Transcript Chapter 2

KULIAH 2
Permintaan dan
Penawaran
Topik Diskusi

Penawaran dan Permintaan

Mekanisme Pasar

Perubahan Ekuilibrium Pasar

Elastisitas Permintaan dan Penawaran

Elastisitas jangka pendek vs jangka
panjang
Chapter 2: The Basics of Supply and Demand
Slide 2
Topik Diskusi

Pemahaman dan Perkiraan Efek
Perubahan Kondisi Pasar

Efek Campur Tangan PemerintahKontrol Harga
Chapter 2: The Basics of Supply and Demand
Slide 3
Pengantar

Aplikasi Analisis Penawaran dan
Permintaan

Memahami dan memperkirakan bagaimana
kondisi perekonomian dunia mempengaruhi
harga pasar dan tingkat produksi.

Menganalisis dampak dari kontrol harga
pemerintah, upah minimum, subsidi harga,
dan insentif produksi.
Chapter 2: The Basics of Supply and Demand
Slide 4
Pengantar

Aplikasi Analisis Permintaan dan
Penawaran

Menganalisis bagaimana pajak, subsidi, dan
pembatasan import mempengaruhi
konsumen dan produsen.
Chapter 2: The Basics of Supply and Demand
Slide 5
Supply and Demand

Kurva Penawaran

Kurva penawaran menunjukkan banyaknya
jumlah barang yang akan dijual produsen
pada tingkat harga tertentu, dengan asumsi
faktor-faktor lain yang mempengaruhi
penawaran dianggap tetap.
Chapter 2: The Basics of Supply and Demand
Slide 6
Supply and Demand

Kurva Penawaran

Hubungan tingkat produksi dan harga dapat
ditunjukkan dengan persamaan:
Qs  QS (P )
Chapter 2: The Basics of Supply and Demand
Slide 7
Supply and Demand
The Supply
Curve Graphically
Price
($ per unit)
Vertical axis measures
price (P) received
per unit in dollars
Horizontal axis measures
quantity (Q) supplied in
number of units per
time period
Quantity
Chapter 2: The Basics of Supply and Demand
Slide 8
Supply and Demand
Price
($ per unit)
S
The Supply
Curve Graphically
P2
The supply curve slopes
upward demonstrating that
at higher prices firms
will increase output
P1
Q1
Q2
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 9
Supply and Demand

Faktor-faktor selain harga barang yang
mempengaruhi penawaran

Biaya Produksi

Tenaga Kerja

Modal

Bahan baku
Chapter 2: The Basics of Supply and Demand
Slide 10
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’

P
S’
S
P1
P2
More produced at any
price on S’ than on S
Q0
Chapter 2: The Basics of Supply and Demand
Q1
Q2
Slide 11
Q
Supply and Demand

Supply - A Review

Penawaran ditentukan oleh variabel-variabel
penawaran di luar harga seperti biaya
tenaga kerja, modal, dan biaya bahan baku.

Perubahan penawaran ditunjukkan dengan
pergerakan kurva penawaran.
Chapter 2: The Basics of Supply and Demand
Slide 12
Supply and Demand

Supply - A Review

Perubahan dari jumlah barang yang
ditawarkan ditunjukkan oleh pergerakan di
sepanjang kurva penawaran dan disebabkan
oleh perubahan harga produk/ barang.
Chapter 2: The Basics of Supply and Demand
Slide 13
Supply and Demand

Kurva Permintaan

Kurva permintaan menunjukkan banyaknya jumlah
barang yang ingin dibeli oleh konsumen akibat
perubahan tingkat harga dan variabel-variabel lain di
luar harga dianggap konstan.

Hubungan harga dengan jumlah barang yang
diminta ditunjukkan oleh persamaan berikut:
QD  QD(P)
Chapter 2: The Basics of Supply and Demand
Slide 14
Supply and Demand
Price
($ per unit)
Vertical axis measures
price (P) paid
per unit in dollars
Horizontal axis measures
quantity (Q) demanded in
number of units per
time period
Quantity
Chapter 2: The Basics of Supply and Demand
Slide 15
Supply and Demand
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 and the
consumer’s real income
increases.
D
Quantity
Chapter 2: The Basics of Supply and Demand
Slide 16
Supply and Demand

Variable selain harga yang
mempengaruhi permintaan:

