Introduction to Economics Project

Introductory%Economics%

16th%October%2013

!Project!I: ECONOMICS!ANALYSIS! on

!INCREASING!CEMENT!DEMAND

Made%by: Azalia%Zatadini 0131131001 Claudia%Arryana 0131131399 Ersha%Egrianto 0131131375 Gavin%Ali%Suryanto 0131131411 SebasBan%Alex%Dharmawangsa 0131131309

INTRODUCTORY!ECONOMICS S1!BUSINESS PRASETIYA!MULYA!BUSINESS!SCHOOL 2013 Business%1A%M%Group%4%

Introductory%Economics%

16th%October%2013

INTRODUCTION

Economics%is%the%study%of%how%society%manages%its%scarce%resources.%Scarce%resources%means%that%it% is%limited%in%nature;%thus%creaBng%a%situaBon%in%which%not%all%people%could%have%the%goods%and%services%they% wish%to%posses%or%own.%This%is%why%economics%is%responsible%in%examining%how%the%mulBtude%of%buyers%and% sellers%together%determines%the%price%for%which%the%good%is%sold%at.%Also,%economics%is%responsible%on% analyzing%the%forces%and%trends%that%distorts%the%economy%as%whole,%either%posiBvely%or%negaBvely.%The% most%opBmum%result%from%the%use%of%economics%knowledge%is%efficiency,%in%which%the%society%could%get%the% most%out%of%its%scarce%resource,%and%equity,%in%which%the%economic%prosperity%is%fairly%distributed%among%the% society’s%members.%Things%are%not%always%so%easy%on%determining%the%most%opBmum%result,%most%of%Bme% they%come%to%an%uneasy%opportunity%cost,%goods%or%opBons%that%must%be%given%up%to%obtain%a%beYer%choice. %

In%this%report,%however,%we%are%going%to%apply%all%these%knowledge%to%analyze%how%the%increasing%

cement%demand%affects%the%market%and%how%are%the%steps%taken%by%the%cement%producers%going%to%affect% the%cement%market%and/or%the%community%as%whole.%We%will%use%three%basic%economics%theories%to%analyze% the%impact%of%these%moves%on%fixing%the%scarcity%of%cement.%The%way%to%read%this%analysis%is%that%first%each% segment%is%going%to%be%opened%by%a%review%on%the%topic,%then%followed%by%the%applicaBon%of%the%topic% discussed%into%the%problem/arBcle%that%we%found. %

The%first%theory%that%we%will%use%would%be%the%supply%and%demand%theory.%This%theory%would%

generally%discuss%the%effect%of%the%increment%in%demand%and%how%the%suppliers%handle%with%it%to%the%stability% of%the%cement%price%in%the%market.%Also,%how%the%quanBty%of%cement%demanded%and%supplied%plays%a%great% role%on%determining%the%price%of%cement.%Lastly%how%to%avoid%the%market%from%suffering%any%surplus%or% shortages. %

Second%theory%that%we%will%use%would%be%elasBcity.%This%theory%in%general%would%discuss%whether%

the%market%for%cement%is%an%elasBc%or%an%inelasBc.%This%would%explain%how%much%buyers%and%sellers%respond% to%the%changes%in%the%cement%market%condiBons,%this%topic%would%complement%the%supply%and%demand% theory. %

Lastly,%we%will%analyze%the%case%from%the%steps%that%the%suppliers%take%to%manage%the%externaliBes%of%

the%cement%they%are%producing.%ExternaliBes%in%general%talks%about%the%impacts%of%the%acBons%taken%by%one% person%or%firm%on%the%well%being%of%bystander(s).%These%impacts%could%be%either%posiBve%or%negaBve%and% could%be%done%on%purpose,%not%on%purpose,%or%even%by%a%natural%force%creaBng%a%turn%of%events.%Here%we% will%also%talk%about%how%the%changes%of%demand%from%the%externaliBes%creates%a%significant%changes%in%price% as%well. %

On%the%end%of%the%report%we%will%also%sum%up%the%result%of%our%analysis%of%how%the%increase%in%

cement%demand%and%the%steps%taken%by%suppliers%affects%the%market%of%cement.%Also%we%will%sum%up%on%how% the%price%and/or%quanBty%of%cement%would%be%altered%by%these%decisions.

