APPLICATION OF THE THEORY OF DEMAND AND SUPPLY

Demand and supply analysis provide meaningful assistance to economists in understanding some form of economic events in the community.

The theory of demand and supply are useful to explain the interaction between sellers and buyers in a perfectly competitive market.

Perfect competition is in the market - the market there are many sellers and buyers.

It - the points described in this chapter are:

1.      The long-term problems facing the agricultural sector:
• Demand is slow pertambahannya
• rapid technological developments

2.      Problems of large price fluctuations in the short term

3.      Government policies to stabilize prices and incomes of agricultural products

4.       The maximum price policy and its effects

5.      Effect of sales taxes and subsidies on the price and quantity of goods sold

LONG-TERM PROBLEMS AGRICULTURAL SECTOR

            In the underdeveloped economy, the agricultural sector has significance because most of the national product is agricultural and the majority of household income spent on results - agricultural products. The economic development will gradually reduce the role of the large agricultural sector.

In an economy that is already modern, as in the United States and in the Country - Western European countries, agriculture plays a very small contribution to national production.

            In line with the enactment of the agricultural sector slump role in creating the national production of its role in providing jobs also slumped. In a modern industrial state only minority of the population activity in the agricultural sector. While in the State - the State that had just begun to develop normally most of the population live and work in the agricultural sector.

            Setbacks role of agriculture in the economy that has achieved a high level of progress brought about by two factors, is the demand for agricultural products that slow development and technological progress in agriculture which allow high productivity gains.

ADDED AGRICULTURAL PRODUCTS DEMAND SLOW

Economic growth causes household income is constantly increasing. In Western countries, the increase of revenues achieved since the beginning of the last century is very large. During that time their income increases several fold. This allows them to buy more goods. How revenues experienced a huge increase the use? More specifically, to increase revenue where it will impact the demand for agricultural goods?

            Corak public demand drastic changes in the economy which is growing. The increase in income will increase consumption of various items, both industrial goods and agricultural goods. But the increase was bebanding is not proportional to the increase in consumption pendapatan. Accreation non-agricultural goods such as items of clothing, housing, durable goods, entertainment and tourist resorts have added faster than the accretion pendapatan.Ini berartibarang things like that have a high income elasticity of demand. In contrast, demand for results - agricultural products is growing slower than the increase of the increase in revenue, which means that low-income demand elasticity. As a result, at high levels of income than just a small part of household income used to purchase agricultural goods. In other words, the rate of increase in demand for industrial goods faster. Then the price increase would have added a faster, when compared to the rising prices of agricultural goods. As a result, in the long run the difference in price of industrial goods and agricultural goods tend to be widened.

TECHNOLOGICAL PROGRESS OF THE FAST

Rapid technological development sector in the sector allows produtivitas high rise.

Example: In 1929 in the United States as many as 12.8 million people working in the agricultural sector. Production they created in 1929, if produced at the present time, namely approximately after seven decades, requiring only as much

               1.7 people. This picture shows how big the increase produktivita someone who apply daalam period of more than 70 thun ago in the United States. As a result of the United States and other developed countries are agricultural production can be increased quickly if there is enough demand. But it turns out the demand for agricultural goods progressing much slower than its ability to increase agricultural production.

That situation raises two important implications for the agricultural sector in those countries forward.

1.      This encourages the movement of workers from the agricultural sector to the industrial sector. but perpindaahan it is generally not as fast as desired Seeperti and is mainly caused by the shortage of labor in other sectors keseempatan.

2.      The rapid technological advances pose the problem of excess agricultural production. Amount that can be produced by farmers is more than is needed by the community. This situation causes the price of farm goods are likely to remain at a very low level.

LONG-TERM PROBLEMS OF AGRICULTURE IN FIGURES

            Long-term problems in the agricultural sector can also be explained in the form of demand and supply curves.

The tendency Prices of Agricultural Products in the Long Run Short-Term Problems in Agriculture Sector Preformance short term prices of agricultural products tend to rise turunyang relatively large. Perhaps the price reached a very high level at a time, otherwise decline very bad the next future. The price instability can be caused by the demand and supply on agricultural otters that are not elastic. These properties lead to a very big change to the price level if demand or supply changes.

Factor leading to instability of agricultural prices in the short term can be divided to two sources:

a. Rise and fall of demand
b. Rise and fall deals

Instability Originating from changes Deals

Agricultural production is strongly influenced by natural factors. Padda general, agricultural production is always changing from one season to the other. Musuman change was mainly influenced by the weather, and factor-factor ikllim other scientific. Besides that attack crop pests and vermin can also cause a critical influence on changes in agricultural production. Factor-factor is causing the level of agricultural production are likely to experience relatively large changes compared with changes in the production of goods industry.

