Principles of Microeconomics - Chapter 4

Supply and Demand

are the forces that make market economies work. They determine the quantity of each good produced and the price at which it is sold

Market

is a group of buyers and sellers of a particular good or service

Competitive Market

a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price

Perfectly Competitive

. To reach this highest form of competition, a market must have two characteristics:

(1) The goods offered for sale are all exactly the same

(2) The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price

Price Takers

buyers and sellers in perfectly competitive markets must accept the price the market determines

Monopoly

Only one seller of some markets, and this seller sets the price

Quantity Demanded

the amount of the good that buyers are willing and able to purchase

Law of Demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

Demand Schedule

a table that shows the relationship between the price of a good and the quantity demanded

Demand Curve

The line relating price and quantity demanded

slopes downward because, other things being equal, a lower price means a greater quantity demanded

Increase in demand

a rightward shift of the demand curve

decrease in demand

a leftward shift of the demand curve

Normal Good

if the demand for a good falls when income falls

Inferior Good

if the demand for a good rises when income falls

Substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

Complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

Quantity Supplied

the amount of any good or service that sellers are willing an able to sell

Law of Supply

the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises

Supply Schedule

a table that shows the relationship between the price of a good and the quantity supplied

Supply Curve

A graph of the relationship between the price of a good and the quantity supplied

Increase in Supply

a rightward shift of the supply curve

Decrease in Supply

a leftward shift of the supply curve

Equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

Equilibrium Price

The price that balances quantity supplied and quantity demanded

Equilibrium Quantity

the quantity supplied and the quantity demanded at the equilibrium price

Market-Clearing price

another name for equilibrium price

Surplus

a situation in which quantity supplied is greater than quantity demanded

Shortage

a situation in which quantity demanded is greater than quantity supplied

Law of Supply and Demand

the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

Three Steps for Analyzing Changes in Equilibrium

1. Decide whether the event shifts the supply or demand curve (or perhaps both)

2. Decide in which direction the curve shifts

3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity

Supply

refers to the position of the supply curve

Quantity Supplied

refers to the amount suppliers wish to sell

Change in Supply

a shift in the supply curve

Change in Demand

a shift in the demand curve

Change in Quantity Supplied

a movement along a fixed supply curve

Change in Quantity Demanded

a movement along a fixed demand curve