Macro Supply and Demand Quiz

Market

An institution that brings buyers and sellers together so that they can interact and transact with each other.

Price System

A name given to the market economy because prices provide considerable information to both buyers and sellers.

Demand

The maximum amount of a product that buyers are willing and able to purchase over some time at various prices, ceteris paribus.

Demand Curve

The demand curve shows how much of a good consumers are willing to buy at each price, sloping downward: As price falls, quantity demanded rises.

Law of Demand

As price increases, quantity demanded decreases because buyers often have limited budgets, find substitutes, or reconsider if the product is 'worth it.'

Determinants of Demand

Nonprice factors that shift the demand curve, including tastes and preferences, income, prices of related goods, number of buyers, and expectations about future prices.

Normal Goods

Goods for which demand increases as incomes increase.

Inferior Goods

Goods for which demand decreases as incomes increase.

Price of Substitutes

If the price of Good A increases, the demand for Good B increases.

Price of Complements

If the price of a good increases, the demand for its complement decreases.

Expectations

A change in consumers' expectations about future prices, a good's availability, or their own income can influence demand.

Change in Demand

A change in demand occurs when one or more of the determinants of demand change, shifting the entire demand curve.

Supply

The maximum amount of a product that sellers are willing and able to offer for sale over some time at various prices, ceteris paribus.

Law of Supply

Price and quantity supplied are positively related; as prices rise, quantity supplied increases.

Higher prices

Greater potential profits and more incentive to produce.

Ceteris paribus

Holding all else constant.

Determinants of Supply

Nonprice factors that shift the supply curve left or right.

Production technology

Better methods that increase supply.

Costs of resources

Cheaper inputs that boost supply.

Supply increase due to resource costs decrease

If resource costs decrease, supply increases (curve shifts right).

Supply decrease due to resource costs increase

If resource costs increase, supply decreases (curve shifts left).

Prices of related commodities

Changes in the price of one good can affect the supply of another when two goods are substitutes in production.

Number of sellers

Anticipated future prices influence supply today; more sellers shift the supply curve right.

Taxes and subsidies

Taxes decrease supply; subsidies increase supply.

Market Equilibrium

Occurs when quantity supplied equals quantity demanded (Qs = Qd).

Equilibrium price

The price at which Qs equals Qd.

Equilibrium quantity

The output at which Qs equals Qd.

Surplus

Occurs when quantity supplied exceeds quantity demanded.

Shortage

Occurs when quantity demanded exceeds quantity supplied.

Price Adjustment in Surplus

Falls to restore balance.

Price Adjustment in Shortage

Rises to restore balance.

Increase in Demand

Shifts the demand curve to the right, resulting in higher equilibrium price and quantity.

Decrease in Demand

Shifts the demand curve to the left, resulting in lower equilibrium price and quantity.

Increase in Supply

Shifts the supply curve to the right, resulting in lower equilibrium price and higher equilibrium quantity.

Decrease in Supply

Shifts the supply curve to the left, resulting in higher equilibrium price and lower equilibrium quantity.

Alfred Marshall

Pioneered modern supply and demand analysis and introduced price elasticity of demand.