Pendapatan

Selera Konsumen

Harga barang lain yang berhubungan

Substitusi

Komplementer
Chapter 2: The Basics of Supply and Demand
Slide 17
Supply and Demand
Change in Demand

Income Increases
P
D’
D
P2

At P1, produce Q2

At P2, produce Q1

Demand Curve shifts right P1

More purchased at any
price on D’ than on D
Q0
Chapter 2: The Basics of Supply and Demand
Q1
Q2
Slide 18
Q
Perubahan Permintaan dan Penawaran

Permintaan - A Review

Permintaan dipengaruhi oleh faktor di luar
harga seperti pendapatan, harga barang lain,
dan selera.

Perubahan permintaan ditunjukkan oleh
pergeseran seluruh kurva permintaan.

Perubahan jumlah barang yang diminta
ditunjukkan oleh pergerakan di sepanjang
kurva permintaan.
Chapter 2: The Basics of Supply and Demand
Slide 19
Mekanisme Pasar
Price
($ per unit)
S
The curves intersect at
equilibrium, or marketclearing, price. At P0 the
quantity supplied is equal
to the quantity demanded
at Q0 .
P0
D
Q0
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 20
Mekanisme Pasar

Karakteristik Equilibrium Pasar:
 QD
= QS
 Tidak
ada kekurangan
 Tidak
ada kelebihan suplay
 Tidak
ada tekanan terhadap harga untuk
berubah
Chapter 2: The Basics of Supply and Demand
Slide 21
The Market Mechanism
Price
($ per unit)
S
Surplus
P1
If price is above equilibrium:
1) Price is above the
market clearing price
2) Qs > Qd
3) Price falls to the
market-clearing price
P0
D
Q0
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 22
The Market Mechanism
Surplus

Harga Pasar di atas equilibrium

Terjadi kelebihan suplai produksi

Produsen menurunkan harga

Jumlah barang yang diminta meningkat dan
jumlah barang yang ditawarkan menurun.

Pasar akan terus menyesuakan hingga
tingkat harga equilibrium tercapai.
Chapter 2: The Basics of Supply and Demand
Slide 23
The Market Mechanism
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
Q1
Q3
Q2 Quantity
Chapter 2: The Basics of Supply and Demand
Slide 24
The Market Mechanism
Shortage

Harga pasar di bawah equilibrium:

Terjadi kekurangan jumlah barang

Produsen menaikkan harga barang

Jumlah barang yang diminta menurun dan
jumlah penawaran meningkat

Pasar akan terus menyesuaikan hingga
tingkat equilibrium harga tercapai.
Chapter 2: The Basics of Supply and Demand
Slide 25
The Market Mechanism
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
Q1
Q3
D
Q2 Quantity
Chapter 2: The Basics of Supply and Demand
Slide 26
Mekanisme Pasar

Kesimpulan
1) Permintaan dan penawaran berinteraksi
untuk memperoleh harga keseimbangan.
2) Ketika tidak berada dalam kondisi
equilibrium, pasar akan terus meningkatkan
atau mengurangi permintaan atau penawaran.
3) Pasar harus bersaing untuk mendapatkan
mekanisme pasar yang efisien.
Chapter 2: The Basics of Supply and Demand
Slide 27
Changes In Market Equilibrium

Harga keseimbangan ditentukan oleh tingkat
permintaan dan penawaran.

Penawaran dan permintaan ditentukan oleh nilai
permintaan dan penawaran yang ditentukan oleh
beberapa variabel.

Perubahan dari berbagai kombinasi variabel tersebut
dapat menyebabkan terjadinya perubahan equlibrium
harga dan atau jumlah barang yang diminta atau
ditawarkan.
Chapter 2: The Basics of Supply and Demand
Slide 28
Changes In Market Equilibrium

Harga bahan baku
turun

P
D
S
S’
S bergerak ke S’

Surplus @ P1 of
Q 1, Q 2

Equilibrium @ P3,
Q3
P1
P3
Q1 Q3 Q2
Chapter 2: The Basics of Supply and Demand
Slide 29
Q
Changes In Market Equilibrium

Peningkatan
pendapatan
P

Demand shifts to D1

Shortage @ P1 of Q1, Q2 P1

Equilibrium @ P3, Q3
D
D’
S
P3
Q2 Q1 Q3
Chapter 2: The Basics of Supply and Demand
Slide 30
Q
Changes In Market Equilibrium

