Demand, Supply, and Market Equilibrium

Flashcards covering key vocabulary related to Chapter 3: Demand, Supply, and Market Equilibrium, including definitions of market components, laws, determinants, equilibrium concepts, and government price controls.

Markets

An interaction between buyers and sellers, which can be local, national, or international, where price is discovered.

Demand

A schedule or curve representing the amount consumers are willing and able to purchase at a given price, assuming all other things are equal.

Individual Demand

The demand of a single consumer for a product.

Market Demand

The total demand of all consumers for a product in a market.

Law of Demand

States that, other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls; indicating an inverse relationship between price and quantity demanded.

Determinants of Demand

Factors other than price that cause the entire demand curve to shift, including consumer tastes, number of buyers, income, prices of related goods, and consumer expectations.

Normal Goods

Goods for which demand increases as consumer income increases.

Inferior Goods

Goods for which demand decreases as consumer income increases.

Complements

Goods that are consumed together; an increase in the price of one will decrease the demand for the other.

Substitutes

Goods that can be used in place of one another; an increase in the price of one will increase the demand for the other.

Change in Demand

A shift of the entire demand curve due to a change in one or more determinants of demand.

Change in Quantity Demanded

A movement from one point to another along a fixed demand curve, caused solely by a change in the price of the good itself.

Supply

A schedule or curve representing the amount producers are willing and able to sell at a given price.

Individual Supply

The supply of a single producer for a product.

Market Supply

The total supply of all producers for a product in a market.

Law of Supply

States that, other things equal, as price rises, the quantity supplied rises, and as price falls, the quantity supplied falls, because price acts as an incentive to producers and costs tend to rise with increased production.

Determinants of Supply

Factors other than price that cause the entire supply curve to shift, including resource prices, technology, number of sellers, taxes and subsidies, prices of other goods, and producer expectations.

Change in Supply

A shift of the entire supply curve due to a change in one or more determinants of supply.

Change in Quantity Supplied

A movement from one point to another along a fixed supply curve, caused solely by a change in the price of the good itself.

Market Equilibrium

The point where the demand curve and supply curve intersect, establishing the equilibrium price and quantity where quantity demanded equals quantity supplied.

Surplus

Occurs when quantity supplied exceeds quantity demanded at a given price, usually when the price is above the equilibrium price.

Shortage

Occurs when quantity demanded exceeds quantity supplied at a given price, usually when the price is below the equilibrium price.

Rationing Function of Prices

The ability of competitive forces of demand and supply to establish a price that clears the market, making buying and selling decisions consistent.

Efficient Allocation

A state where resources are distributed to maximize overall societal well-being, achieved at market equilibrium through productive and allocative efficiency.

Productive Efficiency

Producing goods and services in the least costly way possible.

Allocative Efficiency

Producing the particular mix of goods and services most desired by society.

Increase in Demand (equilibrium effect)

Causes equilibrium price and equilibrium quantity to both increase.

Decrease in Demand (equilibrium effect)

Causes equilibrium price and equilibrium quantity to both decrease.

Increase in Supply (equilibrium effect)

Causes equilibrium price to decrease and equilibrium quantity to increase.

Decrease in Supply (equilibrium effect)

Causes equilibrium price to increase and equilibrium quantity to decrease.

Complex Cases (equilibrium)

Situations where both supply and demand change simultaneously, making the ultimate impact on equilibrium price and quantity less certain without knowing the relative magnitudes of the shifts.

Price Ceilings

A maximum legal price that can be charged for a good or service, set below the equilibrium price, often leading to shortages and the potential emergence of black markets (e.g., rent control).

Price Floors

A minimum legal price that can be charged for a good or service, set above the equilibrium price, often leading to chronic surpluses (e.g., minimum-wage laws).