Microeconomic: A.Sumarto Eka Putra

MICROECONOMIC
A.SUMARTO EKA PUTRA
Directorate General Of Treasury

Human Reosurce Division
ELASTISITAS
BEFORE CONTINUE......
• Understanding Demand and Supply
• Determinant Factor of Demand and
Supply
• Understanding Demand and Supply Curve
• Relationship Between Demand and supply
Sumarto Eka Putra, Presentasi Microeconomic @2010

What is Elasticity?
• Measure the reaction or responsiveness
level of Quantity change to a change in
price
• Elasticity of Demand and Elasticiy of
Supply
• Other Elasticity
• Cross elasticity of Demand

Price Elasticity of Demand
• Defining price elasticity of demand (Pe ) D
responsiveness of quantity demanded to a

change in price
PeD = % change in quantity demanded in

response to a 1 % change in price

Market Supply and Demand
S1
S2
Price
a
P1
b
P2
D
O Q1 Q2 Quantity
Market Supply and Demand
S1
S2
Price
a
P1
c
P3 D'
b
P2
D
O Q1 Q2 Q3 Quantity
• Measuring price elasticity of demand
%QD / %P
– use of percentage measures
– the sign: positive or negative?
– the value: greater or less than 1?

– PeD >1: Elastic demand
– PeD <1: Inelastic demand
– Pe D =1: Unit elastic demand

Information of Goods
Goods Unit Initial Price New Price
Cheese Per kg 1.700 1.500
Shirt Per piece 8.100 7.900
Radio Perunit 40.100 39.900

Can u measure the Elasticity?????

Goods Unit Initial New Average Initial New Average
Price Price Price Quantity Quantity Quantity
Cheese Per kg 1.700 1.500 1.600 116.250 123.750 120.000
Shirt Per 8.100 7.900 8.000 197.500 202.500 200.000
piece
Radio Perunit 40.100 39.900 40.000 9.950 10.050 10.000
Goods Percentage of Percentage of Elasticity of

Price Fall Quantity Rise Demand
Cheese 12,5 6,25 0,5
Shirt 2,5 2,5 1,0
Radio 0,5 1,0 2,0

Measuring Elasticity
10
P ($) DQ ¸ DP
m Ped =
mid Q mid P
8
7 P = –2
n
6
Q = 10
Mid P
2 Demand
0
0 10
15 20 30 40 50
Mid Q
10
Measuring Elasticity
DQ DP
P ($) Ped = ¸ mid P
mid Q
m
8 10 -2
=
15
¸7
7 P = –2 = 10/15 x -7/2
n
6 = -70/30
Q = 10 = -7/3 = -2.33
Mid P
2 Demand
0
0 10 15 20 30 40 50
Mid Q
• Determinants of price elasticity of demand
– number and closeness of substitute goods
– proportion of income spent on the good
– the time period

Price Elasticity of Demand and
Total Consumer Expenditure
• Defining total consumer expenditure

TE = P × Q
• Illustrating TE graphically

Total Expenditure
4
P($)
Consumers’ total expenditure

=
1 firms’ total revenue
= D
$2 x 3m = $6m
0
0 1 2 3 4 5 Q
• Effects of a price change: elastic demand

P rises: TE falls
P falls: TE rises

Elastic Demand Between Two Points
P($)
Expenditure falls
as price rises
Expenditure rises
b as price falls
5
a
4
D
0 10 20 Q
• Effects of price change: inelastic demand

P rises: TE rises
P falls: TE falls

Inelastic Demand Between Two Points
P($) Expenditure rises
as price rises
c
8
Expenditure falls
as price falls
a
4
0 15 20 Q
• Special cases
PeD = 0: Totally inelastic demand
PeD = : Infinitely elastic demand

Totally Inelastic Demand (PÎD = 0)
P
D
P2 b
P1 a
O Q1 Q
Infinitely Elastic Demand (PÎD = ¥)
P
a b
P1 D
O Q1 Q2
Q
• Special cases
– PeD = 0: Totally inelastic demand
– PeD = : Infinitely elastic demand
– PeD = –1: Unit elastic demand

