MECHANISM CONCEPT PRICE ESTABLISHMENT IN

THE MARKET, COEFFICIENT OF ELASTICITY, and

PRICE SETTING BY GOVERNMENT

Lecturer:

Dr. Moh Farih Fahmi, S.Pd., M.Pd.

Arranged by:

Danish Izza Nadira (22081194128)

Miftakul Khoiriyah (22081194089)

FACULTY OF ECONOMICS AND BUSINESS

SURABAYA STATE UNIVERSITY
2022

1
 INTRODUCTION

We give thanks to God Almighty for the blessings, mercy, and grace so that this
paper can be completed in a timely manner. We say thanks to our Introduction to Economic
Theory lecturer Dr. Moh Farih Fahmi, S.Pd., M.Pd. and all parties who have helped in the
process of making this paper. We realize that this paper is far from perfect. Therefore, we
expect criticism and suggestions from readers. Finally, I hope this paper can provide benefits
for the reader.

Surabaya, 9 September 2022

Writer

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 LIST CONTENTS

PAGE COVER …………………………………………………………………………………..1

INTRODUCTION……………………………………………………………………………….2

LIST CONTENTS …………………………………………………...………………………….3

CHAPTER 1 PRELIMINARY... ……………………………………………………………... 4

1.1 Background Behind Problem ………………………………………………………………………….4

1.2 Formulas Problem ………………………………………………………………………………….... 5

1.3 Purpose Problem ………………………………………………………………………………………5

CHAPTER 2 DISCUSSION ……………………………...………………………………….....6

1. Mechanism of Price Formation in the Market………………………………………………..7

2. Explaining the Coefficient of Elasticity..………………………………….............................6

3. Pricing Policy by the Government…………………………………………………………..14

CHAPTER 3 CLOSING ……………………………………………………............................17

A. Conclusion ……………………………………………………………...……..………..17

B. Suggestions………………………………………………………………...……..……..17

LIST LIBRARY …………………………………………………………….............................18

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 CHAPTER 1

PRELIMINARY

1.1 Background Behind Problem

What definition from demand

and supply ?
2. What type type demand and
supply ?
3. What only the factors that
influence demand and supply ?
4. How law demand and supply
in economy ?
What definition from demand
and supply ?
2. What type type demand and
supply ?
3. What only the factors that
influence demand and supply ?
4
4. How law demand and supply
in economy ?
What definition from demand
and supply ?
2. What type type demand and
supply ?
3. What only the factors that
influence demand and supply ?
4. How law demand and supply
in economy ?
What definition from demand
and supply ?
2. What type type demand and
supply ?
3. What only the factors that
influence demand and supply ?
5
4. How law demand and supply
in economy ?
Everyone knows that humans have needs. amount and The types are
getting more and more numerous and varied. When I was a baby I needed only
milk. After the large needs increase, not only milk but also rice, vegetables and
fish. Developments that show humans were created by God as a creature that
continues to grow towards independence. We should be grateful for the gift this,
even as much as possible continue to cultivate the ability to become a creature that
useful to other creatures. Direct development of own needs influence level request
and offer goods or service.

The meaning of daily demand is a desire that demands to be fulfilled, and

the real meaning of request is not only limited to desire, but accompanied by
willingness and ability to buy the goods needed. The price change is very affect
demand. Sometimes, the change in demand is bigger compared to changes in
price, or vice versa. Sometimes the price changes proportional to changes in
demand. Therefore, analysis of the demand curve will we relate to the elasticity of
demand. The elasticity of demand is what measure the magnitude of the effect of
price changes on changes in demand which is expressed While the supply is the
number of goods that will be sold at the price level, certain time and place. The
elasticity of supply is a measure of how much influence change price to change
the offer expressed in quantitative.

While the income elasticity is the level of people's income, namely

enhancement or drop which influence Request or offer goods.

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1.2 Formulas Problem

1. is which meant elasticity and function?

2. how policy determination price by government?

3. is which meant with elasticity offer?

4. is which meant with elasticity Request?

5. is which meant with elasticity cross?

6. is which meant with elasticity income?

7. how wisdom determination price retail Lowest?

8. how wisdom determination price retail highest?