Income Increases &
raw material prices fall


The increase in D is
greater than the
increase in S
P
D
D’
S
S’
P2
P1
Equilibrium price and
quantity increase to P2,
Q2
Q1
Chapter 2: The Basics of Supply and Demand
Q2
Slide 31
Q
Perubahan Permintaan dan Penawaran

Pada saat permintaan dan penawaran
berubah secara simultan, dampak
terhadap harga keseimbangan ditentukan
oleh:
1)
Ukuran relativ dan arah perubahan
2)
Bentuk model permintaan dan penawaran
Chapter 2: The Basics of Supply and Demand
Slide 32
Elasticities of Supply and Demand

Generally, elasticity is a measure of the
sensitivity of one variable to another.

It tells us the percentage change in one
variable in response to a one percent
change in another variable.
Chapter 2: The Basics of Supply and Demand
Slide 33
Elasticities of Supply and Demand
Price Elasticity of Demand

Measures the sensitivity of quantity
demanded to price changes.

It measures the percentage change in the
quantity demanded for a good or service that
results from a one percent change in the
price.
Chapter 2: The Basics of Supply and Demand
Slide 34
Elasticities of Supply and Demand

The price elasticity of demand is:
EP  (%Q)/(%P)
Chapter 2: The Basics of Supply and Demand
Slide 35
Elasticities of Supply and Demand
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.
Chapter 2: The Basics of Supply and Demand
Slide 36
Elasticities of Supply and Demand
Price Elasticity of Demand

So the price elasticity of demand is also:
Q/Q P Q
EP 

P/P
Q P
Chapter 2: The Basics of Supply and Demand
Slide 37
Elasticities of Supply and Demand

Interpreting Price Elasticity of Demand
Values
1) Because of the inverse relationship
between P and Q; EP is negative.
2) If EP > 1, the percent change in quantity is
greater than the percent change in
price. We say the demand is price
elastic.
Chapter 2: The Basics of Supply and Demand
Slide 38
Elasticities of Supply and Demand

Interpreting Price Elasticity of Demand
Values
3) If EP < 1, the percent change in
quantity is less than the percent
change in price. We say the demand
is price inelastic.
Chapter 2: The Basics of Supply and Demand
Slide 39
Elasticities of Supply and Demand
Price Elasticity of Demand

The primary determinant of price elasticity
of demand is the availability of
substitutes.

Many substitutes demand is price elastic

Few substitutes demand is price inelastic
Chapter 2: The Basics of Supply and Demand
Slide 40
Price Elasticities of Demand
Price
EP  - 
The lower portion of
a downward sloping
demand curve is less elastic
than the upper portion.
4
Q = 8 - 2P
Ep = -1
2
Linear Demand Curve
Q = a - bP
Q = 8 - 2P
Ep = 0
4
Chapter 2: The Basics of Supply and Demand
8
Q
Slide 41
Price Elasticities of Demand
Price
Infinitely Elastic Demand
D
P*
EP  - 
Quantity
Chapter 2: The Basics of Supply and Demand
Slide 42
Price Elasticities of Demand
Completely Inelastic Demand
Price
EP  0
Q*
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 43
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.
Chapter 2: The Basics of Supply and Demand
Slide 44
Elasticities of Supply and Demand
Other Demand Elasticities

The income elasticity of demand is:
Q/Q
I Q
EI 

I/I
Q I
Chapter 2: The Basics of Supply and Demand
Slide 45
Elasticities of Supply and Demand
Other Demand Elasticities

Cross 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.

For example consider the substitute
goods, butter and margarine.
Chapter 2: The Basics of Supply and Demand
Slide 46
Elasticities of Supply and Demand

The cross elasticity of demand is:
Qb/Qb Pm Qb
EQbPm 

Pm/Pm Qb Pm

The cross elasticity for substitutes is positive,
while that for complements is negative.
Chapter 2: The Basics of Supply and Demand
Slide 47
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.
Chapter 2: The Basics of Supply and Demand
Slide 48
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.
Chapter 2: The Basics of Supply and Demand
Slide 49
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
Chapter 2: The Basics of Supply and Demand
Slide 50
Elasticities of Supply and Demand
The Market for Wheat