Unit Elastic Demand (PÎD = -1)
P
a
20
b
8
D
O 40 100 Q
Price Elasticity of Supply
• Meaning of price elasticity of supply
responsiveness of quantity supplied to a

change in price
PeS = % change in quantity supplied in

response to a 1 % change in price

Supply Curves with Different Price Elasticity of Supply
P
S1
S2
P1
O Q1 Q
Supply Curves with Different Price Elasticity of Supply
P
S1
S2
P2
P1
O Q1 Q2 Q3 Q
• Measuring price elasticity of supply

%QS / %P
elastic and inelastic supply

• Determinants of price elasticity of
supply
– amount that costs rise as output increases
• spare capacity or stocks of inventory
• access to raw materials
• ability to switch away from alternative products
• avoidance of the need to pay overtime
– time period
• immediate: very inelastic
• short run: some responsiveness
• long run: highly elastic
Other Elasticities
• Income elasticity of demand
– measurement
%QD / %Y
– determinants
• degree of necessity
• rate at which people are satisfied
• level of income
– normal goods; income elasticity positive
– inferior goods; income elasticity negative
– applications; marketing, planning, govt. policy

Normal Good
Q
Barang yang Dibeli
pada semua tingkat
pendapatan yang tinggi
dimana sebagian dari
pendapatan itu
dibelanjakan untuk
barang ini, walaupun
proporsinya cenderung
menurun
Ex: Primary Goods

Normal Good
Q
Barang yang bersifat
inelastis terhadap
pendapatan setelah
tingkat pendapatan
Ex: Electronic, Vehicles
I
I

Inferior Goods
Barang yang tergolong

kebutuhan pokok untuk
tingkat pendapatan yang
rendah, yang menjadi
barang inferior untuk
tingkat pendapatan
setelah C
Ex: Electronic, Vehicles
II
C

Other Elasticities
• Cross-price elasticity of demand
– measurement
%QD of good A / %P of good B
– determinants
• closeness of substitute goods
• closeness of complementary goods
– Applications; marketing, advertising

Markets and Adjustment Over
Time
• Short-run and long-run adjustment

– short-run and long-run supply curves

Response of Supply to an Increase in Demand
P
P1
a
D2
D1
O Q1 Q
Response of Supply to an Increase in Demand
P
S short-run
b S long-run
P2 c
P3
P1
a
D2
D1
O Q1 Q2 Q3 Q
Markets and Adjustment over
Time
• Short-run and long-run adjustment
– short-run and long-run supply curves
– short-run and long-run demand curves

Response of Demand to an Increase in Supply
P
S1
S2
a
P1
O Q1 Q
P
S1
S2
a
P1
P2 b
D short-run
O Q1 Q2 Q
P
S1
S2
a
P1 c
P3
P2 b
D long-run
D short-run
O Q1 Q2 Q3 Q
Response of Demand to a Decrease in
Supply
• What are the short run consequences for

buyers of a rise in price?
– Can they adjust?
– What determines ability to adjust?
– What is different in the longer term?
– Draw diagrams to show short run and long
run demand responses to short supply and
higher prices.

Time
• Speculation
– stabilising speculation

Stabilising Speculation: Initial Price Rise
P
S1
P2 b
P1 a
D2
D1
O Q
Stabilising Speculation: Initial Price Rise
P
S1
S2
P2 b
P3 c
P1 a
D2
D3
D1
O Q
Stabilising Speculation: Initial Price Fall
P
S1
P1 a
D1
P2 b
D2
O Q
Stabilising Speculation: Initial Price Fall
P
S2
S1
P1 a
P3 c
D1
P2 b
D2 D3
O Q
Time
• Speculation
– stabilising speculation
– destabilising speculation

Destabilising Speculation: Initial Price Rise
P
S1
P2 b
P1 a
D2
D1
O Q
Destabilising Speculation: Initial Price Rise
P
S2
S1
P3 c
P2 b
P1 a
D3
D2
D1
O Q
Destabilising Speculation: Initial Price Fall
P
S1
P1 a
P2 b
D1
D2
O Q
Destabilising Speculation: Initial Price Fall
P
S1
S2
P1 a
P2 b
P3 c
D1
D2
D3
O Q
Time
• Dealing with uncertainty and risk
– defining risk and uncertainty

