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 Pemerintah-
Kontrol 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:
Q s

Q
S
( P )
Chapter 2: The Basics of Supply and Demand Slide 7

Supply and Demand
Price
($ per unit)
Vertical axis measures price (P) received per unit in dollars
The Supply
Curve Graphically
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
P
2
P
1
The supply curve slopes upward demonstrating that at higher prices firms will increase output
Q
1
Q
2
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 P
1
, produce Q
2
 At P
2
, produce Q
1
 Supply curve shifts right to S ’
 More produced at any price on S
’ than on S
P
P
1
P
2
Q
0
Q
1
Q
2
Slide 11
Q
Chapter 2: The Basics of Supply and Demand
S S’

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:
Q
D

Q
D
(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
Chapter 2: The Basics of Supply and Demand
Quantity
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
 At P
1
, produce Q
2
P
2
 At P
2
, produce Q
1
 Demand Curve shifts right
P
1
 More purchased at any price on D’ than on D
D D’
Chapter 2: The Basics of Supply and Demand
Q
0
Q
1
Q
2
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
P
0
The curves intersect at equilibrium, or marketclearing, price. At P
0 the quantity supplied is equal to the quantity demanded at Q
0
.
D
Q
0
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 20

Mekanisme Pasar
 Karakteristik Equilibrium Pasar:
 Q
D
= Q
S
 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
P
P
1
0
If price is above equilibrium:
1) Price is above the market clearing price
2) Q s
> Q d
3) Price falls to the
market-clearing price
D
Q
0
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
P
1
P
2
Assume the price is P
1
, then:
1) Q s
: Q
2
> Q d
: Q
1
2) Excess supply is Q
1
:Q
2
.
3) Producers lower price.
4) Quantity supplied decreases and quantity demanded increases.
5) Equilibrium at P
2
Q
3
D
Q
1
Q
3
Q
Chapter 2: The Basics of Supply and Demand
2
Quantity
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
P
3
P
2
Shortage
Assume the price is P
2
, then:
1) Q d
: Q
2
> Q s
: Q
1
2) Shortage is Q
1
:Q
2
.
3) Producers raise price
.
4) Quantity supplied increases and quantity demanded decreases.
5) Equilibrium at P
3
, Q
3
D
Q
1
Q
3
Q
Chapter 2: The Basics of Supply and Demand
2
Quantity
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
 S bergerak ke S’
 Surplus @ P
1
Q
1
, Q
2 of
 Equilibrium @ P
3
,
Q
3
P
P
1
P
3
D S S’
Q
1
Q
3
Q
2
Slide 29
Q
Chapter 2: The Basics of Supply and Demand

Changes In Market Equilibrium
 Peningkatan pendapatan
P
 Demand shifts to D
1
 Shortage @ P
1 of Q
1
, Q
2
P
3
P
1
 Equilibrium @ P
3
, Q
3
D D’ S
Q
2
Q
1
Q
3
Slide 30
Q
Chapter 2: The Basics of Supply and Demand

Changes In Market Equilibrium
 Income Increases & raw material prices fall
P
 The increase in D is greater than the increase in S
 Equilibrium price and quantity increase to P
2
,
Q
2
P
2
P
1
D D’ S S’
Q
1
Q
2
Slide 31
Q
Chapter 2: The Basics of Supply and Demand

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:
E
P

(%

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:
E
P


Q/Q

P/P

P
Q

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 ; E
P is negative.
2) If E
P
> 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 E
P
< 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
P rice
4
E
P

-

Q = 8 - 2P
The lower portion of a downward sloping demand curve is less elastic than the upper portion.
E p
= -1
2
4
Chapter 2: The Basics of Supply and Demand
Linear Demand Curve
Q = a - bP
Q = 8 - 2P
8 Q
E p
= 0
Slide 41