Equilibrium: Q S = Q D
1,800 240P  3,550 266P
506P  1,750
P  3.46 / bushel
Q  1,800 (240)(3.46)  2,630million bushels
Chapter 2: The Basics of Supply and Demand
Slide 51
Elasticities of Supply and Demand
The Market for Wheat
P QD
3.46
E 

(2.66)  .035 Inelastic
Q P
2,630
D
P
P QS
3.46
E 

(2.40)  .032 Inelastic
Q P 2,630
S
P
Chapter 2: The Basics of Supply and Demand
Slide 52
Elasticities of Supply and Demand
The Market for Wheat

Assume the price of wheat is $4.00/bushel
QD  3,550 (266)(4.00)  2,486
4.00
Q 
(266)  0.43
2,486
D
P
Chapter 2: The Basics of Supply and Demand
Slide 53
Changes in the Market: 1981-1998
The Market for Wheat
Supply (Qs) Demand (QD)
Equilibrium Price (Qs = QD)
1981
1800 + 240P
3550 - 266P
1800+240P = 3550-266P
506P = 1750
P1981 = $3.46/bushel
1998
1,944 + 207P
3,244 - 283P
1,944+207P = 3,244-283P
P1998 = $2.65/bushel
Chapter 2: The Basics of Supply and Demand
Slide 54
Short-Run Versus
Long-Run Elasticities
Demand

Price elasticity of demand varies with the
amount of time consumers have to
respond to a price.
Chapter 2: The Basics of Supply and Demand
Slide 55
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)
Chapter 2: The Basics of Supply and Demand
Slide 56
Gasoline: Short-Run and
Long-Run Demand Curves
Price
DSR
People tend to
drive smaller and
more fuel efficient
cars in the long-run
Gasoline
DLR
Quantity
Chapter 2: The Basics of Supply and Demand
Slide 57
Automobiles: Short-Run and
Long-Run Demand Curves
Price
DLR
People may put
off immediate
consumption, but
eventually older cars
must be replaced.
Automobiles
DSR
Quantity
Chapter 2: The Basics of Supply and Demand
Slide 58
Short-Run Versus
Long-Run Elasticities
Income Elasticities

Income elasticity also varies with the
amount of time consumers have to
respond to an income change.
Chapter 2: The Basics of Supply and Demand
Slide 59
Short-Run Versus
Long-Run Elasticities
Income Elasticities

Most goods and services:

Income elasticity is greater in the long-run
than in the short run.
Higher
incomes may be converted into
bigger cars so the income elasticity of
demand for gasoline increases with time.
Chapter 2: The Basics of Supply and Demand
Slide 60
Short-Run Versus
Long-Run Elasticities
Income Elasticities

Other Goods (durables):

Income elasticity is less in the long-run than
in the short-run.
Originally,
consumers will want to hold
more cars.
Later,
purchases will only to be to replace
old cars.
Chapter 2: The Basics of Supply and Demand
Slide 61
Short-Run Versus
Long-Run Elasticities
The Demand for
Gasoline and Automobiles

Gasoline and automobiles are
complementary goods.
Chapter 2: The Basics of Supply and Demand
Slide 62
Short-Run Versus
Long-Run Elasticities
The Demand for
Gasoline and Automobiles

Gasoline


The long-run price and income elasticities
are larger than the short-run elasticities.
Automobiles

The long-run price and income elasticities
are smaller than the short-run elasticities.
Chapter 2: The Basics of Supply and Demand
Slide 63
Short-Run Versus
Long-Run Elasticities
The Demand for Gasoline
Years Following Price or Income Change
Elasticity
Price
Income
1
2
3
4
5
6
-0.11 -0.22 -0.32 -0.49 -0.82 -1.17
0.07 0.13
0.20
Chapter 2: The Basics of Supply and Demand
0.32
0.54
0.78
Slide 64
Short-Run Versus
Long-Run Elasticities
The Demand for Automobiles
Years Following Price or Income Change
Elasticity
Price
Income
1
2
3
4
5
6
-1.20 -0.93 -0.75 -0.55 -0.42 -0.40
3.00 2.33
1.88
Chapter 2: The Basics of Supply and Demand
1.38
1.02
1.00
Slide 65
Short-Run Versus
Long-Run Elasticities
The Demand for
Gasoline and Automobiles

