Unit 2: Supply, demand, and market equilibrium

Law of Demand

Establishes an inverse relationship between the price of a good and the quantity demanded, holding all other factors constant.

Change in Quantity Demanded

A movement along an existing demand curve caused solely by a change in price.

Change in Demand

A shift of the entire demand curve due to changes in external factors such as income or preferences.

TONIE

A mnemonic representing determinants of demand: Tastes, Other goods, Number of buyers, Income, Expectations.

Substitutes

Goods that can be used in place of one another; if the price of one substitute increases, the demand for the other increases.

Complements

Goods that are consumed together; if the price of one complement increases, the demand for the other decreases.

Normal Goods

Products for which demand increases as consumer income rises.

Inferior Goods

Products for which demand decreases as consumer income rises.

Market Demand

The horizontal summation of all individual demand curves in a market.

Equilibrium Price

The price at which the quantity demanded equals the quantity supplied.

Surplus

Occurs when the market price is above equilibrium, leading to excess supply.

Shortage

Occurs when the market price is below equilibrium, leading to excess demand.