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Theory!I:!Supply!and!Demand The%Supply%and%Demand%Curve %

As%the%name%suggests%the%supply%and%demand%curves%in%the%priceMquanBty%graphs%plots%the%amount%

of%supply%or%demand%the%market%sets%in%the%set%price%of%an%item%or%vice%versa.% %

QuanBty%demanded%is%the%amount%of%good%that%buyers%are%

willing%and%able%to%purchase%under%set%price%range(s).%As%shown%on% the%graph,%the%law%of% demand%states%that%under% normal%condiBons% the% quanBty% demanded% in% of% a% good% falls%when% the% price% of% the% good%rises.%This%happens%because%customer%would%be%happier%with% lower% price% since% they% can% save% more,% and% creaBng% a% higher% customer% surplus.% Thus%the%demand% curve,% the% graph% that% shows% the% relaBonship% between% the% price% of% good% and% the% quanBty% demanded,%will% always%have%a%negaBve%gradient%on%normal%condiBons.%When% the%demand% increases,% the% curve%would%go%to%the%right%side.%Whilst,%when%the%demand%decreases%the%curve%moves%to%the%lec. %

QuanBty% supplied,%on%the%other%hand,%states%the%amount%of%%

goods %that%sellers%are%willing%and%able%to%sell.%The%law%of%supply%states% that%under%normal%condiBons,%the%quanBty%of% goods%supplied%would% rise%as %the% price%of% the% good% rises.%This% happens% because% a%certain% seller% would% like%to%gain% more%proďŹ t,%and%this%could% happen% by% the% increment% of% price.% This% is% why% the% supply% curve,% the% graph% that% shows% the% relaBonship% between% the% price% of% the% good% and% the% quanBty% supplied,%will%always%have%a%posiBve%gradient%under%normal% circumstances.%When%the%quanBty%of%supply% increases,%the%curve%would%go%to%the%right%side.%Whilst,%when% the%supply%decreases%the%curve%moves%to%the%lec. %

To% determine%the%right% quanBty% sold% and%selling/buying% price% in% a %

market,% we% should% overlap% the% two% graphs% creaBng% the% supply% and% demand%curves%in%the%priceMquanBty%graph.%This%way%we%could%ďŹ nd%the% equilibrium% in% the% market.% Equilibrium% is% the% state% where% the% price% reached% the% level% where% quanBty% supplied% equals% to% the% quanBty% demanded,%as%in%the%graph%next%to%this%paragraph%shows%an%equilibrium% of%5%units%sold%in%a%price%of%$5.00%each. %

This%knowledge%is%the%very%basic%of%every%economics%problems.%So,%the%supply%and%demand%curves%

are%going%to%pop%up%excessively%in%out%report%to%enlighten%the%explanaBon%further%and%to%make%the% explanaBon%easier%to%grasp.

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Markets%Not%in%Equilibrium %

As%we%discuss%previously,%equilibrium%is%the%state%when%the%price%reached%the%level%where%quanBty%

supplied%equals%to%the%quanBty%demanded.%This%is%when%a%market%is%efficient.%But%this%is%not%always%the%case.% The%paragraphs%that%follow%will%talk%about%the%maYer%in%more%depth,%grouping%surplus%and%shortage. %

SomeBmes %the%market%has%an%excess%in%supply.%This%is%what%

we%call% a%surplus% in% the% market.% Surplus% is %a%situaBon% in% which% the% quanBty% supplied%is%greater%than%the%quanBty%demanded.%This%would% leave% some% of% the% stock% to% pile% up,% unsold.% This% situaBon% could% happen%because%the%market%price%that%is%set%for%is%too%high.%This%high% price%moBvates%the%producer% (supply)% to%increase%their% supply% since% they%can%gain%more%profit.%On%the%other%hand,%this%makes%the%buyers% (demand)%reluctant%to%buy%the%product. %