Data Explains:
1) Why the price of oil did not continue to
rise above $30/barrel even though it
rose very rapidly in the early 1970s.
2) Why automobile sales are so sensitive
to the business cycle.
Chapter 2: The Basics of Supply and Demand
Slide 66
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
Chapter 2: The Basics of Supply and Demand
Slide 67
Short-Run Versus
Long-Run Elasticities
Primary Copper: Short-Run and
Long-Run Supply Curves
Price
SSR
SLR
Due to limited
capacity, firms
are limited by
output constraints
in the short-run.
In the long-run, they
can expand.
Quantity
Chapter 2: The Basics of Supply and Demand
Slide 68
Short-Run Versus
Long-Run Elasticities
Secondary 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
Chapter 2: The Basics of Supply and Demand
Slide 69
Short-Run Versus
Long-Run Elasticities
Supply of Copper
Price Elasticity of:
Short-run
Long-run
Primary supply
0.20
1.60
Secondary supply
0.43
0.31
Total supply
0.25
1.50
Chapter 2: The Basics of Supply and Demand
Slide 70
Short-Run Versus
Long-Run Elasticities
Weather in Brazil and
the price of Coffee
in New York

Elasticity explains why coffee prices are
very volatile.

Due to the differences in supply elasticity in
the long-run and short run.
Chapter 2: The Basics of Supply and Demand
Slide 71
Price of Brazilian Coffee
Chapter 2: The Basics of Supply and Demand
Slide 72
Short-Run Versus
Long-Run Elasticities
Coffee
S’
S
Price
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
Q0
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 73
Short-Run Versus
Long-Run Elasticities
Coffee
Price
S’
S
P2
P0
Intermediate-Run
1) Supply and demand are
more elastic
2) Price falls back to P2.
3) Quantity falls to Q2
D
Q2 Q 0
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 74
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
Q0
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 75
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.
Chapter 2: The Basics of Supply and Demand
Slide 76
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.
Chapter 2: The Basics of Supply and Demand
Slide 77
Understanding and Predicting the Effects
of Changing Market Conditions
Price
Supply: Q = c + dP
a/b
ED = -bP*/Q*
ES = dP*/Q*
P*
-c/d
Demand: Q = a - bP
Q*
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 78
Understanding and Predicting the Effects
of Changing Market Conditions

Let’s begin with the equations for supply
and demand:
Demand: QD = a - bP
Supply:

QS = c + dP
We must choose numbers for a, b, c,
and d.
Chapter 2: The Basics of Supply and Demand
Slide 79
Understanding and Predicting the Effects
of Changing Market Conditions

Step 1:
Recall:
E  (P/Q)( Q/P)
Chapter 2: The Basics of Supply and Demand
Slide 80
Understanding and Predicting the Effects
of Changing Market Conditions

For linear demand curves, the change in
quantity divided by the change in price is
constant (equal to the slope of the curve).
Chapter 2: The Basics of Supply and Demand
Slide 81
Understanding and Predicting the Effects
of Changing Market Conditions

Substituting the slopes for each into the
formula for elasticity, we get:
ED  - b(P * /Q*)
ES  d(P * /Q*)
Chapter 2: The Basics of Supply and Demand
Slide 82
Understanding and Predicting the Effects
of Changing Market Conditions

Since we will have values for ED, ES, P*,
and Q*, we can solve for b & d, and a & c.
QD  a  bP
*
*
QS  c  dP
*
Chapter 2: The Basics of Supply and Demand
*
Slide 83
Understanding and Predicting the Effects
of Changing Market Conditions

Deriving the long-run supply and demand
for copper:

The relevant data are:

Q* = 7.5 mmt/yr.

