class: center, middle, inverse, title-slide # Supply and Demand ## Week 2 ### Krisna Gupta ### IBE Petra ### 15 February 2021 (updated: 2021-02-14) --- # Today's content - Supply and demand: a model of competitive market - Demand curve - Supply curve - The perfect equilibrium --- class: middle, center # Supply and demand ## a model of competitive market --- class: center, middle # What happen to chip?  --- # Some problems .pull-left[ - More stuff are smart these days - Lockdown force people to buy gadget to work and play - more servers for service provider ] .pull-right[ - Lockdown forced stand-downs - US-China trade war ] --- class: top, left # Supply and demand - COVID-19 and trade war cause demand and supply shocks - Demand for electronices rose up, while supply can hardly keep-up - Supply, demand and price are important to making decision. - high price incentivies producer to expand, hence lower price. --- # Market - Chip makers and chip users create the market for chip. - Market is a "place" where buyers and sellers meet to exchange goods and services for payment. - When there are 'many' buyers and 'many' sellers, we often say the maket is **competitive**. - How many is 'many'? 100? 1.000? --- # Competitive market - The important feature of competitive market is power. - In the competitive market, buyer and seller cannot control price. - Seller trying to sell above market price won't get any buyer, vice versa. - Competitive market is also known as **perfect market** or **perfect competition**. --- class: middle # Competitive market - Competitive market is characterised by low entry and exit cost. - It is easy to start production or file for bankruptcy. - On the other extreme, there is **monopoly**, where the buyer/seller have absolute power. - Most markets are somewhere in between. --- # Competitive market - As previously discussed, we analyze with model. - While no market is exactly perfect, we always start with competitive market. - Like all model, we start with something simple. - as we move forward, we will see the implication of relaxing the perfect market assumption. --- <iframe src="https://embed.polleverywhere.com/multiple_choice_polls/kCLaPj1TxWcd4kjiT3PpP?controls=none&short_poll=true" width="800px" height="600px"></iframe> --- class: middle, center # Demand curve ## demand & price in #### a competitive market --- # Demand - Demand is the consumer side of the market, measured by quantity. - It is generally accepted that people buy less goods if it is expensive, *ceteris paribus* ¹. - People say this is the **law of demand**. - economists usually measure this using the **demand schedule** & **demand curve**. .footnote[ [1]: All other things being equal. ] --- class: middle, center # Intermezzo #### Is *ceteris paribus* realistic? What makes it hard to say exactly high price decrease demand? --- # Demand schedule - A demand schedule is a table showing how much people will want to buy a certain product given prices. - If everyone in a country face the same price, we can measure demand by adding up all demand for a given price. - Making a demand schedule is not easy, in part because *ceteris paribus* isn't realistic. - prices change, but so other things. --- class: center, middle # Price and demand  --- # Demand schedule .center[A hypothetical demand schedule for rice in Indonesia] <table class="table" style="font-size: 20px; margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; " colspan="1"><div style="border-bottom: 1px solid #ddd; padding-bottom: 5px; ">Price of rice</div></th> <th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; " colspan="1"><div style="border-bottom: 1px solid #ddd; padding-bottom: 5px; ">Rice Consumption</div></th> </tr> <tr> <th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; " colspan="1"><div style="border-bottom: 1px solid #ddd; padding-bottom: 5px; ">P</div></th> <th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; " colspan="1"><div style="border-bottom: 1px solid #ddd; padding-bottom: 5px; ">Q</div></th> </tr> <tr> <th style="text-align:center;"> (1.000 IDR per kg) </th> <th style="text-align:center;"> (kg per person per year) </th> </tr> </thead> <tbody> <tr> <td style="text-align:center;"> 12.0 </td> <td style="text-align:center;"> 116 </td> </tr> <tr> <td style="text-align:center;"> 11.0 </td> <td style="text-align:center;"> 130 </td> </tr> <tr> <td style="text-align:center;"> 10.5 </td> <td style="text-align:center;"> 141 </td> </tr> <tr> <td style="text-align:center;"> 10.0 </td> <td style="text-align:center;"> 154 </td> </tr> <tr> <td style="text-align:center;"> 9.5 </td> <td style="text-align:center;"> 170 </td> </tr> </tbody> </table> --- # Demand curve - We can illustrate the demand schedule in a graph. - A High school reminder of a Cartesian diagram: - Two planes, `\(x\)` (horizontal) and `\(y\)` (vertical). - `\(y=f(x)\)` - We plot price on the y-axis, and quantity on the x-axis. - however, perfect market implies `\(Q^D=f(P)\)` --- class: center, middle <!-- --> --- # Demand curve ### High school reminder - Change in price leads to change in quantity along the lines. - We say **quantity is a function of price** $$ Q^D=f(P) $$ - Price is exogenous, quantity is endogenous. - quantity does not affect price. - That's why perfect market is convinient. --- class: center, middle ### Change in price, ceteris paribus <!