CH 4: the market forces of supply & demand

Supply and demand

refer to the behavior of people as they interact in competitive markets

Market

a group of buyers and sellers of a G or S

Competitive market

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

Perfectly competitive

goods offered for sale are all exactly the same and the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price

Price takers

at the market price, buyers can buy all they want and sellers can sell all they want

Monopoly

some markets only have one seller, and the seller sets the price

Quantity demanded

the amount 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 quantity demanded at each price, holding all other factors constant

Demand curve

a graph of the relationship between the price of a good and the quantity demanded (slopes downward)

Market demand

the sum of all the individual demands for a particular G or S

Increase in demand

a change that increases the quantity demanded at every price, shifts the demand curve to the right

Decrease in demand

a change that reduces the quantity demanded at every price shifts the demand curve left

Normal good

an increase in income leads to an increase in demand

Inferior good

an increase in income leads to a decrease in demand

Substitutes

goods used in place of each other

Complements

goods that are used together

Quantity supplied

amount 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 and quantity supplied, holding all other factors constant

Supply curve

a graph of the relationship between the price of a good and the quantity supplied(slopes upward)

Increase in supply

a change that raises the quantity supplied at every price shifts the curve right

Decrease in supply

a change that reduces the quantity supplied at every price shifts left

Equilibrium

point which the supply and demand curves intersect

Equilibrium price (Market-clearing price)

the price that balances the quantity supplied and the quantity demanded

Surplus

the quantity supplied is greater than the quantity demanded

Shortage

the quantity demanded is greater than the quantity supplied

Law of supply and demand

the price of any good adjusts to bring the quantity supplied and the quantity demanded into balance

Equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price