P* = 75 cents/pound

ES = 1.6

ED = -0.8
Chapter 2: The Basics of Supply and Demand
Slide 84
Understanding and Predicting the Effects
of Changing Market Conditions

Es = d(P*/Q*)

Ed = -b(P*/Q*)

1.6 = d(0.75/7.5)
= 0.1d

-0.8 = -b(0.75/7.5)
= -0.1b

d = 1.6/0.1 = 16

b = 0.8/0.1 = 8
Chapter 2: The Basics of Supply and Demand
Slide 85
Understanding and Predicting the Effects
of Changing Market Conditions

Supply = QS* = c + dP*

Demand = QD* = a -bP*

7.5 = c + 16(0.75)

7.5 = a -(8)(.75)

7.5 = c + 12

7.5 = a - 6

c = 7.5 - 12

a = 7.5 + 6

c = -4.5

a =13.5

Q = -4.5 + 16P

Q = 13.5 - 8P
Chapter 2: The Basics of Supply and Demand
Slide 86
Understanding and Predicting the Effects
of Changing Market Conditions

Setting supply equal to demand gives:
Supply = -4.5 + 16p = 13.5 - 8p = Demand
16p + 8p = 13.5 + 4.5
p = 18/24 = .75
Chapter 2: The Basics of Supply and Demand
Slide 87
Understanding and Predicting the Effects
of Changing Market Conditions
Price
Supply: QS = -4.5 + 16P
a/b
.75
-c/d
Demand: QD = 13.5 - 8P
7.5
Chapter 2: The Basics of Supply and Demand
Mmt/yr
Slide 88
Understanding and Predicting the Effects
of Changing Market Conditions

We have written supply and demand so
that they only depend upon price.

Demand could also depend upon income.

Demand would then be written as:
Q  a  bP  fI
Chapter 2: The Basics of Supply and Demand
Slide 89
Understanding and Predicting the Effects
of Changing Market Conditions

We know the following information
regarding the copper industry:

I = 1.0

P* = 0.75

Q* = 7.5

b=8

Income elasticity: E = 1.3
Chapter 2: The Basics of Supply and Demand
Slide 90
Understanding and Predicting the Effects
of Changing Market Conditions

f can be found by substituting known
values into the income elasticity formula:
E  (I / Q)(Q/ I )
and
f  Q / I
Chapter 2: The Basics of Supply and Demand
Slide 91
Understanding and Predicting the Effects
of Changing Market Conditions

Solving for f gives:
1.3 = (1.0/7.5)f
f = (1.3)(7.5)/1.0 = 9.75
Chapter 2: The Basics of Supply and Demand
Slide 92
Understanding and Predicting the Effects
of Changing Market Conditions

Solving for a gives:
Q  a  bP  fI
*
*
7.5 = a - 8(0.75) + 9.75(1.0)
a = 3.75
Chapter 2: The Basics of Supply and Demand
Slide 93
Declining Demand and the
Behavior of Copper Prices

The relevant factors leading to a
decrease in the demand for copper are:
1) A decrease in the growth rate of power
generation
2) The development of substitutes: fiber
optics and aluminum
Chapter 2: The Basics of Supply and Demand
Slide 94
Real versus Nominal
Prices of Copper 1965 - 1999
Chapter 2: The Basics of Supply and Demand
Slide 95
Real versus Nominal
Prices of Copper 1965 - 1999

We will try to estimate the impact of a 20
percent decrease in the demand for
copper.

Recall the equation for the demand curve:
Q = 13.5 - 8P
Chapter 2: The Basics of Supply and Demand
Slide 96
Real versus Nominal
Prices of Copper 1965 - 1999

Multiply this equation by 0.80 to get the
new equation. This gives:
Q = (0.80)(13.5 - 8P)
Q = 10.8 - 6.4P

Recall the equation for supply:
Q = -4.5 + 16P
Chapter 2: The Basics of Supply and Demand
Slide 97
Real versus Nominal
Prices of Copper 1965 - 1999

The new equilibrium price is:
-4.5 + 16P = 10.8 - 6.4P
-16P + 6.4P = 10.8 + 4.5
P = 15.3/22.4
P = 68.3 cents/pound
Chapter 2: The Basics of Supply and Demand
Slide 98
Real versus Nominal
Prices of Copper 1965 - 1999

The twenty percent decrease in demand
resulted in a reduction in the equilibrium
price to 68.3 cents from 75 cents, or 10
percent.
Chapter 2: The Basics of Supply and Demand
Slide 99
Price of Crude Oil
Chapter 2: The Basics of Supply and Demand
Slide 100
Upheaval in the World Oil Market

We can predict numerically the impact of
a decrease in the supply of OPEC oil.

In 1995:

P* = $18/barrel

World demand and total supply = 23 bb/yr.

OPEC supply = 10 bb/yr.