9. how wisdom determination price combination?

1.3 Purpose Problem

1. To know the process of forming market prices

2. To understand the concept of elasticity

3. To find out the types of elasticity of demand and supply

4. To find out what factors affect the elasticity of demand and supply

5. To understand the concepts of cross elasticity and income elasticity

6. To find out what the government's policies are in setting prices

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 CHAPTER 2

DISCUSSION

1. Mechanism of Price Formation in the Market

The market price is the price level that occurs based on an agreement between the buyer (demand) and
the seller (bidder). At the market price level, producers are willing to release the goods or services they
sell, while consumers are willing to pay.

A producer will be able to set a price for goods based on several things including the costs incurred in
producing an item, apart from the number of requests for goods from consumers, the benefits to be
obtained, as well as the competitiveness that could occur between fellow producers of the same goods.

The formation of market prices occurs due to the interaction between supply and demand which
ultimately reaches equilibrium. Such a process in economics is called market forces. According to
Adam Smith, market forces play a role in shaping the prices of goods and services automatically.
Without the need for interference from any party. Adam Smith dubbed the market power as the invisible
hand (the invisible hand).

The balance between supply and demand will result in a stable market price. If the price is forced not to
match the market price, there will be a market imbalance (disequilibrium). However, this inequality will
not last long because it will cause a market reaction. What is it like?

If the condition of the price is lower than the market price, then demand exceeds supply
As a result, there is a shortage of goods (deficit) that is unable to meet the large demand. This excess
demand problem will push the price up until it reaches the market price balance.

If the condition of the price is higher than the market price, then supply exceeds demand
As a result, there is a problem of excess supply of goods (surplus) which is not proportional to the lack
of demand. The problem of excess supply will push the price down until it reaches the equilibrium
market price.

In addition, the market reaction in overcoming the imbalance in the form of deficit and surplus confirms
Adam Smith's opinion above about the ability of market forces to maintain market price balance.

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 2. Explaining the Coefficient of Elasticity

Elasticity is one of the important concepts for understanding various problems in the
economy. For example, local governments can find out the impact of an increase in taxes or
subsidies on regional income, the level of public services, population welfare, economic
growth, growth investment, and other economic indicators using the elasticity approach. In
addition, the concept of elasticity can be used to analyze the impact of an increase regional
income to regional expenditures or types of regional expenditures certain. With its usefulness,
this analysis tool can help decision makers policies in deciding priorities and policy alternatives
that provide greatest benefit for regional progress.
Elasticity can measure how much a variable changes to other variable
changes. For example, the elasticity of Y with respect to X measures how much
percent change Y because the change in X is 1 percent.
Elasticity Y to X= % change Y / % change X
The discussion of this elasticity is explained in the context of the market,
namely between demand and supply of goods. By understanding this concept, the
Government Regions will be able to apply this concept in government regions
according to the context at hand, both in terms of the Regional Government
becoming provider public goods and services as well as in various condition other .
A. Types Elasticity
a. Elasticity Request
Elasticity Request is level change Request to goods/services, caused by changes
in the price of the goods/services. Big or small the rate of change can be
measured by numbers called coefficient elasticity Request.

Miscellaneous Elasticity Request

- Request Perfectly Inelastic (E = 0)

Request inelastic perfect occur when change price which occur does not
affect the number of requests (coefficient E = 0). As An example is the
demand for salt. Condition of inelastic demand this perfect could could
depicted to in the form of a curve following:

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- Request Inelastic (E < 1)

Request inelastic occur if change price not enough take effect on request
change. E value < 1, meaning that the price increase is 1 percent is only
followed by a decrease in the quantity demanded by less than one percent,
on the other hand, a decrease in price of 1 percent causes an increase in
the quantity demanded of the good is less than 1 percent. As An example
is the community's demand for rice or necessities tree other.

- Request Elastic unit (E = 1)

Unitary elastic demand occurs when the change in demand is proportional

to with change price. Coefficient elasticity Request unitary is one (E = 1),
meaning that a 1 percent increase in price is followed by decrease in
quantity request of 1 percent, and on the contrary.