In the short term and the long term, the demand for agricultural goods is not elastic. In the long term is due to the income elasticity of demand for agricultural goods is low, the increase in revenue caused only a minor increase in the demand.

In the short term, it is not elastic as most agricultural products is a daily essential goods, which are used every day. Although the price is greatly increased, namunn same amount still to be consumed. Conversely, when the price had declined consumption will not be much increased because consumption is relatively fixed earlier.

Instability Brought By Change Requests

There are several factors that lead to a bid for the agricultural goods are not elastic:

a.       Agricultural goods produced in season

b.      Capacity memprooduksi agricultural sector tends to achieve a high level and not affected by changes in demand.

c.       Some plants take many years before results can be obtained.

Demand, Revenue and Utilization of Labor

Revenue of agricultural goods producers experienced a substantial reduction as a result of declining demand.

It can be concluded that in agricultural activities, changes in demand affecting revenues daripadda more employment opportunities.

Changes in industry activity affecting demand more employment opportunities while revenue (mainly income per worker) had no change for the agricultural sector.

Stabilizing the Prices and Income Agriculture

To stabilize prices and incomes of agricultural producers, many countries have intervened in the production and price determination. The intervention can be done in several ways, namely:

1.      Limiting (determining quotas) the level of production that can be done each manufacturer.

2.      purchases of goods who wish to stabilize the market price is free.

3.      Provide subsidies to the producers when the market price is lower than the price deemed appropriate by the government.

Limiting the amount of production

To keep production did not reach excessive levels, causing problems that cause deterioration of agricultural producer income, the government can restrict the amount of production.

     Membatassi policy production, when compared to the production of free market determination, cause two kinds of change, namely:

a.       The price of goods will rise

b.       The amount to be produced and sold at farmers reduced.

A policy of limiting production with the aim to increase the income of farmers will reach the goal only if the demand for goods whose production is limited is not elastic.

Intervene in the buying and selling

How else can the government do to stabilize prices and ensure that farmers receive a fair price is to make buying and selling of agricultural products whose prices will be stabilized. Campr hand to do this, governments need to establish a body that will make buying and selling goods and keep a stock of goods to be traded.

This issue will be analyzed in two circumstances:

a.       Government to stabilize prices at a level determined by the free market

b.      Government to stabilize prices at a level higher than the free market equilibrium price.

In this policy the government is: "in the long-term price level is equal to the equilibrium price determined in the free market". So in essence the government found bebass determined by the market is already quite reasonable and does not need to be changed.

Setting a higher price than the equilibrium price

The policy is more often done by the government is to set prices at a level higher than that specified free market. Such a pricing policy is known as the minimum price policy or the policy of the lowest prices.

Stabilizing revenues with subsidies

In this policy the government does not determine market price but set a price that will guarantee farmers receive for each production.

Price guarantees are higher than the prices achieved assurance market. The amount of the subsidies to be given by the government for each unit of production is equal to the difference between the price of the guarantee and the price balance.

The maximum price policy

The maximum price policy aims to control prices at a lower level than the equilibrium price in the free market

The maximum price policy implications

Because the maximum price policy led to his form of excess demand, a policy like that sought to to create a black market is the buying and selling activities that do not openly and contrary to the policy of maximum prices implemented. If the government can not avoid this tendency, the maximum price policy can be seen to fail and not meet its target.

One way to reduce black market activity is to wear a heavy punishment or dend ayang to those who do. The actions of any other that can be done is to rationing. That buyer is allowed to buy a certain amount, but the amount was less than he wanted.
With this allotment, the buyers do not earn as much as he wants but, rationing may reduce the desire to make a purchase illicit market and simultaneously reduce the likelihood of the realization of high market prices dark.

Influence Sales Tax

Sales tax is a tax levied by the government and paid at the time of sale and purchase of goods subject to sales tax.

Sales tax imposed in the form of a presentation from the sale proceeds.
Most of the sales tax charged will be borne pleh seller. The division between the tax burden and the seller called the incident pembali taxes or tax incidence.
To analyze the incidence of tax should be seen prporsi tax burden between buyers and sellers in each of the following circumstances:

§  Due to the different elasticity of demand above the tax burden borne by the buyer and seller

§  As a result of the elasticity of the different offers and above the tax burden ditanggumg buyers and sellers.

INCIDENT TAX AND ELASTICITY DEMAND

To see how the elasticity of demand may affect the incidence of the tax would suppose that its offer is the same in both circumstances compared. With this analogy will then be compared to a state where elastic demand with a request that is not elastic.
In conclusion:

§  The more elastic demand curve the less the tax burden to be borne by the buyer.
If the demand curve is perfectly elastic, the entire sales tax paid by the seller. If the demand curve is not perfectly elastic, the entire sales tax borne by the buyer.