• uncertainty = unexpected change = volatility = risk
– reducing risks by holding stocks
– a market in information
• Information is valuable, will be paid for
• Market research, predictions,

Markets Where Prices are
Controlled
• Minimum (high) price - price floor

– Justification
• price stabilisation, industry support
– effect: surplus

Minimum Price: Price Floor
P
S
surplus
minimum
price
Pe
O Qd Qs Q
Controlled
– consequences
• dealing with resulting surpluses
• cushion inefficiency
• discourage production of more efficient
alternative products
• higher prices for consumers
– eg: Common Agricultural Policy (EU); OPEC

Controlled
• Maximum (low) price – price ceiling

– Justification
• Social welfare, prevent abuse of monopoly
power
– effect: shortage

Minimum Price: Price Ceiling
P
S
Pe
maximum
price
shortage
O Qs Qd Q
Controlled
– consequences
• dealing with resulting shortages
• preferential treatment to particular customers
• rationing
• black markets

Microeconomic: A.Sumarto Eka Putra

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MICROECONOMIC

A.SUMARTO EKA PUTRA

Directorate General Of Treasury

Sumarto Eka Putra, Presentasi Microeconomic @2010

Sumarto Eka Putra, Presentasi Microeconomic @2010

• Defining price elasticity of demand (Pe ) D

responsiveness of quantity demanded to a

PeD = % change in quantity demanded in

Sumarto Eka Putra, Presentasi Microeconomic @2010

– use of percentage measures

– the sign: positive or negative?

– the value: greater or less than 1?

Sumarto Eka Putra, Presentasi Microeconomic @2010

– PeD <1: Inelastic demand

– Pe D =1: Unit elastic demand

Sumarto Eka Putra, Presentasi Microeconomic @2010

Sumarto Eka Putra, Presentasi Microeconomic @2010

Can u measure the Elasticity?????

Sumarto Eka Putra, Presentasi Microeconomic @2010

Goods Percentage of Percentage of Elasticity of

Sumarto Eka Putra, Presentasi Microeconomic @2010

– proportion of income spent on the good

– the time period

Sumarto Eka Putra, Presentasi Microeconomic @2010

• Defining total consumer expenditure

Sumarto Eka Putra, Presentasi Microeconomic @2010

Consumers’ total expenditure

• Effects of a price change: elastic demand

Sumarto Eka Putra, Presentasi Microeconomic @2010

• Effects of price change: inelastic demand

Sumarto Eka Putra, Presentasi Microeconomic @2010

Sumarto Eka Putra, Presentasi Microeconomic @2010

Sumarto Eka Putra, Presentasi Microeconomic @2010

responsiveness of quantity supplied to a

PeS = % change in quantity supplied in

Sumarto Eka Putra, Presentasi Microeconomic @2010

• Measuring price elasticity of supply

elastic and inelastic supply

Sumarto Eka Putra, Presentasi Microeconomic @2010

Sumarto Eka Putra, Presentasi Microeconomic @2010

Ex: Primary Goods

Sumarto Eka Putra, Presentasi Microeconomic @2010

Ex: Electronic, Vehicles

Sumarto Eka Putra, Presentasi Microeconomic @2010

Barang yang tergolong

Ex: Electronic, Vehicles

Sumarto Eka Putra, Presentasi Microeconomic @2010

%QD of good A / %P of good B

– Applications; marketing, advertising

Sumarto Eka Putra, Presentasi Microeconomic @2010

• Short-run and long-run adjustment

Sumarto Eka Putra, Presentasi Microeconomic @2010

Sumarto Eka Putra, Presentasi Microeconomic @2010

• What are the short run consequences for

Sumarto Eka Putra, Presentasi Microeconomic @2010

Sumarto Eka Putra, Presentasi Microeconomic @2010

Sumarto Eka Putra, Presentasi Microeconomic @2010

– defining risk and uncertainty

– reducing risks by holding stocks

• Market research, predictions,

Sumarto Eka Putra, Presentasi Microeconomic @2010

• Minimum (high) price - price floor

Sumarto Eka Putra, Presentasi Microeconomic @2010