CHAPTER 4

The Price System, Demand

and Supply, and Elasticity

Prepared by: Fernando

Quijano and Yvonn Quijano

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 The Price System

The market system, also called the sistem

harga, performs two important and closely
related functions :

penjatahan
pengalokasian sumber
daya

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Price Rationing

Penjatahan harga proses

dimana sistem pasar
mengalokasikan barang
dan jasa untuk konsumen
ketika kuantitas permintaan
melebihi kuantitas
penawaran

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Price Rationing

A decrease in supply
creates a shortage at
P0. Quantity demanded
is greater than quantity
supplied. Price will
begin to rise.
The lower total supply
is rationed to those
who are willing and
able to pay the higher
price.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Price Rationing

There is some price

that will clear any
market.
The price of a rare
painting will eliminate
excess demand until
there is only one bidder
willing to buy the single
available painting.

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Alternative Rationing Mechanisms

pagu harga harga maksimal yang

mungkin ditetapkan oleh penjual untuk
suatu barang biasanya ditentukan
oleh pemerintah

Antrian menunggu giliran sebagai

sarana mendistribusikan barang dan
jasa . Suatu mekanisme penjatahan
non harga .

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Alternative Rationing Mechanisms

Pelanggan pilihan orang yang menerima

perlakuan khusus dari penyalur selama
situasi permintaan berlebih
Kupon penjatahan tiket atau kupon yang
memungkinkan seseorang membeli
sejumlah tertentu produk tertentu tiap bulan

The problem with these alternatives is that

excess demand is created but not eliminated.

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Alternative Rationing Mechanisms

In 1974, the
government used an
alternative rationing
system to distribute the
available supply of
gasoline.
At an imposed price of
57 cents per gallon, the
result was excess
demand.

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Alternative Rationing Mechanisms

Pasar gelap pasar

dimana perdagangan
ilegal terjadi pada
harga yang ditentuka
oleh pasar

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Alternative Rationing Mechanisms

Tak peduli betapa baiknya niat organisasi

swasta dan pemerintah , sangat sulit
mencegah sistem harga beroperasi dan
menghentikan kemauan membayar

tiap kali alternatif dicoba , sistem harga

cenderung menerobos dari pintu belakang .
Dengan pasar gelap dan pelanggan terpilih
distribusi akhir yang terjadi mungkin akan lebih
tidak adil daripada jika distribusi dihasilkan dari
penjatahan harga sederhana
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Prices and the Allocation of Resources

Perubahan harga yang disebabkan oleh pergeseran

permintaan dalam pasar output menyebabkan laba
meningkat atau turun .

Laba menarik modal , kerugian menyebabkan disinvestasi

.

Upah yang lebih tinggi menarik tenaga kerja dan

mendorong pekerja untuk memperoleh keahlian .

Di inti sistem ini , penawaran , permintaan , dan harga di

pasar input dan output menentukan alokasi sumber daya
dan kombinasi akhir dari barang barang yang diproduksi .

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Supply and Demand Analysis:
An Oil Import Fee

The tax on imports causes an

At a world price of $18,
increase in domestic production, and
imports are 5.9 million barrels quantity imported falls.
per day.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Elasticity

Elasticity is a general concept that can be used

to quantify the response in one variable when
another variable changes.

% A
e la s tic ity o f A w ith re s p e c t to B
% B
Price elasticity of demand measures how
responsive consumers are to changes in the
price of a product.

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Price Elasticity of Demand

Measures the responsiveness of demand to

changes in price.
It is the ratio of the percentage change in
quantity demanded to the percentage change
in price.
% c h a n g e in q u a n tity d e m a n d e d
p ric e e la s tic ity o f d e m a n d
% c h a n g e in p ric e
Its value is always negative, but stated in
absolute terms.
The value of the line of the slope and the
value of elasticity are not the same.
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Characteristics of Demand Elasticity

Value of Type of Magnitudes of Response to

Elasticity Demand Change Price Changes

> |1| Elastic %Qd > %P Responsive

< |1| Inelastic %Qd < %P Unresponsive

= |1| Unitary elastic %Qd = %P Proportional

Type of Substitutes
Elasticity Available
Elastic Many
Inelastic Few
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Shape of Demand According to Elasticity

