Chap 4: The Market Forces of Supply and Demand

Market

A group of buyers and sellers of a particular good or service.

Competitive Market

A market where many buyers and sellers cannot influence the market price.

Perfect Competition

A situation where goods offered are identical, and no single buyer or seller can influence the market price.

Demand

The relationship between the price of a good and the quantity demanded by consumers.

Law of Demand

When the price of a good rises, the quantity demanded falls; when the price falls, the quantity demanded rises.

Demand Schedule

A table showing the relationship between the price of a good and the quantity demanded.

Demand Curve

A graph that shows the relationship between the price of a good and the quantity demanded, sloping downward.

Increase in Demand

When more of a good is demanded at every price, shifting the demand curve to the right.

Decrease in Demand

When less of a good is demanded at every price, shifting the demand curve to the left.

Normal Goods

Goods for which demand increases as income rises.

Inferior Goods

Goods for which demand falls as income rises.

Substitutes

Goods that can replace each other; if the price of one rises, the demand for its substitute increases.

Complements

Goods that are consumed together; if the price of one rises, the demand for its complement falls.

Law of Supply

When the price of a good rises, the quantity supplied rises; when the price falls, the quantity supplied decreases.

Supply Schedule

A table showing the relationship between the price of a good and the quantity supplied.

Supply Curve

A graph showing the relationship between the price of a good and the quantity supplied, sloping upward.

Increase in Supply

When more of a good is supplied at every price, shifting the supply curve to the right.

Decrease in Supply

When less of a good is supplied at every price, shifting the supply curve to the left.

Equilibrium

The point where quantity supplied equals quantity demanded.

Equilibrium Price

The price at which the quantity of the good demanded equals the quantity supplied.

Surplus

When the price is above the equilibrium price, leading to excess supply.

Shortage

When the price is below the equilibrium price, leading to excess demand.

Shifts in Demand

Changes in demand that affect equilibrium price and quantity when the demand curve shifts.

Shifts in Supply

Changes in supply that affect equilibrium price and quantity when the supply curve shifts.

Simultaneous Shifts

When both supply and demand curves shift, affecting equilibrium outcomes.

Efficiency

Markets allocate resources efficiently, producing goods by the lowest cost suppliers and sold to the highest value consumers.