ECONOMIC SUPPLY AND DEMAND

CASE STUDY

ADINDA AMALIA (1306370253)

DYASRENNY TIARA PUTRI (1306369951)
RENDY SAPUTRA (1306402053)
SONNY (1306446761)

TECHNOLOGY POLICY SYSTEM DINAMIC

CLASS OF 2016

1. What should inventory be in order for the system to be in equilibrium? (Hint: look at the supply
price schedule and the demand price schedule).
Number of inventory needed in order to make system to be in equilibrium is 57 quantities of
clothing per week with price is $15.
Describe your reasoning:
In equilibrium theory, all stocks must remain constant. The price will remain constant when the
inventory ratio is one. Therefore, in equilibrium, the inventory is equal to the desired inventory
because the formula of inventory ratio is Inventory/ desired inventory. By looking at the supply and
demand curves that contained in the graphical functions of Demand Price Schedule and Supply Price
Schedule we can see that the equilibrium price is $15 when demand and production both equal 57
articles of clothing per week. Since the given desired inventory coverage is 4 weeks in the case, the
equilibrium inventory is 228 articles of clothing ( gained from 57 articles of clothing per week * 4
weeks).

2. Assume that the system is in equilibrium. Price and inventory remain the same until the tenth
week, at which time there is a permanent increase in demand of 10 units. (At each price, the
consumer demand is 10 articles per week higher.) What are the new equilibrium values for price
and inventory?
The new equilibrium inventory is then 62*4 or 248 articles of clothing.
Describe your reasoning:
Increasing demand of 10 articles of clothing per week means that the demand curve in the demand
price schedule is shifted up by 10. An easy way to figure out the new equilibrium price is to plot the
supply curve and the new demand curve on the same graph and find the intersection. Doing this
shows that the new equilibrium price will be about $17 with production and demand slightly less
than 62 articles per week. The new equilibrium inventory is then 62*4 or 248 articles of clothing.

3.

Draw below what you think will happen to inventory in response to an increase in demand.
The increment of demand will causes the desired inventory going up. In the other hand, it creates
the decrement of inventory because the shipment is bigger than supply. This event causes the
inventory ratio going down and as the result the price is going up. The increment of price causes
the demand is going down and supply is trying to catch up with desired inventory. Then, price will
continuous to rise up until the inventory exceeds its equilibrium value. It makes the inventory ratio
becomes positive and price is starting down. Eventually, the price falls below the equilibrium price
and causes the inventory to begin decreasing. The full graph can be seen below.

shirt

Inventory

270

240

210
05

06

Non-commercial use only!

Figure 1. Step in demand

4. If we change desired inventory coverage to 6 weeks, how would the system react to the same
increase in demand? Draw the expected behaviour
From the graph we can see that if the coverage is increased to 6 weeks, the wave line increase
smoothly meaning that the reaction to increase in demand is smaller and stabilized more quickly. It
can be good because the inventory remains stable due to the fluctuation of demand. But the
drawback is, to keep a big inventory coverage can be costly.

400

300

De m and (shirt/wk )
Supply (shirt/wk )
200

Inve ntory (shirt)

100

05

06

Figure 2. Inventory Graph for Desired inventory coverage 6 Weeks

5. Now, draw on the same graph what you expect the behavior of inventory will be if desired
inventory coverage is equal to 2 weeks and there is an increase in demand
The desired inventory coverage affects the size of the desired inventory. The response of the system
to an increase in demand was very different for the three values of desired inventory coverage.
When the desired inventory coverage was 2 weeks, the inventory seemed to give more sustained
oscillation. As the coverage was increased to 4 and 6 weeks, the reaction to an increase in demand
was smaller and stabilized more quickly. This behavior shows that there is a tradeoff when

considering the size of inventory coverage. When the desired inventory coverage is high, inventory
remains fairly stable and is not greatly affected by changes in demand. Unfortunately, maintaining a
large inventory can be costly for the firm. Lower values for desired inventory coverage are less costly
to maintain, but react quite drastic to changes in demand

Figure 3. Inventory Graph for Desired inventory coverage 2 Weeks

6. Currently, the price change delay is 15 weeks. Assuming everything else remains unchanged
(system in equilibrium), would price or inventory change over time if the delay is suddenly
shortened?
The price change delay does not affect the equilibrium state of the model. This delay only comes
into effect when the price is changing. Any change in the price change delay will not affect the
model if it is already in equilibrium.
7.

Would you expect the system to reach equilibrium more quickly when the price change delay is
equal to 30 weeks or 15 weeks?
The price change delay affects how long the system adjusts themselves to reach the equilibrium. If
the price change delay is short (5 weeks), the equilibrium will be reached in short time. As the price
change delay increase to 15 or 30 weeks, equilibrium will takes longer to reach. Below are the
graphs to illustrate how the price change delay influence the time to reach equilibrium.

shirt/wk
66

64

De m and

62

Supply

60

58
05

06

Non-commercial use only!

Figure 4 Supply-Demand Graph for Price Change Delay 5 Weeks

shirt/wk
66

64

De m and

62

Supply

60

58
05

06

Non-commercial use only!

Figure 5 Supply-Demand Graph for Price Change Delay 15 Weeks

shirt/wk
66

64

De m and

62

Supply

60

58
05

06

Non-commercial use only!

Figure 6 Supply-Demand Graph for Price Change Delay 30 Weeks

8.

If the price change delay is changed to 5 weeks, how would the system react to an increase in
demand? Draw the expected behaviour of price
If the price change delay is changed to 5 weeks, as stated before, the price change delay affects
how long the system adjusts themselves to reach the equilibrium. the osciliation is the shortest
compared to the 15week and 30 week, the increase of demand is faster but takes shorter time to
achieve the equilibrium.
shirt/wk
66

64

De m and

62

Supply

60

58
05

06

Non-commercial use only!

Figure 7 Supply-Demand Graph for Price Change Delay 5 Weeks

9.

Now, draw on the same graph what you expect the behavior of price to be if price change delay
is changed to 30 weeks and there is an increase in demand.
The price graph when price change delay is changed to 30 weeks will make the oscillation became
larger and shorter. In equilibrium state, the price change delay affects in how it approaches the

new equilibrium. When price change delay increases, the changes in the price graph are more
gradual, the overshoot smaller, and the equilibrium takes longer to reach.

Figure 8 Price Graph for price change delay 30 Weeks