Price Elasticities of Demand
Price Infinitely Elastic Demand
P * D
E
P

-

Chapter 2: The Basics of Supply and Demand
Quantity
Slide 42

Price Elasticities of Demand
Completely Inelastic Demand
Price
E
P

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:
E
I


Q/Q

I/I

I
Q

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:
E
Q b
P m


Q b
/Q

P m
/P m b 
P
Q b m

Q b

P m
 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
 Q
S
= 1,800 + 240 P
 1981 Demand Curve for Wheat
 Q
D
= 3,550 - 266 P
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

240 P

3 , 550

266 P
506 P

1 , 750
P

3 .
46 / bushel
Q

1 , 800

( 240 )( 3 .
46 )

2 , 630
Chapter 2: The Basics of Supply and Demand Slide 51

Elasticities of Supply and Demand
The Market for Wheat
E
P
D 
P
Q

Q
D

P

3 .
46
2 , 630
(

2 .
66 )
 
.
035
E
P
S 
P
Q

Q
S

P

3 .
46
2 , 630
( 2 .
40 )

.
032
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
Q
D

3 , 550

( 266 )( 4 .
00 )

2 , 486
Q
P
D 
4 .
00
2 , 486
(

266 )
 
0 .
43
Chapter 2: The Basics of Supply and Demand Slide 53

Changes in the Market: 1981-1998
The Market for Wheat
Supply (Q s
) Demand (Q
D
) Equilibrium Price (Q s
= Q
D
)
1981 1800 + 240P 3550 - 266P 1800+240P = 3550-266P
506P = 1750
P
1981
= $3.46/bushel
1998 1,944 + 207P 3,244 - 283P 1,944+207P = 3,244-283P
P
1998
= $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
D
SR
People tend to drive smaller and more fuel efficient cars in the long-run
Gasoline
D
LR
Chapter 2: The Basics of Supply and Demand
Quantity
Slide 57

Automobiles: Short-Run and
Long-Run Demand Curves
Price
D
LR
People may put off immediate consumption, but eventually older cars must be replaced.
Automobiles
D
SR
Chapter 2: The Basics of Supply and Demand
Quantity
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
Elasticity
Price
Income
The Demand for Gasoline
Years Following Price or Income Change
1 2 3 4 5 6
-0.11 -0.22 -0.32 -0.49 -0.82 -1.17
0.07 0.13
0.20
0.32
0.54
0.78
Chapter 2: The Basics of Supply and Demand Slide 64

Short-Run Versus
Long-Run Elasticities
Elasticity
Price
Income
The Demand for Automobiles
Years Following Price or Income Change
1 2 3 4 5 6
-1.20 -0.93 -0.75 -0.55 -0.42 -0.40
3.00 2.33
1.88
1.38
1.02
1.00
Chapter 2: The Basics of Supply and Demand 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
S
SR
Price
S
LR
Chapter 2: The Basics of Supply and Demand
Quantity
Due to limited capacity, firms are limited by output constraints in the short-run.
In the long-run, they can expand.
Slide 68

Short-Run Versus
Long-Run Elasticities
Secondary Copper: Short-Run and
Long-Run Supply Curves S
LR
Price
S
SR
Chapter 2: The Basics of Supply and Demand
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
Slide 69

Short-Run Versus
Long-Run Elasticities
Supply of Copper
Price Elasticity of: Short-run Long-run
Primary supply
Secondary supply
Total supply
0.20
0.43
0.25
1.60
0.31
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
P
1
P
0
Q
1
Q
0
Chapter 2: The Basics of Supply and Demand
D
Short-Run
1) Supply is completely inelastic
2) Demand is relatively inelastic
3) Very large change in price
Quantity
Slide 73

Short-Run Versus
Long-Run Elasticities
Coffee
S’ S
Price
P
2
P
0
Intermediate-Run
1) Supply and demand are more elastic
2) Price falls back to P
2
.
3) Quantity falls to Q
2
Q
2
Q
0
Chapter 2: The Basics of Supply and Demand
D
Quantity
Slide 74

Short-Run Versus
Long-Run Elasticities
Coffee
Price
Long-Run
1) Supply is extremely elastic.
2) Price falls back to P
0
.
3) Quantity increase to Q
0.
P
0
S
D
Q
0
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, E
S
, and demand, E
D.
Chapter 2: The Basics of Supply and Demand Slide 77

