ECON 201 1st Edition Lecture 4 Outline of Last Lecture I Introduction to PANSTAAFL a Production possibility curve II Production Possibility Curve for society a Comparative advantage III Efficiency a Production Efficiency Outline of Current Lecture I Supply and Demand II Demand III The Law of Demand IV Demand Curve a Why the demand curve slope is negative V VI VII The demand table Shifts in Demand Shifts in Demand Versus movements along a demand curve a Quantity movement and shift VIII Shift factors Current Lecture I II Supply and Demand Chapter 4 a Prices coordinate individual s desires in free market economies through supply and demand b Forces of supply and demand determine prices and quantity Demand a Demand means the willingness and capacity to pay These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute III IV V VI VII b Desires are unlimited I may want to have all the best things in the world Is that a demand No c Desires do not create a demand d Example I want to own a Ferrari costs 650 000 e If one is able to pay then it creates a demand The Law of Demand a There is an inverse relationship between price and quantity demanded i Quantity demanded rises as price falls other things constant ii Quantity demanded falls as price rises other things constant b Example If one ice cream cone cost 3 you are likely to buy 2 cones per week but if prices go up to 5 a cone you will probably only buy 1 cone per week Demand Curve a The graphic representation of the law of demand b Two variables on x axis quantity demanded per unit of time and y axis price per unit c Why does the demand curve slop downward i As the price goes down the quantity demanded goes up ii The demand curve is downward sloping for the following reasons 1 At lower prices existing demanded buy more and new demanders enter the market 2 Substitution and income effect 3 Example If prices of ice cream goes down you may substitute frozen yogurt with it The demand table a The demand table assumes all of the following i Quantity demanded has a specific time dimension to it ii All the products involved are identical quality iii Ceteris Paribus means Everything else is held constant b Other things constant i These factors may include changing tastes prices of other goods income even the weather Shifts in Demand Versus movements along a demand curve a Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices others things constant it is the entire demand curve b Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price it is a point on the demand curve c A movement along the demand curve is the graphical representations of the effect of a change in the price of the quantity demanded d A shift in demand is a graphical representation of the effect of anything other than price on demand Shift factors of demands a Shift factor of demand are factors that cause shift in the demand curve i Society s income ii iii iv v vi 1 An increase in income will increase demand for normal goods demand curve shifts to the right 2 Example when income rises one is likely to buy more DVDs 3 Increase in income will decrease demand for inferior goods 4 Example When income rises one is less likely to ride a bus You can afford to buy a car rent a parking space or take a cab The price of other goods 1 When the price of substitute good fall demand falls for the good whose price has not changed 2 Example Movie tickets and DVD rentals 3 When the price of a complement good falls demand rises for the good whose price has not changed 4 Example If price increases on cars the price of gas goes down because you will not be using it as frequently Tastes 1 A change in taste will change demand with no change in price Expectations 1 If you expect a fall in the prices of jeans in the future you may put off purchases today so the demand goes to the right Number of buyers 1 If a new consumer enters the market some additional quantity is demanded at each price Taxes on subsidies to consumers 1 Taxes levied on consumers increase the cost