Principles of Microeconomics – Chapter 3: Demand, Supply & Market Equilibrium

Vocabulary flashcards covering the key terms from Chapter 3—Demand, Supply, and Market Equilibrium.

Firm

An organization that transforms resources (inputs) into products (outputs); the primary producing unit in a market economy.

Entrepreneur

An individual who organizes, manages, and assumes the risks of a firm, turning new ideas or products into successful businesses.

Households

The consuming units in an economy; they both supply inputs to firms and purchase the goods and services firms produce.

Product (Output) Markets

Markets in which finished goods and services are exchanged between firms and households.

Input (Factor) Markets

Markets in which the resources used to produce goods and services—land, labor, and capital—are exchanged.

Labor Market

The input market in which households supply work for wages to firms that demand labor.

Capital Market

The input market in which households supply savings (or claims to future profits) to firms that demand funds to buy capital goods.

Land Market

The input market in which households supply land or other real property in exchange for rent.

Factors of Production

The inputs—land, labor, and capital—used in the production process.

Quantity Demanded

The number of units a household would buy during a given period if it could purchase all it wanted at the current market price.

Demand Schedule

A table showing the quantities of a product a household is willing to buy at different prices during a specific time period.

Demand Curve

A graph illustrating the quantities of a product a household would buy at various prices; it slopes downward.

Law of Demand

Ceteris paribus, as price rises the quantity demanded falls, and as price falls the quantity demanded rises.

Income

The flow of wages, salaries, profits, interest, rents, and other earnings to a household over a period of time.

Wealth (Net Worth)

The stock measure equal to what a household owns minus what it owes.

Normal Goods

Goods for which demand increases when household income rises and decreases when income falls.

Inferior Goods

Goods for which demand falls when household income rises and rises when income falls.

Substitutes

Goods that can replace one another; when the price of one increases, demand for the other increases.

Perfect Substitutes

Identical products that consumers regard as interchangeable on a one-to-one basis.

Complements (Complementary Goods)

Goods that are consumed together; a fall in the price of one increases demand for the other.

Shift of a Demand Curve

A change in the entire demand relationship caused by factors such as income, preferences, or prices of related goods.

Movement along a Demand Curve

A change in quantity demanded caused solely by a change in the good’s own price.

Market Demand

The sum of all quantities of a good or service demanded per period by all households in the market.

Profit

The difference between a firm’s revenues and its costs.

Quantity Supplied

The amount of a product a firm is willing and able to offer for sale at a particular price during a given time period.

Supply Schedule

A table showing how much of a product firms will sell at alternative prices.

Supply Curve

A graph illustrating how much of a product a firm will sell at various prices; it slopes upward.

Law of Supply

Ceteris paribus, an increase in price leads to an increase in quantity supplied, and a decrease in price leads to a decrease in quantity supplied.

Movement along a Supply Curve

A change in quantity supplied caused solely by a change in the good’s own price.

Shift of a Supply Curve

A change in the entire supply relationship resulting from changes in costs, technology, or prices of related goods.

Market Supply

The sum of all quantities supplied per period by all producers of a product.

Equilibrium (Market Equilibrium)

The condition where quantity supplied equals quantity demanded; there is no pressure for price to change.

Excess Demand (Shortage)

The condition in which quantity demanded exceeds quantity supplied at the current price, creating upward pressure on price.

Excess Supply (Surplus)

The condition in which quantity supplied exceeds quantity demanded at the current price, creating downward pressure on price.

Cost of Production

The expenses a firm incurs to produce a good, determined by input prices, technology, and input quantities.