Q b = = Pm Pm Q b Pm

Other Demand Elasticities

Complements: Cars and Tires
Cross-price elasticity of demand is negative
Price of cars increases, quantity demanded of tired decreases

Substitutes: Butter and Margarine

Cross-price elasticity of demand is positive
Price of butter increases, quantity of margarine demanded increases

Price Elasticity of Supply

Measures the sensitivity of quantity supplied given a change in price
Measures the percentage change in quantity supplied resulting from a 1 percent change in price.

S P

% Q = % P

Point v. Arc Elasticities

Point elasticity of demand
Price elasticity of demand at a particular point on the demand curve

Arc elasticity of demand

Price elasticity of demand calculated over a range of prices
D EP

= Q

P P Q

Elasticity: An Application
During 1980s and 1990s, market for wheat went through changes that had great implications for American farmers and US agricultural policy Using the supply and demand curves for wheat, we can analyze what occurred in this market

Elasticity: An Application
Supply: QS = 1900 + 24P Demand: QD = 3550 266P

Elasticity: An Application
QD = QS 1800 + 240P = 3550 266P 506P = 1750 P = $3.46 per bushel Q = 1800 + (240)(3.46) = 2630 million bushels

Elasticity: An Application
We can find the elasticities of demand and supply at these points
D EP

P Q D 3 .46 = = ( 2 .66 ) = .035 Q P 2,630

S EP

P QS 3 . 46 = = ( 2 . 40 ) = . 032 Q P 2,630

Elasticity: An Application
Assume the price of wheat is $4.00/bushel due to decrease in supply
Q D = 3,550 ( 266 )( 4 . 00 ) 2 , 486

D P

4 . 00 = ( 266 ) = 0 . 43 2 , 486

Elasticity: An Application
In 2002, the supply and demand for wheat were:
Supply: QS = 1439 + 267P Demand: QD = 2809 226P

Elasticity: An Application
QD = QS 2809 - 226P = 1439 + 267P P = $2.78 per bushel Q = 2809 - (226)(2.78) = 2181 million bushels Price of wheat fell in nominal terms.

Short-Run Versus LongRun Elasticity

Price elasticity varies with the amount of time consumers have to respond to a price. Short run demand and supply curves often look very different from their long-run counterparts.

Short-Run Versus LongRun Elasticity

Demand
In general, demand is much more price elastic in the long run
Consumers take time to adjust consumption habits Demand might be linked to another good that changes slowly More substitutes are usually available in the long run

Gasoline: Short-Run and Long-Run Demand Curves

Price

DSR

People cannot easily adjust consumption in short run. In the long run, people tend to drive smaller and more fuel efficient cars.

DLR

Quantity of Gas

Short-Run Versus LongRun Elasticity

Demand and Durability
For some durable goods, demand is more elastic in the short run If goods are durable, then when price increases, consumers choose to hold on to the good instead of replacing it But in long run, older durable goods will have to be replaced

Cars: Short-Run and Long-Run Demand Curves

Price

DLR

Initially, people may put off immediate car purchase In long run, older cars must be replaced.

DSR

Quantity of Cars

Short-Run Versus LongRun Elasticity

Income elasticity also varies with the amount of time consumers have to respond to an income change.
For most goods and services, income elasticity is larger in the long run When income changes, it takes time to adjust spending

Short-Run Versus LongRun Elasticity

Income elasticity of durable goods
Income elasticity is less in the long-run than in the short-run.
Increases in income mean consumers will want to hold more cars. Once older cars replaced, purchases will only to be to replace old cars. Less purchases from income increase in long run than in short run

Demand for Gasoline

Demand for Automobiles

Short-Run Versus LongRun Elasticity

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 Elasticity

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 Primary Copper

Short-Run Versus LongRun Elasticity S

Price

SLR

SR

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 Secondary Copper

Short-Run v. Long-Run Elasticity An Application

Why are coffee prices very volatile?
Most of the worlds coffee produced in Brazil. Many changing weather conditions affect the crop of coffee, thereby affecting price Price following bad weather conditions is usually short-lived In long run, prices come back to original levels, all else equal

Price of Coffee Bean

Short-Run v. Long-Run Elasticity An Application

Demand and supply are more elastic in the long run In short-run, supply is completely inelastic
Weather may destroy part of the fixed supply, decreasing supply

Demand relatively inelastic as well Price increases significantly

An Application Coffee S S
Price
A freeze or drought decreases the supply of coffee Price increases significantly due to inelastic supply and demand

P1

P0 D Q1 Q0
Quantity

An Application - Coffee
Price

Intermediate-Run 1) Supply and demand are more elastic 2) Price falls back to P2.

P2 P0

D Q2 Q0
Quantity

An Application - Coffee
Price
Long-Run 1) Supply is extremely elastic. 2) Price falls back to P0. 3) Quantity back to Q0.

P0

D Q0
Quantity

Supply of Copper

Declining Demand and the Behavior of Copper Prices

Copper has gone through difficult market changes leading the significantly reduced prices most from decreased demand from
A decrease in the growth rate of power generation The development of substitutes: fiber optics and aluminum

Real versus Nominal Prices of Copper 1965 - 2002

Declining Demand and the Behavior of Copper Prices

Give producers concern about further declines in demand, we can calculate by how much prices will fall with future declines in demand Assume that demand will fall by 20%
What is the resulting decrease in price? Demand curve will shift to left by 20%

Declining Demand and the Behavior of Copper Prices

We want to consider 80% of the past demand

Q = (0.80)(13.5 - 8P) Q = 10.8 - 6.4P

Recall the equation for supply:

Q = -4.5 + 16P

Declining Demand and the Behavior of Copper Prices

Setting supply equal to demand:

-4.5 + 16P = 10.8 - 6.4P -16P + 6.4P = 10.8 + 4.5 P = 15.3/22.4 P = 68.3 cents/pound
A decline in demand of 20% will lead to a drop in price about 7%

TUTORIAL DISCUSSION
1. What are supply and demand? 2. What are elasticities of supply and demand?