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SUPPLY & D EM A ND

BY :
AHMAD ISYROQI AKBAR
BOBBY CAHYADI
BIBIT SOFANI NGUSMAN
WHY ?
The driving force behind the market economics that exist in the world
A tool that managers can use to visualize the big picture
DEMAND
Quantities of goods or service consumers are willing and able to buy at different
possible prices
LAW OF DEMAND
THE QUANTITY OF GOODS OR SERVICES CONSUMERS ARE WILLING AND ABLE TO PURCHASE GOES DOWN
AS THE PRICES RISES

When price goes up.. Demand goes down.. When price goes down.. Demand goes up..

NOTE : holding consumer income, advertising, prices of related goods, population, consumer expectations, and other
variables constant.
DEMAND CURVE
Market demand curve :

A curve indicating the total quantity of a


good all consumers are willing and able
to purchase at each possible price,
holding the prices of related goods,
income, advertising, and other variables
constant.
DEMAND SHIFTER
VARIABLES OTHER THAN THE PRICE OF A GOOD THAT INFLUENCE DEMAND.
Like.
Consumer Income
Prices of Related Goods
Advertising
Consumer Tastes
Population
Consumer Expectation
CHANGE IN DEMAND QUANTITY
PRICE
A to B: Increase in quantity demanded
A
10
B
6

D0
4 7 Quantity
CHANGES IN DEMAND CURVE..
CUSTOMERS INCOME EFFECT..
NORMAL GOOD INFERIOR GOOD
Income goes Demand Income goes Demand goes
up goes up up down
PRICES OF RELATED GOODS
1. SUBTITUTES EFFECT
GOODS FOR WHICH A INCREASE/DECREASE IN THE PRICE OF ONE GOOD LEADS TO AN INCREASE/DECREASE
IN THE DEMAND FOR OTHER GOOD.
Pepsi
Coke price demand
increase increase
PRICES OF RELATED GOODS
2. COMPLEMENTS GOOD
GOODS FOR WHICH AN INCREASE/DECREASE IN THE PRICE OF ONE GOOD LEADS TO A DECREASE/INCREASE IN THE DEMAND FOR OTHER GOOD

Jam
Breads
demand
price
decrease
increase
ADVERTISING
1. INFORMATIVE ADVERTISING
PROVIDES CONSUMERS WITH INFORMATION ABOUT THE EXISTENCE OR QUALITY OF A PRODUCT, WHICH IN
TURN INDUCES MORE CUSTOMERS TO BUY THE PRODUCT

2. PERSUASIVE ADVERTISING
INFLUENCE DEMAND BY ALTERING THE UNDERLYING TASTES OF CONSUMERS.
POPULATION
CONSUMERS EXPECTATIONS
STOCKPILING BEHAVIOR
DEMAND FUNCTION
A FUNCTION THAT DESCRIBES HOW MUCH OF A GOOD WILL BE PURCHASED AT ALTERNATIVE PRICES OF THAT GOOD AND
RELATED GOODS, ALTERNATIVE INCOME LEVELS, AND ALTERNATIVE VALUES OF OTHER VARIABLES AFFECTING DEMAND

Which, = Quantity demanded of good X = Income

= The price of good X = The value of any other variable that


= The price of a related good affects demand
DEMAND FUNCTION
LINEAR DEMAND FUNCTION
A REPRESENTATION OF THE DEMAND FUNCTION IN WHICH THE DEMAND FOR A GIVEN GOOD IS A LINEAR
FUNCTION OF PRICES, INCOME LEVELS, AND OTHER VARIABLES INFLUENCING DEMAND.