On%other%Bmes%the%market%set%the%price%for%the%good%for%too%

low.% This%creates%a%situaBon%on% which% the%producer% (supply)% would% decrease% their% producBon% so% that% they% could% make% an% opBmum% profit%from% low%selling% price.% Whilst,%the%buyers%(demand)%would% be% more%eager%to%buy%the%products%due%to%the%cheap%price.%This%creates% a%market%with% a %high%selling% probability% but%limited%products%to%sell.% This%is%what%we%call%a%shortage%in%supply,%or%simply,%shortage.%

These%kind%of%markets%result%in%an%inefficient%system.%Whereby%fulfilling%society’s%control%out%of% most%out%of%its%scarce%resource,%also%the%point%where%the%economic%prosperity%is%fairly%distributed%among% the%society’s%members,%wouldn’t%be%able%to%take%place.%This%is%why%the%law%of%supply%and%demand%states% that%the%price%of%any%goods%will%adjust%so%that%the%quanBty%supplied%and%quanBty%demanded%will%be%in% balance.

Shics%on%the%Curve(s)%and%Their%Impact %

Some%events%in%the%environment%might%alter%the%posiBons%of%the%curves%depending%on%the%

situaBons%that%affects%the%market.%The%changes/shics%in%the%curve,%unlike%shortage%and%surplus,%creates%a% new%equilibrium.%This%new%equilibrium%decides%the%new%opBmum%price%and%new%opBmum%amount%of% quanBty. When the demand quantity increases, it would make the good more attractive to sell. This make the supplier more eager on increasing the price, creating a higher price equilibrium.

The opposite happens on decrease in market demand. The demand is few, so to attract buyer they should lower down the prices.

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When the supply quantity decreases, it would make the good more scarce. This make the buyers more willing on to pay for a higher price, creating a higher price equilibrium.

The opposite happens on increase in supply. The supply is a lot, so people are not willing to pay for so much for goods that are already readily available.

ApplicaBon%of%Knowledge%into%the%Topic %

In%this%secBon%we%are% going% to%apply% the%knowledge%gained%in%supply% and% demand%theory% to% the%

arBcle%that%we%have%provided.

Permintaan semen di Indonesia pada 2013 mencapai 55 juta ton dan diperkirakan meningkat sepuluh persen hingga lima belas persen pada tahun-tahun mendatang. %

The%statement%above%states%that%the%demand%of%

cement% in% Indonesia% has% been% increasing% and% will% conBnue%to%increase.% If%we%plot%this%in% a%PriceMQuanBty% Graph% using% Supply% and% Demand% Curve,% the% demand% would%increase%(shics%to%the%right)% creaBng%an%increase% of%quanBty%with%an%increase%in%price.% Hal itu mendorong sejumlah perusahaan membangun pabrik semen di Indonesia.

--“Potensi jumlah penduduk dan sumber daya alam di Indoensia cukup besar. Kami terdorong untuk membangun industri semen dengan mendirikan pabrik semen ...” President Siam Cement Group %

As%the%supplier%for%cement%grows,%it%creates%a%shic%

in%the%priceMquanBty% graph%in%which%supply% shics%down%(to%

the%right)%in%respect%to%the%increase%of%quanBty. To%sum%up,%an%increase%in%cement%demand%would%increase%the%price%of%cement%due%to%the%supplier% not%afraid%to%sell%cement%in%higher%price,%the%market%will%sBll%take%it%anyways.%And,%in%this%case,%to%sustain% the%growing%amount%of%cement,%corporaBons%decides%to%increase%the%amount%of%factories,%thus%increasing% the%supply%of%cement%in%the%market.%By%increasing%the%cement%supply%the%new%equilibrium%would%be%aYain% in%the%same%price%(or%not%much%of%a%difference),%with%a%larger%amount%of%quanBty%in%equilibrium.%But%if%the% increase%of%supply%surpasses%the%increase%of%demand,%the%price%of%cement%would%even%be%cheaper.%This%is% why%the%price%of%cement%would%%increase%during%the%first%growth%of%demand%in%Indonesia%(currently).%But%by% the%Bme%that%the%new%factories%has%been%built,%the%price%would%again%return%to%it’s%original%state%(in%2015).