-- --> --- # Demand curve - There are plenty of things affect demand: - increased income, change of taste, influencers, etc. - Additionally, prices change too: - Technology, disaster, tax, etc. - As long as the change doesn't cause by buyers & sellers. - When this happen, we shift the curve. --- class: center, middle ### Change in something else <!-- --> --- # Key take away - We use graph to show relationship between price and quantity. - In perfect competitive market, buyers and sellers can't affect price. Hence price is **exogenous** and quantity is **endogenous**. - Change in price `\(\Rightarrow\)` movement along the curve. - Change in everything else `\(\Rightarrow\)` shift the curve. --- # Back to demand - Shift the curve is what generally means by economist when we say **increase in demand** or **decrease in demand**. - i.e., at the same price point, demand change. - What shift the demand curve? - Changes in the prices of related goods. - Changes in income. - Changes in taste. - Changes in expectations. - Changes in the number of consumers. --- class: middle, center # What shifts the demand curve? ## Finding This out is your job as a businessman! --- #### Changes in the prices of related goods or services - Most normal goods have a **substitutes**. - A Substitute is another good which serve the same purpose. - you will not likely to buy it if you have your main good. - Bread, noodle, and pasta can be considered a substitute for rice. What else? - When `\(P_{noodle}\)` goes down, you might want to switch to noodle, hence reducing demand for rice even when `\(P_{rice}\)` doesn't change. --- #### Changes in the prices of related goods or services - The opposite of substitute is **complements** `\(^2\)` - Demand is reduced if its complement is also reduced in demand. - Demand for combustion engine car reduced when gasoline (*bensin*) prices go up. - similarly, people tend to buy electric car if charging it is relatively cheaper. .footnote[[2]: not compliment. different word] --- #### Changes in income - In most goods, people buy more when their income increases. - that's why businesses pay attention to a country's economic growth. - Most goods are **normal goods**, not **inferior goods**. - **inferior goods** behave the other way around: buy less when income goes up. - you buy less of instant noodle when you're richer. --- <iframe src="https://embed.polleverywhere.com/multiple_choice_polls/0ok1Kh10igzuTlSWS3Xdj?controls=none&short_poll=true" width="800px" height="600px"></iframe> --- #### Changes in tastes. - Changes in taste is straightforward. - nobody listens to K-Pop back in the 90s. - We don't know how, but people's taste is changing. - Marketers and advertisers would like to disagree. - If you can detect changes in tastes, or even better, influence other people's taste, you have an advantage in business! --- #### Changes in expectations. - People reacts on signal and what they expect for the future. - Some people hold back purchasing some goods because they know those goods will have a discount in the near future. - People buy more stocks when vaccine introduced cuz they expect the economy to grow in the near future. - Knowledge is an advantage - that's why insider trading is illegal. --- #### Changes in the number of buyer - Similar with income, more buyer means more demand given the same price. - This is why *warteg* often gets higher demand when there is a new construction site nearby. - As the number of middle-class increases, demand for things that they usually buy also increase. --- class: center, middle # Break time --- class: center, middle # Supply & Prices --- # Supply - Is the other side of the market. - Like demand but the opposite: - Supply goes up when prices goes up. - When surgical facemask's price went up, even [Polytron supplies facemasks](https://www.tokopedia.com/tokosinarbarujakarta/masker-kesehatan-polytron-3ply?src=topads). - We also express supply with **supply schedule** and **supply curve**. --- # Demand schedule .center[A hypothetical demand schedule for rice in Indonesia] <table class="table" style="font-size: 20px; margin-left: auto; margin-right: auto;"> <thead> <tr> <th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; " colspan="1"><div style="border-bottom: 1px solid #ddd; padding-bottom: 5px; ">Price of rice</div></th> <th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; " colspan="1"><div style="border-bottom: 1px solid #ddd; padding-bottom: 5px; ">Supply of rice</div></th> </tr> <tr> <th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; " colspan="1"><div style="border-bottom: 1px solid #ddd; padding-bottom: 5px; ">P</div></th> <th style="border-bottom:hidden;padding-bottom:0; padding-left:3px;padding-right:3px;text-align: center; " colspan="1"><div style="border-bottom: 1px solid #ddd; padding-bottom: 5px; ">Q</div></th> </tr> <tr> <th style="text-align:center;"> (1.000 IDR per kg) </th> <th style="text-align:center;"> (kg per person per year) </th> </tr> </thead> <tbody> <tr> <td style="text-align:center;"> 12.0 </td> <td style="text-align:center;"> 170 </td> </tr> <tr> <td style="text-align:center;"> 11.0 </td> <td style="text-align:center;"> 154 </td> </tr> <tr> <td style="text-align:center;"> 10.5 </td> <td style="text-align:center;"> 141 </td> </tr> <tr> <td style="text-align:center;"> 10.0 </td> <td style="text-align:center;"> 129 </td> </tr> <tr> <td style="text-align:center;"> 9.5 </td> <td style="text-align:center;"> 113 </td> </tr> </tbody> </table> --- class: center, middle #### Supply curve <!