Ch.4 The Market Forces of Supply and Demand

what do the terms supply and demand refer to?

the behavior of people as they interact with one another in competitive markets

market

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

competitive market

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

buyers as a group

determine the demand for the product

sellers as a group

determine the supply of the product

two (2) characteristics of a perfectly competitive market

goods offered for sale are all exactly the same

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

when a market only has one seller and that seller sets the price

quantity demanded

the amount of a 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

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

market demand curve

the sum of all the individual demands for a particular good or service

the sum of the individual demand curves ____ to obtain the market demand curve

horizontally

increase in demand (for either supply or demand)

any change that increases the quantity supplied or demanded at every price

shifts the demand curve to the right

decrease in demand (for either supply or demand)

any change that decreases the quantity supplied or demanded at every price

shifts the demand curve to the left

normal good

a good for which, other things being equal, an increase in income leads to an increase in demand

inferior good

a good for which, other things being equal, an increase in income leads to a decrease in demand

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

three (3) determinants of demand

tastes

expectations

number of buyers

quantity supplied

the amount of a good that sellers are willing and 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

four (4) variables that shift the supply curve

input prices

technology

expectations

number of sellers

equilibrium

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

equilibrium price

aka market-clearing price

the price that balances quantity supplied and quantity demanded

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

market equilibrium

at the equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell

surplus

aka excess supply

a situation in which quantity supplied is greater than quantity demanded

shortage

aka excess demand

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 (3) steps to analyze how some events market equilibrium

1. decide whether the events shift the supply curve

2. decide whether the curve shifts to the right or left

3. use the supply-and-demand diagram to compare initial equilibrium with the new one

what will the supply-and-demand diagram show?

how the supply curve shift affects the equilibrium price and quantity

___ refers to the position of the supply curve while ___ refers to the amount suppliers wish to sell

supply

quantity supplied

price system

the baton that the invisible hand uses to conduct the economic orchestra