Which, = Fixed number that the firms research department


DEMAND FUNCTION
EXAMPLE,
DEMAND FUNCTION
= 12,000 3(200) + 4(15)-1(10,000)+2(2,000)
= 5460 units

= 4. Which is 4 > 0 . Thus, goods X and Y are subtitutes

= -1. Which is -1 < 0. Thus good X is an inferior good


DEMAND FUNCTION
GRAPH A DEMAND CURVE
FROM THE EXAMPLE DEMONSTRATION PROBLEM
DEMAND FUNCTION
CONSUMER SURPLUS
THE VALUE CONSUMERS GET FROM A GOOD BUT DO NOT HAVE TO PAY FOR
CONSUMER SURPLUS
Price
Consumer Surplus:
10
The value received but not
paid for
8
6
4

1 2 3 4 Quantity
SUPPLY
MARKET SUPPLY CURVE SUMMARIES THE TOTAL QUANTITY ALL PRODUCERS ARE WILLING AND ABLE TO
PRODUCE AT ALTERNATIVE PRICES, HOLDING OTHER FACTORS THAT AFFECT SUPPLY CONSTANT.

THE SUPPLY CURVE IS UPWARD SLOPING.


LAW OF SUPPLY
AS THE PRICE OF A GOOD RISES (FALLS) AND OTHER THINGS REMAIN CONSTANT, THE QUANTITY SUPPLIED
OF THE GOOD RISES (FALLS).
When price goes up.. Supply goes up.. When price goes Supply goes down..
down..
SUPPLY SHIFTERS
VARIABLES THAT AFFECT THE POSITION OF THE SUPPLY CURVE
SUCH AS
- INPUT PRICES - SUBTITUTES IN PRODUCTION
- TECHNOLOGY OR GOVERNMENT - TAXES
REGULATIONS
- PRODUCER EXPECTATIONS
- NUMBER OF FIRMS (ENTRY OR EXIT)
CHANGE IN SUPPLY
Price Decrease in
supply
S1 Whenever one or more variables
S0 changes, the position of supply curve
shifts.
S2
Decrease supply : producers sell less
Increase in
supply output (shift from S0 to S1

Increase supply : producers sell more


Quantity output (shift from S0 to S2.
INPUTS PRICES
S1
Price Decrease in
supply
Inputs prices Supply goes
goes up down
S0

Quantity
TECHNOLOGY OR GOVERNMENT REGULATION

Technology changes and changes in government regulation


can affect the position of the supply curve (increase/decrease
supply)
NUMBER OF FIRMS
Additional firms, more output available then
increase in supply (shift to the right)

Firms leave , less output available then decrease


in supply (shift to the left)
SUBSTITUTES IN PRODUCTION
Car Price increase!
Firms increase the quantity of cars supplied. The truck supply is decrease.

Truck assembly
substitutes by car
assembly
TAXES
EXCISE TAX IS A TAX ON EACH
UNIT OF OUTPUT SOLD.

EFFECTS DECREASING OF A GOOD


SUPPLY
TAXES
AD VALOREM TAX IS VALUE
ADDED TAX

EFFECTS DECREASING OF A
GOOD SUPPLY
PRODUCER EXPECTATIONS
SELLING A UNIT OF OUTPUT TODAY AND SELLING A UNIT OF OUTPUT TOMORROW ARE SUBSTITUTES IN PRODUCTION

FUTURE PRICE
SELL PRODUCT
INCREASE !!!!!!
LATER
SUPPLY FUNCTIONS
DESCRIBES HOW MUCH OF A GOOD WILL BE PRODUCED AT
ALTERNATIVE PRICES OF THAT GOODS, ALTERNATIVE INPUT
PRICESS, AND ALTERNATIVE VALUES OF THE OTHER VARIBALES
AFFECTING SUPPLY.
SUPPLY FUNCTIONS
AN EQUATION REPRESENTING THE SUPPLY CURVE:
QXS = F(PX , PR ,W, H,)

Q = QUANTITY SUPPLIED OF GOOD X.


X
S

P = PRICE OF GOOD X.
X

P = PRICE OF A PRODUCTION SUBSTITUTE.


R

W = PRICE OF INPUTS (E.G., WAGES).