-- --> --- # Supply Curve - When price changes, quantity supplied go up. - like demand, if sellers can't affect the market price, they follow the market price. $$ Q^S=f(P) $$ - the difference is, prices positively correlated with `\(Q^S\)`, `\(i.e.,\)` `\(\frac{dQ^S}{dP} > 0\)`, `\(i.e.,\)` upward sloping. - Hence, `\(P\)` is exogen, `\(Q^s\)` is endogen. --- class: center, middle #### Change in price, ceteris paribus <!-- --> --- # Supply curve - Plenty of things that are not prices also affects the supply curve. - Affecting farmers' decision to supply includes: - change in import price. - change in minimum wage in manufacturing. - Draught or flood. - Adoption in tech, etc. - we'll learn more about production cost later. - When these changes, we shift the curve. --- class: center, middle ### Changes in something else <!-- --> --- ## What shifts the supply curve? - Like demand, there are several generelised factors affecting the supply curve. - They are: - Changes in input prices - Changes in the prices of related goods or services - Changes in technology - Changes in expectations - Changes in the number of producers --- #### Changes in input prices - To produce, you need inputs - labour, seeds, fertilizers, price of land. - `\(P_{input} \uparrow \enspace \Rightarrow\)` Increase in production cost. - needs higher price to supply same amount of goods. - In a sense, a producer in a market may be a consumer in another market. - A Factory outlet is a producer in the shirt market, but a consumer in the fabric market. --- #### Changes in the prices of related goods or services - Especially important for producers which sell many types of products with a very similar inputs. - Toyota produces a lot of Avanza in Indonesia. - taxes for sedan and utility vehicles is higher in Indonesia. - You won't see Avanza in Australia. Instead, there's a lot of Camries and Hiluxes. --- #### Changes in expectation - Suppliers also tend to react to expectation. - When a producer think there will be increase in price of its good in the future, it will hold to sell it. - In fact, hoarding is a part of a producer's strategy. - There's a trade-off between selling it now vs storing it and sell it later. --- #### Changes in the number of sellers - Similar with income, more seller means more supply given the same price. - The rise of Gojek and the likes leads to higher supply of transportation service. - Similarly when China started to rise up in manufacturing: more supply for cheap labour for electronic industry. --- class: center, middle # Perfect market equilibrium --- # Market equilibrium - Now that we learn that buyer and seller react to price on a curve, it is time to unite them! - The perfect market is when quantity supplied matches quantity demanded. $$ Q^D=Q^S $$ - The price that causes this is called **equilibrium price** or **market clearing price**. - The easiest way is to graph the two Q together. --- class: center, middle #### Equilibrium price <!-- --> --- class: center, middle #### Excess Supply <!-- --> --- class: center, middle #### Excess Demand <!-- --> --- # Market equilibrium .s[ - If price is **above market price**, there will be excess supply. Many goods are left unsold as the price isn't worth it for some buyers. - Some of the less competitive supplier will close, driving price down. - If price is **below market price**, there will be excess demand. Not enough goods are supplied and there will be **scarcity** in the market. People will try to sell more as producers increase production. - sometimes it is even worth it to invest. Many alcohol producer turns to making hand sanitiser. Also, Polytron. ] --- # Market equilibrium - Price equilibrium may take some time to adjust. - Some Markets are constantly moving (stock price is a good example) - Shocks to demand and/or supply will move market equilibrium to a new position. - **New market equilibrium** basically means a new equilibrium price and equilibrium quantity is formed. --- class: middle, center #### Equilibrium amid demand shock <!-- --> --- class: middle, center #### Equilibrium amid supply shock <!-- --> --- ## Equilibrium after shock - A positive demand shock leads to a higher equilibrium quantity and price. - A positive supply shock leads to a higher equilibrium quantity but a lower price. - A negative demand shock leads to a lower equilibrium quantity and price, and lower equilibrium quantity with a higher price. --- class: middle, center #### Equilibrium amid demand shock <!-- --> --- class: middle, center #### Equilibrium amid demand shock then supply shock <!-- --> --- # Double positive shocks - As you can see, if the positive shock is big enough, it can offset the rise in price with even higher increase in demand. - You might note as well that the slope of the curve matters. - steeper curve change quantity even more. - We will learn more later on **elasticity**. --- # Perfect market - So we learned a bit on how perfect market operates: - Supply and demand will eventually settle on a market clearing price. - Market clearing price adjust quickly. - No single buyer or seller can affect it. - Movement along the curve occurs when price change - while exogenous shock (non-price change) shifts the curve. --- # Next week - What happens when market prices doesn't adjust as quickly? - What happens when the government intervene in a perfect market? - We will learn tomorrow in: ## Meddling with the market