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Theory!II:!ElasIcity ElasBcity%in%General

ElasBcity%measures%how%much%the%buyers%and%sellers%respond%to%the%changes%in%the%certain% market’s%condiBons%or%the%determinants%of%supply%and%demands.%Thus%we%could%be%able%to%analyze%supply% and%demand%with%greater%precision.%ElasBcity%could%be%seen%in%two%views,%the%elasBcity%of%demand%and%the% elasBcity%of%supply.% %

ElasBcity%itself%is%divided%into%three%cases,%inelasBc,%unit%elasBc,%and%elasBc.%ElasBc%means%that%the%

quanBty%will%respond%more%than%proporBonately%to%the%amount%of%change%in%price.%Whilst,%unit%elasBc%is% when%the%quanBty%responds%proporBonally%to%the%amount%of%change%in%the%price.%On%the%other%hand,% inelasBc%means%that%the%quanBty%would%respond%less%than%proporBonately%to%the%changes%in%the%price%of%the% good%in%the%market.

ElasBcity%of%Demand %

The%price%elasBcity%of%demand%measures%how%much%the%quanBty%demanded%will%increase%or%

decrease%if%there%is%either%a%decrease%or%increase%in%the%price%of%a%certain%good.%ElasBcity%of%demand%is%easily% determined%by%the%availability%of%close%subsBtute,%type%of%product%(necessity%vs%luxury),%the%market% definiBon,%and/or%the%Bme%horizon%of%price%change.

Price Elasticity of Demand =

Percentage change in quantity demanded Percentage change in price

Goods%with%close%subsBtutes%tends%to%have%a%more%elasBc%demand%due%to%the%fact%that%all%the% buyers/consumers%could%easily%switch%to%the%subsBtute%product%when%the%original%product’s%price%hikes.% IdenBcally,%luxury%goods%tends%to%be%an%elasBc%demand%because%when%the%price%comes%to%hike%people%tend% to%reduce%their%needs%of%luxury/unneeded%goods.%On%the%other%hand,%necessiBes%or%goods%that%are%essenBal% to%one’s%living%are%inelasBc%because%no%maYer%where%they%are%priced%people%would%sBll%need%to%buy%them,% perhaps%they%could%reduce%the%use%of%the%good%but%not%very%dramaBcally.%The%elasBcity%of%demand%for%a% broadly%defined%market%also%tends%to%be%inelasBc,%since%there%are%no%subsBtute%for%the%good%(e.g.%drinking% water).%Whilst,%a%narrowly%defined%market%could%be%described%to%be%more%elasBc%since%there%are%subsBtute% (e.g.%market%for%Aqua,%market%for%Ades,%market%for%Nestlé,%etc.).%Lastly,%goods%tend%to%have%more%elasBc% demand%over%longer%Bme%horizons. %

This% elasBcity% could% be% used% to% calculate% the% total% profit%

gained% by%an%individual.%This%is %because%an% inelasBc%demand%curve% has% an% increase% in% price% that% leads% to% a% minuscule% decrease% of%

Total Revenue = Ps x QD

quanBty.% Thus% creaBng% a% higher% total% revenue.% The% other% way% around%goes%for%elasBc%demand.%In%which%an%increase%in%price%leads% to%a%larger%decrease%in%quanBty%demanded.%Thus%creaBng%a%lower%total%revenue.

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ElasBcity%of%Supply %

Price%elasBcity%of%supply%measures%how%much%does%the%quanBty%supplied%of%a%good%responds%to%the%

changes%in%the%price%of%the%good.%This%is%easily%determined%by%the%flexibility%of%sellers%to%alter%the%amount%of% goods%they%produce.%Goods%that%are%easy%to%alter%in%number%are%more%elasBc%compared%to%those%that%are%in% fixed%amount.%Also%supply%is%generally%more%elasBc%in%the%long%run%than%in%the%short%run.%This%is%due%to%the% fact%that%corporaBons%could%easily%build%new%factories%for%producBon%or%close%old%ones%for%decreasing%the% supply.

Price Elasticity of Supply =

Percentage change in quantity supplied Percentage change in price

ApplicaBon%of%Knowledge%into%the%Topic %

In%this%secBon%we%are%going%to%apply%the%knowledge%gained%in%elasBcity%theory%to%the%arBcle%that%we%

have%provided.