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 - Request Elastic (E > 1)

Elastic demand occurs when the change in demand is greater than price
changes. The coefficient of elastic demand is more than one (E > 1), it
means increase price as big as 1 percent cause increase amount more
request from 1 percent, and vice versa. Condition this usually occurs in
the demand for cars and luxury goods other.

- Request Elastic Perfect (E = ~)

Perfectly elastic demand occurs if the change in demand does not

influenced same very by change price. The curve will parallel with axis X
or Q (item quantity.

b. Elasticity Offer

The elasticity of supply is the rate of change in the supply of goods and services
which caused because existence change price goods and service the. For
measuring the size of the level of change is measured by numbers which are
called coefficient elasticity offer.

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Miscellaneous Elasticity Offer

- Offer Perfectly Inelastic (E = 0)

Perfectly inelastic supply occurs when a change in price occurs does not
affect the number of bids. Supply curve parallel with vertical axis Y or
P (level price).

- Offer Inelastic (E < 1)

Offer inelastic occur if change price not enough take effect on offer
changes. In other words, the quantity supplied is relative no sensitive to
price changes.

- Offer Unitary Elastic (E = 1)

Offer elastic unitary occur when change price comparable with change number of
bids.

- Offer Elastic (E > 1)

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 Offer elastic occur if change price followed with amount more offers big.

- Offer Perfect Elastic (E = ~ )

Perfectly elastic supply occurs if the change in supply does not influenced
same very by change price, so that curve offer will be parallel to the
horizontal (X) or Q axis (the amount of output offered).

c. Elasticity Cross (Cross elasticity)

Cross elasticity shows the relationship between the quantity demanded to change
price goods other which have connection with goods the. The relationship can be
surrogate, it can also be complement.

Miscellaneous Elasticity Cross

- Elasticity Cross Positive

Enhancement item price A cause enhancement number of requests good B.

For example, an increase in the price of coffee increases demand for tea.
Coffee and tea are two things that can be replace each other (substitutive
goods).

- Elasticity Cross Negative

Enhancement price of goods A result in a decrease Request goods
B. For example, an increase in the price of gasoline results in a decrease
in Request to vehicle motorized. Second goods the character
complementary (complementary).

- Elasticity Cross Zero

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 An increase in the price of good A will not result in a change in demand
for goods B. In this kind of shirt, both kinds of goods no each other
related. As example, increase price coffee no will take effect to demand
for motorized vehicles.

Table Connection between goods based on score elasticity cross

Score Connection Increase in the Price of Decrease Price Goods A

Elasticity between Goods A result in result in
Cross goods

E>0 Substitution Goods B which asked to go Goods B which requested down

up

E=0 Not Relate Goods B which requested Goods B which requested

permanent permanent

E<0 Complementary Goods B which requested Goods B which asked to go up

down

Measurement Elasticity Cross

Cross elasticity of goods A =

Change request item A Product price changes B

÷
Request item A start − start Price item Start start

% Change Request goods X

Elasticity cross item X = % change price goods Y

d. Elasticity Income

Elasticity and income Total in Throughout curve Request Straight

A straight demand curve has a constant slope. Remember that slope is defined as
''axis y divided by x-axis'', where means ratio Among change price (axis y) and
change amount (axis x). the slope of this demand curve is constant because every $1
increase in price causes a decrease of 2 units in amount Request.

Although the slope of the straight-line demand curve is constant, its elasticity not
constant. The reason is that the slope is the ratio of the change in two variables.

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Elasticity Income from Request

Income elasticity of demand measures the change in the quantity demanded

as a consumer's income changes. This elasticity is calculated as the percentage
change in the number of requests divided by by percentage income changes.
Rumes :

Elasticity Income from request =

change percentage amount Request

change percentage income

Most items is a normal good: as income rises, the number of requests will also
increase. Due to the amount of demand and income moving in the same
direction, normal goods have elasticity positive income. Some goods, such as
bus transportation, are goods inferior have negative income elasticity.

Even among normal goods, the income elasticity varies in terms of

size. Basic needs, such as food and clothing tend to have a small income
elasticity because consumers, without regardless of how small the income is,
choose to buy some of these items. Luxury goods, such as caviar and
diamonds, tend to have a large income elasticity because consumers feel they
can live without these things when their income quite low.

