PAM 2000 Lecture 1 Agenda: Marginal analysis: non-market examples Demand Curves Demand Shifters Supply Curves Supply Shifters Market Equilibrium Reading for PAM 2000 Perloff, Ch. 1 and 2 M,B,N Ch. 1-20. Demand Curves Let s look at a specific economic relationship: The Demand Curve Say for cars at a dealership, we observe data: PRICE / # CARS SOLD per week $20,000 5 $16,000 10 $12,000 15 10,000 20 Demand Curves (con t) Graph of data shows a demand curve or demand schedule for cars at this dealership: Which is the dependent and which is the independent variable? Dependent versus independent variables are traditionally reversed for demand graph! Demand Curves (con t) Def n. of the demand curve: A demand curve shows the quantity of a good buyers are willing to buy at various prices, <a href="/keyword/ceteris-paribus/" >ceteris paribus</a> , such as the income of buyers, price of substitutes, etc. Reflects the Law of demand : As the price of any good rises, the quantity purchased of the good falls, <a href="/keyword/ceteris-paribus/" >ceteris paribus</a> . Demand Curves (con t) <a href="/keyword/market-demand-curve/" >market demand curve</a> s are simply all the individual demand curve summed up We are usually interested in <a href="/keyword/market-demand-curve/" >market demand curve</a> s. But it is still driven by individual Demand Shifters Now say income of car buyers rises (an exogenous increase): Changes from average income of $40,000, to average income of $80,000 Q: How will the quantity demanded change?? Demand Shifters (con t) New data: PRICE / # CARS SOLD @ $40K / #CARS SOLD @ 80k $20,000 $16,000 $12,000 10,000 5 10 15 20 8 13 18 23 Demand Shifters (con t) the demand schedule for cars will shift to the right (or outward) Something besides price changed. If something affecting demand besides prices changes, then the curve shifts (left or right) Demand Shifters (con t) Difference between a movement along the curve and a shift in the curve Things that shift the demand curve, or demand shifters include: Income of demanders Price of substitutes Price of complements Expectations about the future, etc. Demand Shifters (con t) Income: Recall that an increase in income will shift the individual demand curve to the right It will also shift the <a href="/keyword/market-demand-curve/" >market demand curve</a> to the right Inversely if income decreases This is true only for what type of good? Demand Shifters (con t) PRICE OF SUBSTITUTES Q: What is a substitute good? EX: Oranges and grapefruits; cars and buses; pencils and pens, beer and wine BOB S Demand for Oranges: Price/ quantity purchased $2.40lb 6 3.00 5 3.50 4 4.00 3 4.50 2 Demand Shifters (con t) Now say the Price of Grapefruits Increased from $2.00/lb to $3.00/lb Q: What will happen to Bob s demand for oranges at each price? A rise in the price of a substitute for good X will cause an increase in the Demand Shifters (con t) 3. Price of Complementary goods Q: What are complementary goods? Examples? Demand Shifters (con t) Q: What happens to Bob s demand for oranges if the price of the complimentary good rises? Demand Shifters (con t) If the price of a good that is complimentary to good X rises, then the demand for good X falls, and conversely Demand Shifters (con t) Expectations about the Future: EX: Say people expect oranges to be very scarce in the future (expect a harsh Florida winter). They expect prices to be high in the future Demand Shifters (con t) Q: What happens to the demand for oranges now? Supply Curves Definition: Supply is the quantity of a good a seller is willing to sell at various prices, <a href="/keyword/ceteris-paribus/" >ceteris paribus</a> . (note that it is willingness to sell) Quantity Supplied is the quantity of a good suppliers are willing to sell at each price, <a href="/keyword/ceteris-paribus/" >ceteris paribus</a> Supply Curves Note: There is no law of supply like there is a law of demand. The supply curve can take on various shapes. FRANK S Supply of Oranges: Price/ quantity purchased $2.40lb 2 3.00 4 3.50 6 4.00 8 4.50 10 Supply Curves As with demand, in order to get the market supply, we simply add up all the quantities produced by each firm to get the market supply curve The market supply curve reflects the behavior of individual firms Supply Shifters Supply Shifters or determinants of supply Say for oranges: Price of Resources (or price of inputs): One input into the production of oranges is land. Say the price of land in Florida increases Supply Shifters (con t) Producers must obtain a higher price at each previous quantity to be compensated for the higher cost; or they will produce (supply) less at each price. The supply curve shifts to the left if price of resources increases. Q: Is this a direct or inverse relationship? Supply Shifters (con t) Can say that the supply curve shifts up to compensate for the higher cost of production. State of Technology Consider an improvement in the technology of growing oranges. Supply Shifters (con t) EX: Better seed varieties. Oranges grow faster How will this affect supply curve?