Permintaan semen di Indonesia pada 2013 mencapai 55 juta ton dan diperkirakan meningkat sepuluh persen hingga lima belas persen pada tahun-tahun mendatang.

%

The% statement% clarifies% how% the%

demand%for% cement%would%rise.%And% if% we%talk% about%cement,% it%is%a%general% (broad)% market.% Thus%we%could%say%that%it%is%inelasBc.%Currently,%

there%are%no%subsBtutes%available%to%exchange%the%usage%of% cement%as%a%building%material.%This%means%that% if% the%price% of% cement% rises,% the% public% will% sBll% want% to% buy% them.% The% decrease%of% buyers %will% be%less% significant%compared%to%the%change%in%price%itself.%Also%to%the%Bme%horizon,%in%the%short%Bme%period%cement% demand%would%be%inelasBc%since%houses%and%other%buildings%are%already%in%the%middle%of%the%construcBon.% But%on%the%long%period%of%Bme%the%demand%for%houses%and/or%buildings%will%be%lower%since%the%hike%of%price,% creaBng%the%cement%market%to%be%elasBc%in%the%long%run. %

The%statement%to%the%right%discusses%how%

the%factory%could%only% start%producing%by%the%3rd%

Pabrik itu diharapkan dapat mulai berproduksi pada triwulan III-2015

quarter% of% the% year% 2015.% This% means % that% cement%supply%is%not%an%elasBc%supply.%Since,%it%takes%a%while%for%them%to%start%up%a%new%factory%to%alter%the%

amount%of%cement%that%are%going%to%be%supplied%to%the%market.%% Thus%to%sum%up,%we%believe%that%cement%demand%is%inelasBc%in%the%mean%Bme%due%to%the%fact%that% they%have%no%subsBtutes%and%also%there%are%many%projects%that%are%already%in%the%middle%of%the%way%and% needs%to%be%finished.%But%in%the%prolonged%Bme,%the%demand%for%cement%would%be%quite%elasBc%since%people% would%stop%purchasing%buildings%due%to%the%expensive%cement%price.%And%also%to%say,%cement’s%supply% elasBcity%is%inelasBc%due%to%the%fact%that%to%open%up%a%new%factory%and%increase%the%demand%that%the%market% needed%takes%a%while.

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Theory!III:!ExternaliIes ExternaliBes%in%General

ExternaliBes%are%the%uncompensated%impact%of%one%person’s%or%one%firm’s%acBons%on%the%wellMbeing% of%the%people%in%the%community/environment.%This%acBons%could%be%done%on%purpose%or%not%on%purpose%or% even%started%by%a%natural%movement(s)%or%disaster(s).%ExternaliBes%could%come%in%negaBve%ways%or%posiBve% ways.%NegaBve%externality%is%when%the%effects%of%the%people’s%or%firm’s%acBon%is%adverse%to%the%community% or%the%environment.%Whilst,%posiBve%externality%is%when%the%effect%of%the%acBons%create%benefit%to%the% bystanders.%ExternaliBes,%negaBve%mostly,%could%be%discussed%between%the%community%and%the%firm%to% reach%an%agreement%towards%the%handling%of%the%externaliBes.%Also%someBmes,%the%government%could%get% in%hand%on%the%agreement%making%process%to%make%sure%it%is%fair%and%to%resolve%any%disputes%in%the% agreement%making%process.

NegaBve%ExternaliBes

As% said% above,% negaBve% externality% has% negaBve% feedbacks%to% the%bystander%in%the%area%due%to%the%company’s% acBviBes% (e.g.% polluBon,% radiaBon,% noise,% etc.).%This% creates%a% thing%called%a%social%cost.% %

Social% cost% is% the% collecBon% of% the% supply% cost%

(private%cost)% plus%the%amount%of%money%the%producBon%of% the% good% has% cost% the% bystander% (cost% of% externality).% This% addiBonal% amount% of% money% is%usually% paid% by% the% producer/ supplier%in%a%certain%kind%of%agreement.%The%supplier%gains%this%money%by%charging%it%to%the%people%who%uses% the%product%that%creates%the%externaliBes%(the%customers),%thus%creaBng%a%product%with%a%higher%price.% PosiBve%ExternaliBes

Some% firm’s % acBons% give% out% a% posiBve% externaliBes.% This% externality% gives% the% bystanders% and/or% community% an% advantage%or%benefit%(e.g.%educaBon,%immunizaBon,%researches,% etc).% %

This%creates %a%social%value%that%is%much%higher%than%the%

equilibrium% value.% The% people% would% want% to% enroll% in% this% specific% firm% so% that% they% could% get% the% advantage,% thus% the% demand% is% higher.% SomeBmes% the% government% has% to% take% in% their% lead% in% this% maYers% so% that% the% customers% are% protected% from% losing% too% much% money.% The% government%could%create%some%sort%of%subsidizing%program%or%perhaps%creates%a%floor%ceiling%on%the%price.

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ApplicaBon%of%Knowledge%into%the%Topic %

In%this%secBon%we%are%going%to%apply%the%knowledge%gained%in%externaliBes%theory%to%the%arBcle%that%

we%have%provided.

Siam Cement Group menginvestasikan dana ... untuk membangun pabrik semen ramah lingkungan.

Pabrik itu dirancang untuk melindungi lingkungan hidup dengan memanfaatkan teknologi kantong penyaring (bag filter), mesin pertambangan permukaan, dan teknologi hemat energi vertical mill.

“Teknologi kantong penyaring dapat mengontrol emisi debu hingga 99.9%. Mesin surface mining pada process penambangan dapat mengurangi debu, getaran, dan kebisingan” - CEO Siam Cement Group As%we%take%from%these%three%extracts%of%the%arBcle%we%could%see%that%the%company%is%currently% starBng%a%posiBve%externality%towards%the%cement%market.%This%could%increase%the%demand%for%cement%even% more%knowing%that%the%producBon%supports%the%sustainability%of%the%environment.%There%isn’t%any%party% that%is%disturbed%from%the%creaBon%of%this%‘green’%factories.%In%this%way%the%company%could%also%gain%more% profit%by%trading%their%polluBon%permit%with%other%companies,%so%that%other%‘dirty’%companies%could%lower% down%the%amount%of%cash%they%are%spending%for%cleaning%up%their%mess.

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Introductory%Economics%

16th%October%2013

Final!Result!of!Analysis 1. An%increase%in%cement%demand%would%increase%the%price%of%cement%due%to%the%supplier%not%afraid%to%sell% cement%in%higher%price.%And,%in%this%case,%to%sustain%the%growing%amount%of%cement,%corporaBons%decides% to%increase%the%amount%of%factories,%thus%increasing%the%supply%of%cement%in%the%market.%By%increasing% the%cement%supply%the%new%equilibrium%would%be%aYain%in%the%same%price%(or%not%much%of%a%difference),% with%a%larger%amount%of%quanBty%in%equilibrium.%But%if%the%increase%of%supply%surpasses%the%increase%of% demand,%the%price%of%cement%would%even%be%cheaper.% 2. This%is%why%the%price%of%cement%would%%increase%during%the%first%growth%of%demand%in%Indonesia% (currently).%But%by%the%Bme%that%the%new%factories%has%been%built,%the%price%would%again%return%to%it’s% original%state%or%even%cheaper%(in%2015).

3. The%company%is%currently%starBng%a%posiBve%externality%towards%the%cement%market.%This%could%increase% the%demand%for%cement%even%more;%knowing%that%the%producBon%supports%the%sustainability%of%the% environment.%This%could%increase%the%price%of%cement%in%the%future.

4. Lastly,%we%also%believe%that%cement%demand%is%inelasBc%in%the%mean%Bme%due%to%the%fact%that%they%have% no%subsBtutes%and%also%there%are%many%projects%that%are%already%in%the%middle%of%the%way%and%needs%to% be%finished.%But%in%the%prolonged%Bme,%the%demand%for%cement%would%be%quite%elasBc%since%people%would% stop%purchasing%buildings%due%to%the%expensive%cement%price.%And%also%to%say,%cement’s%supply%elasBcity% is%inelasBc%due%to%the%fact%that%to%open%up%a%new%factory%and%increase%the%demand%that%the%market% needed%takes%a%while.

N!The!End!N Business%1A%M%Group%4%