§  The more elastic demand curve greater the fall in the number of traded goods as a result of sales tax collection by the government.

TAX INCIDENCE AND SUPPLY ELASTICITY

To see the effect of the supply elasticity of the tax incidence will be compared to the two state of equilibrium of demand and supply. In the second state of the supply curve is inelastic. In both circumstances it is assumed the demand curve remains the same. The incidence of tax shown in the following figure:

The incidence of taxes and the elasticity of demand

1.      Offer elastic

2.      Offer inelastic

From the picture above we can conclude two things:

§  The more elastic supply curve, the more the burden of the sales tax will be borne by the buyer. The entire tax burden will be borne by the buyer if the supply curve is perfectly elastic. Instead the entire tax burden will be borne by the seller if the supply curve is not perfectly elastic.

§  Sales tax will reduce the number of traded goods. The more elastic supply curve, the more reduction in the number of traded goods.

EFFECTS OF GOVERNMENT SUBSIDIES

To see how subsidies can be beneficial to buyers and sellers will be used the same way as it sees sales tax due to them. Of course, this kind of analysis should be adjusted to shape the changes. Subsidies are government handouts for manufacturers to reduce production costs were borne by the manufacturer. That is, it can be seen as the opposite of a sales tax because subsidies can lower the price. The extent to which the amount of profits earned by their buyers a subsidy is dependent on the magnitude of decline in prices will apply.

Subsidies and Elasticity of Demand

Picture effects of subsidies and elastic demand

Can be concluded that :

§  The more elastic the demand, the greater part of the subsidies to be obtained by the seller.

§  The more elastic demand, more and more in the number of traded goods.

Subsidies and elastic deals

Picture effects of subsidies and supply elasticity

1.      Offer elastic

2.      Offer inelastic

Can be concluded that :

§  The elastic deals, the smaller part of the subsidies to be obtained by the seller.

§  deals more elastic, more and more in the number of traded goods.

THEORY OF DEMAND AND SUPPLY

In the economy of an underdeveloped agricultural sector important role. Setbacks role of the agricultural sector in the economy that has achieved a high level of progress brought about by two factors, namely:

1.      Added Agricultural Products Demand Slow

2.      Advances in technology Rapidly

Short-Term Problems in Agriculture

In the short term the price of agricultural products tend to experience ups and downs relatively large. The price reached a very high level at a time, otherwise decline very bad in the next period. Instability can be caused by the demand and supply on agricultural goods that are not elastic. Factors that cause instability of agricultural prices in the short term can be distinguished in the following two sources:

1.      Sourced from changes in supply

2.       Sourced from changes in demand

Demand, Income and Labour

In agricultural activities affect changes in demand more than employment income. Meanwhile, in the industrial activities affect changes in demand more job opportunities and income per worker does not change for the agricultural sector.

Stabilizing the Prices and Income Agriculture

To stabilize prices and incomes of agricultural producers do to intervene in the determination of prices and production. Intervention that can be done in three ways, namely:

1.      Limiting the level of production that can be done each manufacturer.

2.      purchases of goods who wish to stabilize the market price is free.

3.      Provide subsidies to the producers when the market price is lower than the price deemed appropriate by the government.

Maximum Price Policy

            Sometimes circumstances arise where supply is limited while the demand is much greater. In a free market situation such as this will cause the equilibrium price reached a level much higher than the price is reasonable. The maximum price policy aims to control prices at a lower level than the equilibrium price in the free market.

            Because the maximum price policy caused his form of excess demand, a policy of maximum prices tend to create a black market. Excess demand will encourage sellers secretly offering goods at a higher price.

Influence Sales Tax

Levy a sales tax would cause buyers have to pay more to acquire goods subject to the tax.

·         Tax Incidence and Demand Elasticity

The more elastic demand curve the less the tax burden to be borne by the buyer.
The more elastic demand curve more reduction in the number of traded goods.

·         Tax Incidence and Elasticity of Supply

The more elastic supply curve more tax burden to be borne by the buyer.
The more elastic supply curve more reduction in the number of traded goods.

Effect of Government Subsidies

Subsidies are government handouts for manufacturers to reduce production costs were borne by the manufacturer. The subsidies can lower the price. Gains derived buyers with their subsidies depend on the magnitude of price reductions in force.

§  Subsidies and Elasticity of Demand

The more elastic demand for the greater part of the subsidies to be obtained by the seller.

The more elastic demand more and more in the number of traded goods.

§  Subsidies and Elasticity of Supply

The more elastic deals getting smaller part of the subsidies to be obtained by the seller.

The more elastic the more deals in the number of traded goods.

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