H = OTHER VARIABLE AFFECTING SUPPLY.
SUPPLY FUNCTIONS
Example:
PRODUCER SURPLUS
Producer surplus is the
amount of money producers
receive in excess of the
amount necessary to induce
them to produce the good.
MARKET EQUILIBRIUM
Balance in supply and demand

QxS = Qxd
MARKET EQUILIBRIUM
EXAMPLE
PRICE RESTRICTIONS
PRICE CEILINGS
THE MAXIMUM LEGAL PRICE THAT CAN BE CHARGED
EXAMPLE :
THE GOVERNMENT SET PRICE FOR GASOLINE PREMIUM GRADE IS RP 6650,00/LITER

PRICE FLOORS
THE MINIMUM LEGAL PRICE THAT CAN BE CHARGED
EXAMPLE :
MINIMUM WAGE. AGRICULTURAL PRICE SUPPORT
IMPACT OF A PRICE CEILING
Price S

PF
Pe

Ceiling
Price
Shortage D
Qs Qd Quantity
FULL ECONOMIC PRICE
THE DOLLAR AMOUNT PAID TO A FIRM UNDER A PRICE CEILING, PLUS THE NONPECUNIARY PRICE.

PF = Pc + (PF - PC)

PF = full economic price


PC = price ceiling
PF - PC = nonpecuniary price
IMPACT OF A PRICE FLOORS
PRICE FLOORS ABOVE THE EQUILIBRIUM PRICE:
MORE PRODUCE THAN CONSUMERS
PURCHASE ---- SURPLUS
MORE PEOPLE LOOKING FOR WORK THAN
JOBS VACANCY --- UNEMPLOYMENT
PRICE WILL FALL TO ELLEVIATE THE
UNEMPLOYMENT OR EXCESS INVENTORIES
BUYER PAY HIGHER PRICE AND PURCHASE
FEWER UNITS
COMPARATIVE STATICS ANALYSIS
How do the equilibrium price and quantity change when a
determinant of supply and/or demand change?
APPLICATIONS OF DEMAND AND SUPPLY ANALYSIS

EVENT: THE WSJ REPORTS THAT THE PRICES OF PC COMPONENTS ARE EXPECTED TO FALL BY 5-8
PERCENT OVER THE NEXT SIX MONTHS.

SCENARIO 1: YOU MANAGE A SMALL FIRM THAT MANUFACTURES PCS.


SCENARIO 2: YOU MANAGE A SMALL SOFTWARE COMPANY.
USE COMPARATIVE STATIC ANALYSIS TO SEE THE BIG
PICTURE!
COMPARATIVE STATIC ANALYSIS SHOWS HOW THE EQUILIBRIUM PRICE AND QUANTITY WILL CHANGE
WHEN A DETERMINANT OF SUPPLY OR DEMAND CHANGES.
SCENARIO 1: IMPLICATIONS FOR A SMALL PC MAKER

STEP 1: LOOK FOR THE BIG PICTURE


STEP 2: ORGANIZE AN ACTION PLAN
BIG PICTURE: IMPACT OF DECLINE IN COMPONENT PRICES
ON PC MARKET
SO, THE BIG PICTURE IS:
PC PRICES ARE LIKELY TO FALL, AND MORE COMPUTERS WILL BE SOLD
USE THIS TO ORGANIZE AN ACTION PLAN
CONTRACTS/SUPPLIERS?
INVENTORIES?
HUMAN RESOURCES?
MARKETING?
DO I NEED QUANTITATIVE ESTIMATES?
ETC.
SCENARIO 2: SOFTWARE MAKER
MORE COMPLICATED CHAIN OF REASONING TO ARRIVE AT THE BIG PICTURE
STEP 1: USE ANALYSIS LIKE THAT IN SCENARIO 1 TO DEDUCE THAT LOWER COMPONENT PRICES WILL LEAD
TO
A LOWER EQUILIBRIUM PRICE FOR COMPUTERS
A GREATER NUMBER OF COMPUTERS SOLD.
STEP 2: HOW WILL THESE CHANGES AFFECT THE BIG PICTURE IN THE SOFTWARE MARKET?
BIG PICTURE: IMPACT OF LOWER PC PRICES ON THE
SOFTWARE MARKET
THE BIG PICTURE FOR THE SOFTWARE MAKER:
SOFTWARE PRICES ARE LIKELY TO RISE, AND MORE SOFTWARE WILL BE SOLD
USE THIS TO ORGANIZE AN ACTION PLAN

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