Type of Demand Inclination

Elastic Relatively Flat
Inelastic Relatively Steep

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Extreme Elasticities

Elasticity Value Type of Elasticity Substitutes Available

=0 Perfectly Inelastic None
= Perfectly Elastic Infinite

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Hypothetical Demand Elasticities
for Four Products

Hypothetical Demand Elasticities for Four Products

% CHANGE IN
% CHANGE QUANTITY
IN PRICE DEMANDED ELASTICITY
PRODUCT (% P) (% Qd) (% Qd/% P)
Insulin 10% 0% 0 Perfectly inelastic
Basic telephone service 10% -1% -0.1 Inelastic
Beef 10% -10% -1 Unitary elastic
Bananas 10% -30% -3 Elastic

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Calculating Percentage Changes

Elasticity is a ratio of percentages, and it involves

computing percentage changes.
P2 P1
% c h a n g e in p ric e x 100%
P1
Q2 Q1
% c h a n g e in q u a n tity d e m a n d e d x 100%
Q1
Using the values on the graph to
compute elasticity, then:
100%
p ric e e la s tic ity o f d e m a n d 3 .0
3 3 .3 %

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Computing the Value of Elasticity

The midpoint formula to

compute elasticity is:

Q2 Q1
x 100%
% Qd (Q 1 Q 2 ) / 2

% P P2 P1
x 100%
( P1 P2 ) / 2

10 5 5
x 100% x 100%
% Qd (5 1 0 ) / 2 6 6 .7 %
7 .5 = 1 .6 7
% P 2 3 -1 - 4 0 .0 %
x 100% x 100%
(3 2 ) / 2 2 .5
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Interpreting the Value of Elasticity

Here is how to interpret two different

values of elasticity:
When = 0.2, a 10% increase in price
leads to a 2% decrease in quantity
demanded.
When = 2.0, a 10% increase in price
leads to a 20% decrease in quantity
demanded.

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Elasticity Changes along a Straight-Line
Demand Curve

Price elasticity of demand

decreases as we move
downward along a linear
demand curve.

Demand is elastic on the

upper part of the demand
curve and inelastic on the
lower part.

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Elasticity Changes along a Straight-
Line Demand Curve
Along the elastic range,
6.4
elasticity values are
greater than one.
Along the inelastic range,
.29 elasticity values are less
than one.

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Elasticity and Total Revenue

Effect of an
Change in quantity increase in Effect of a
Type of versus change in price on total decrease in price
demand Value of Ed price revenue on total revenue
Elastic Greater than Larger percentage change Total revenue Total revenue
1.0 in quantity decreases increases
Inelastic Less than 1.0 Smaller percentage Total revenue Total revenue
change in quantity increases decreases
Unitary Equal to 1.0 Same percentage change Total revenue Total revenue does
elastic in quantity and price does not change not change

When demand is inelastic, price and total revenues are directly

related. Price increases generate higher revenues.
When demand is elastic, price and total revenues are indirectly
related. Price increases generate lower revenues.

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Determinants of Demand Elasticity

Availability of substitutes --
demand is more elastic when there
are more substitutes for the product.
Importance of the item in the
budget -- demand is more elastic
when the item is a more significant
portion of the consumers budget.
Time frame -- demand becomes
more elastic over time.

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Other Important Elasticities

Income elasticity of demand measures the

responsiveness of demand to changes in
income.
% c h a n g e in q u a n tity d e m a n d e d
in c o m e e la s tic ity o f d e m a n d
% c h a n g e in in c o m e

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Other Important Elasticities

Cross-price elasticity of demand: A

measure of the response of the quantity of one
good demanded to a change in the price of
another good.
% c h a n g e in q u a n tity o f Y d e m a n d e d
c ro s s - p ric e e la s tic ity o f d e m a n d
% c h a n g e in p ric e o f X

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Other Important Elasticities

Elasticity of supply: A measure of the

response of quantity of a good supplied to a
change in price of that good. Likely to be
positive in output markets.
% c h a n g e in q u a n tity s u p p lie d
e la s tic ity o f s u p p ly
% c h a n g e in p ric e

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
 Other Important Elasticities

Elasticity of labor supply: A measure of the

response of labor supplied to a change in the
price of labor.
% c h a n g e in q u a n tity o f la b o r s u p p lie d
e la s tic ity o f la b o r s u p p ly
% c h a n g e in th e w a g e ra te

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair