Markets and the Forces of Supply and Demand - Chapter 4 (Mankiw, 10th Edition)

A set of question-and-answer flashcards covering the key concepts of supply and demand, determinants, shifts vs movements, equilibrium, and market dynamics from the notes.

What defines a market?

A group of buyers and sellers of a particular good or service; the buyers determine the demand and the sellers determine the supply.

What characterizes a competitive market?

Many buyers and many sellers, each has a negligible impact on the market price.

What is a perfectly competitive market?

Goods are identical; price takers; many buyers and sellers; at the market price, buyers can buy all they want and sellers can sell all they want.

Define quantity demanded.

The amount of a good that buyers are willing and able to purchase.

State the law of demand.

Holding other things equal, the quantity demanded falls when the price rises and rises when the price falls.

What is a demand schedule?

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

What is a demand curve?

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

What is market demand?

The sum of all individual demands for a good or service; the market demand curve is found by horizontally summing individual demand curves.

What is a movement along the demand curve?

A change in quantity demanded resulting from a change in the good’s price, holding non-price determinants constant.

What is a shift in the demand curve?

A change in demand caused by non-price determinants such as income, prices of related goods, tastes, expectations, or the number of buyers.

What are the non-price determinants of demand listed in the notes?

Number of buyers, income, prices of related goods, tastes, and expectations.

What is a normal good?

A good for which an increase in income increases demand, shifting the demand curve to the right.

What is an inferior good?

A good for which an increase in income decreases demand, shifting the demand curve to the left.

What is a substitute good?

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

What is a complementary good?

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

How do tastes affect demand?

A change in tastes toward a good increases demand and shifts the demand curve to the right.

What is the role of expectations in demand?

If people expect higher future income or prices, current demand tends to rise.

What is the difference between shift and movement along a curve?

Shift is a change in demand due to non-price determinants; movement along is a change in price causing a change in quantity demanded.

How does income affect demand for normal vs. inferior goods?

Normal goods: income up → demand up (shift right). Inferior goods: income up → demand down (shift left).

What are the determinants of demand?

Number of buyers, income, prices of related goods (substitutes/complements), tastes, and expectations.

Define market supply.

The sum of the supplies of all sellers of a good or service; market supply curve is the horizontal sum of individual supply curves.

What is the law of supply?

The quantity supplied rises when the price rises, and falls when the price falls, other things equal.

What is a supply schedule?

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

What is a supply curve?

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

What is market supply?

The sum of the supplies of all sellers of a good or service; the market supply curve is the horizontal sum of individual supply curves.

What are the determinants of supply listed in the notes?

Input prices, technology, number of sellers, and expectations about the future.

What happens when input prices fall?

Production becomes cheaper; the supply curve shifts to the right and quantity supplied increases at each price.

How does technology affect supply?

Cost-saving technology reduces production costs and shifts the supply curve to the right.

What happens when the number of sellers increases?

Increases the quantity supplied at each price; the supply curve shifts to the right.

What effect do future price expectations have on supply?

If sellers expect higher prices in the future, they may restrict current supply, shifting the supply curve left.

What is the difference between a shift in supply and a movement along the supply curve?

Shift is caused by non-price determinants; movement along is caused by a price change.

What is equilibrium in a market?

The price at which quantity supplied equals quantity demanded; the market clears with no inherent pressure to change.

What is a surplus (excess supply)?

When quantity supplied exceeds quantity demanded; price tends to fall to restore equilibrium.

What is a shortage (excess demand)?

When quantity demanded exceeds quantity supplied; price tends to rise to restore equilibrium.

What are the three steps to analyze changes in equilibrium?

1) Decide whether the event shifts the supply curve, the demand curve, or both; 2) Decide the direction of the shifts; 3) Compare the new equilibrium with the initial one.

What is the role of prices in allocating resources?

Prices act as signals that guide economic decisions and allocate scarce resources; they balance supply and demand.

How do you determine the final equilibrium after a shift?

Use a supply-and-demand diagram to compare the initial and new equilibrium prices and quantities.

How do prices allocate scarce resources in market economies?

Prices adjust to balance supply and demand, guiding consumption and production decisions toward equilibrium.