Chapter 4: Demand, Supply, and Markets Flashcards

Vocabulary flashcards covering the key concepts of Demand, Supply, and Market Equilibrium from Chapter 4.

Demand

The amount of a product that buyers are willing and able to purchase at alternative prices, other things constant.

Demand Curve

A graph showing how quantity demanded changes as the price changes, implying that everything else affecting demand is assumed constant.

Law of Demand

A principle stating that the lower the price of a good, other things constant, the larger the quantity demanded of that good.

Substitution Effect

The impact of a price change on the quantity demanded that arises because consumers shift their purchases toward relatively cheaper goods when the price of a product increases.

Income Effect

The impact of a change in the price of a good on a consumer's real income and the subsequent effect on the quantity demanded.

Quantity Demanded

The amount of a good consumers are willing and able to buy at a specific price; movements along the demand curve reflect changes in this value.

Consumer Wants

Desires that, unlike demand, do not necessarily take into account the ability to pay.

Normal Good

A good for which demand increases as consumer income increases, shifting the demand curve to the right.

Inferior Good

A good for which demand decreases as consumer income increases, such as used clothing or bus rides.

Substitutes

Goods related in such a way that an increase in the price of one leads to an increase in the demand for the other (e.g., coffee and tea).

Complements

Goods related in such a way that an increase in the price of one leads to a decrease in the demand for the other (e.g., film and film processing).

Supply

The amount of a good that producers are willing and able to sell at each possible price, other things constant.

Law of Supply

A principle stating that there is a direct (positive) relationship between price and quantity supplied, where higher prices lead to greater quantities offered for sale.

Quantity Supplied

The specific amount producers are willing and able to sell at a particular price, represented by a point on the supply curve.

Market

An impersonal mechanism that coordinates the independent decisions of buyers and sellers, reducing transaction costs.

Transaction Costs

The time and information costs spent searching for, negotiating, and completing the exchange of goods and services.

Surplus

A market condition occurring when the quantity supplied exceeds the quantity demanded at a price above the equilibrium level.

Shortage

A market condition occurring when the quantity demanded exceeds the quantity supplied at a price below the equilibrium level.

Market Equilibrium

The point where the independent plans of buyers and sellers match exactly, clearing the market with neither a surplus nor a shortage.

Disequilibrium

A situation in which the quantity demanded does not equal the quantity supplied at the prevailing price.

Price Floor

A minimum legal price set by the government, such as the minimum wage; it results in a surplus if set above the equilibrium price.

Price Ceiling

A maximum legal price set by the government, such as rent control; it results in a shortage if set below the equilibrium price.