Non-OPEC supply = 13 bb/yr
Chapter 2: The Basics of Supply and Demand
Slide 101
Price Elasticity Estimates
Short-Run Long-Run
World Demand:
Competitive Supply
(non-OPEC)
-0.05
-0.40
0.10
0.40
Chapter 2: The Basics of Supply and Demand
Slide 102
Upheaval in the World Oil Market

Short-Run Impact of a stoppage of Saudi
Production equal to 3 bb/yr.

Short-run Demand


D = 24.08 - 0.06P
Short-run Competitive Supply

SC = 11.74 + 0.07P
Chapter 2: The Basics of Supply and Demand
Slide 103
Upheaval in the World Oil Market

Short-Run Impact of a stoppage of Saudi
Production equal to 3 bb/yr.

Short-run Total Supply--before supply
reduction (includes OPEC, 10bb/yr)


ST = 21.74 + 0.07P
Short-run Total Supply--after supply
reduction

ST = 18.74 + 0.07P
Chapter 2: The Basics of Supply and Demand
Slide 104
Upheaval in the World Oil Market

New Price After Reduction
Demand = Supply
24.08 - 0.06P = 18.74 + 0.07P
P = 41.08
Chapter 2: The Basics of Supply and Demand
Slide 105
Impact of Saudi Production Cut
SC
D S’T ST
Price 45
($ per
barrel) 40
Short-Run
Effect
35
30
25
20
18
15
10
5
0
5
10
15
20 23 25
Chapter 2: The Basics of Supply and Demand
30
Quantity
35 (billions barrels/yr)
Slide 106
Upheaval in the World Oil Market

Long-Run Impact of a stoppage Saudi
Production equal to 3 bb/yr..

Long-run Demand
D

= 32.18 - 0.51P
Long-run Total Supply
S
= 17.78 + 0.29P
Chapter 2: The Basics of Supply and Demand
Slide 107
Upheaval in the World Oil Market

New Price is found setting long-run
supply equal to long-run demand:
32.18 - 0.51P = 14.78 + 0.29P
P = 21.75
Chapter 2: The Basics of Supply and Demand
Slide 108
Impact of Saudi Production Cut
SC
Price 45
D
($ per
barrel) 40
S’T ST
Long-run Effect
Due to the elasticity
of the long-run
supply and demand
curves, the long-run
effect of a cut
in production is
much less.
35
30
25
20
18
15
10
5
0
5
10
15
20 23 25
Chapter 2: The Basics of Supply and Demand
30
35
Quantity
(billions barrels/yr)
Slide 109
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.
Chapter 2: The Basics of Supply and Demand
Slide 110
Effects of Price Controls
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
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 111
Price Controls and
Natural 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.
Chapter 2: The Basics of Supply and Demand
Slide 112
Price Controls and
Natural Gas Shortages

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.
Chapter 2: The Basics of Supply and Demand
Slide 113
Price Controls and
Natural Gas Shortages
The Data: Natural Gas
PES  0.2
Cross elasticity of supply for oil  0.1
D
PE
 0.5
Cross elasticity of demand for oil  1.5
Supply : Q  14  2 PG  .25PO
Demand : Q  5 PG  3.75PO
Supply  Demand @ $2/TcF
Chapter 2: The Basics of Supply and Demand
Slide 114
Price Controls and
Natural Gas Shortages
The Data: Natural Gas
1975 regulated price  $1.00
At $1.00/TcF
QS  18 TcF and Q  25 TcF
Shortage  7 TcF/yr
Chapter 2: The Basics of Supply and Demand
Slide 115
Summary

Supply-demand analysis is a basic tool of
microeconomics.

The market mechanism is the tendency
for supply and demand to equilibrate, so
that there is neither excess demand nor
excess supply
Chapter 2: The Basics of Supply and Demand
Slide 116
Summary

Elasticities describe the responsiveness
of supply and demand to changes in
price, income, and other variables.

Elasticities pertain to a time frame.

If we can estimate the supply and
demand curves for a particular market,
we can calculate the market clearing
price.
Chapter 2: The Basics of Supply and Demand
Slide 117
Summary

Simple numerical analysis can often be
done by fitting linear supply and demand
curves to data on price and quantity and
to estimates of elasticities.
Chapter 2: The Basics of Supply and Demand
Slide 118
End of Chapter 2
The Basics of
Supply and
Demand