Understanding and Predicting the Effects of Changing Market Conditions
Price a/b
Supply: Q = c + dP
P*
E
D
E
S
= -bP*/Q*
= dP*/Q*
-c/d
Q*
Chapter 2: The Basics of Supply and Demand
Demand: Q = a - bP
Quantity
Slide 78

Understanding and Predicting the Effects of Changing Market Conditions

Let’s begin with the equations for supply and demand:
Demand: Q
D
= a - bP
Supply: Q
S
= 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:
E
D

b(P * /Q*)
E
S
 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 E
D
, E
S
, P*, and Q*, we can solve for b & d , and a & c .
Q
D
*  a
 bP
*
Q
S
*  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

E
S
= 1.6

E
D
= 0.8
Chapter 2: The Basics of Supply and Demand Slide 84

Understanding and Predicting the Effects of Changing Market Conditions
 E s
= d(P*/Q*)  E d
= -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 = Q
S
* = c + dP*
 7.5 = c + 16(0.75)
 7.5 = c + 12
 c = 7.5 - 12
 c = -4.5
 Q = -4.5 + 16 P
 Demand = Q
D
* = a -bP*
 7.5 = a (8)(.75)
 7.5 = a - 6
 a = 7.5 + 6
 a = 13.5
 Q = 13.5 - 8 P
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 + 16 p = 13.5 - 8 p = Demand
16 p + 8 p = 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 a/b
Supply: Q
S
= -4.5 + 16P
.75
-c/d
7.5
Chapter 2: The Basics of Supply and Demand
Demand: Q
D
= 13.5 - 8P
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 ) f and
 
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 - 8 P
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 - 8 P)
Q = 10.8 - 6.4
P
 Recall the equation for supply:
Q = -4.5 + 16 P
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 + 16 P = 10.8 - 6.4
P
16 P + 6.4
P = 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
World Demand:
Short-Run Long-Run
Competitive Supply 0.10
(non-OPEC)
-0.05
-0.40
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 - 0.06
P
 Short-run Competitive Supply

S
C
= 11.74 + 0.07
P
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)

S
T
= 21.74 + 0.07
P
 Short-run Total Supply--after supply reduction

S
T
= 18.74 + 0.07
P
Chapter 2: The Basics of Supply and Demand Slide 104

Upheaval in the World Oil Market
 New Price After Reduction
Demand = Supply
24.08 - 0.06
P = 18.74 + 0.07
P
P = 41.08
Chapter 2: The Basics of Supply and Demand Slide 105

S
C
D S’
T
S
T
P rice
($ per barrel)
45
40
35
30
25
20
18
15
10
5
0 5 10 15 20 23
Chapter 2: The Basics of Supply and Demand
25 30
Short-Run
Effect
35
Quantity
(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 - 0.51
P
 Long-run Total Supply
 S = 17.78 + 0.29
P
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 - 0.51
P = 14.78 + 0.29
P
P = 21.75
Chapter 2: The Basics of Supply and Demand Slide 108

P rice
($ per barrel)
45
40
35
D
S
C
S’
T
S
T
Long-run Effect
30
25
20
18
15
10
Due to the elasticity of the long-run supply and demand curves, the long-run effect of a cut in production is much less.
5
0 5 10 15 20 23
Chapter 2: The Basics of Supply and Demand
25 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
P rice
S
P
0
If price is regulated to be no higher than P max
, quantity supplied falls to Q
1 and quantity demanded increases to
Q
2
. A shortage results
P max
Q
0
Chapter 2: The Basics of Supply and Demand
D
Excess 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
P
E
S 
0 .
2
Cross elasticity of supply for oil

0.1
P
E
D  
0 .
5
Cross elasticity of demand for oil

1.5
Supply :
Demand
Q
:

Q
14



5
2 P
G
P
G


3
.
25
.
75
P
O
P
O
Supply

Demand @ $2/TcF
Chapter 2: The Basics of Supply and Demand Slide 114

Price Controls and
Natural Gas Shortages
The Data: Natural Gas

Q
S

18
Q


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