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3. Pricing Policy by the Government

a. Policy Determination Price Retail Lowest (Floor Price)

Price base is level
minimum price
enforced
government.
This basic pricing
aims to protect
producer, because it
is felt the market
price of the product
generated is
considered too low so
that income
producers are
threatened. For
protect the producers
government can
intervene with set
price
minimum or Lowest Retail Price. This minimum price is higher than price
balance which apply in market and called Price Base ( Floor Price ).

Take note picture in on. Price balance only reach Rp 2,000. Price this
considered too low. So government set price Lowest Rp 3,000.
Thus, the income of producers is not too minimal. However, at the price
Rp 3,000 this it turns out arise something surplus, because Qs > Qd. To
existence surplus, maybe the government will buy it to be kept as stock or
for for sale to outside country. Only by way thereby offer no reduce.

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b. Policy Determination Price Retail Highest (Ceeling Price)
Determination
price maximum
is the highest
limit the selling
price should be
adhered to by the
manufacturer.
Pricing policy
maximum this aim
for protect
consumers, so that
consumers can
enjoy the price is
not too high. If the
price of an item
considered too high
so that no could
reached again by
Public, so
government

could set price maximum or normal called Price Retail Highest

( HET ) or ceiling price. Meaning HET is that something goods no can for
sale with price more tall than which has been established by the government.

If HET is set equal to or higher than the equilibrium price as determined

by supply and demand at market, then setting price this doesn't have much
effect, and is just to prevent the sellers raise the price more than the set
limit. But when the HET is more lower than the price balance, will arises
various question

Take note picture in on. Price balance Among supply and demand is Rp
3000. This price is considered too high. Then the government set HET as
much Rp 2,000, so that goods could bought by Public. But on price Rp
2,000 is Qd > Qs. The amount you want to buy is 30, while the amount
you want to sell on price that only 15. so there is deficiency. Deficiency
this could cause the black market because to get as many as 15 the buyers
ready pay up to Rp 3,500.

If amount 15 this for sale in market free, so will can reach price Rp
3,500. But the HET set by the government is only Rp. 2,000. This is what
cause market dark, goods for sale by dark with price in on HET which set
by the government. This method only benefits traders, while community
in need goods no got.

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 The question arises when the HET is set lower than the price balance
market is that on price HET that sum which want bought more greater
than the amount to be sold (Qd > Qs) until a shortage arises supply.

c. Policy Determination Price Combination

Combination offers is method policy offer determination haga where offer

will performed with how to combine Among two type goods.
For example, offering a comb with hair oil, a toothbrush with toothpaste,
bath soap with shampoo. Where the two items are laughed at in one kind.
So the price set is installed in one kind. With this way consumers will
need these goods because they feel that the goods the price is cheaper
because you pay one type of price for two kinds necessities.

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 CHAPTER 3
CLOSING
a. Conclusion
At this time, in Indonesia there are still many economic problems, which should
see
theories elasticity mechanism formation price which could reduce economy
problem which
there is.
b. Suggestion
By writing this paper, we apologize for the shortcomings and error which occur in writing, so we
will repair paper next in the future day. Then for scholars Muslims , should could
researching more carry on more opinions from Ibn Khaldun so that it can be developed in
accordance with development of the times, provisions opinion about Islamic economics ,
as well as another opinion about theory mass
economy now .
Expected to all component Public for always Becomes social control in various activity
economy , against the perpetrators economy that themselves so that they operate activity
in accordance with Islamic law

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 LIBRARY

Afif, M. (2017). Teori Permintaan dan Konsumsi Inter -Temporal Antara Islam Dan

Konvensional. Jurnal Ekonomi Syariah, 2(2), 230-242.

Elvira, R. (2015). Teori Permintaan (Komparasi Dalam Perspektif Ekonomi Konvensional

Dengan Ekonomi Islam). Jurnal Islamika, 15(1), 47 - 60.

Ir. Adimarwan A. Karim, S. M. (2017). Ekonomi Mikro Islami Edisi 5. Depok: PT Raja

Grafindo Persada.

Ahmad Syafii, M. H. (2020). Ekonomi Mikro. Medan: Yayasan Kita Menulis

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