[4] Introduction to Economics I: The Market Forces of Supply and Demand

Vocabulary flashcards covering core concepts of market demand, market supply, equilibrium, and elasticity from Lecture 4 of Introduction to Economics I.

Market

A group of buyers and sellers of a particular good or service, where the buyers determine demand and the sellers determine supply.

Competition (Hayek's definition)

A 'discovery process' and constant struggle through which firms try to achieve an advantage over others by learning and using a trial-and-error approach.

Price takers

Buyers and sellers in a market who have no real influence on the market price because there are so many participants.

Perfectly competitive market

A market model defined by two key conditions: (1) goods or services offered by firms are exactly the same, and (2) both buyers and sellers are price takers.

Reservation price

The maximum amount of money an individual buyer is willing to pay for a good or service in a market.

Individual demand curve

A downward-sloping curve illustrating the inverse relationship between the price of a good and the quantity an individual is willing and able to purchase.

Horizontal summation

The method of adding individual demand or supply curves horizontally at every price to derive total market demand or market supply.

Law of demand

The principle that, other things being equal, when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded rises.

Normal good

A good for which demand has a positive relationship with income, meaning demand increases as income rises.

Inferior good

A good for which demand has a negative relationship with income, meaning demand decreases as income rises.

Substitutes

Pairs of goods with a positive relationship, where an increase in the price of one good leads to an increase in the demand for the other.

Complements

Pairs of goods with a negative relationship, where an increase in the price of one good leads to a decrease in the demand for the other.

Shift in the demand curve

A movement of the entire demand curve to the right (increase) or to the left (decrease) caused by non-price factors such as income, prices of related goods, tastes, expectations, or the number of buyers.

Movement along the demand curve

A change in the quantity demanded that occurs purely in response to a change in the product's own price (such as a tax-induced price hike), without shifting the demand curve.

Individual supply curve

An upward-sloping curve showing the quantity of a good or service that an individual firm is willing and able to sell at any given price.

Law of supply

The principle that, other things being equal, when the price of a good rises, the quantity supplied rises, and when the price falls, the quantity supplied falls.

Factors shifting the supply curve

Underlying determinants including input prices, technology, expectations, and the number of sellers.

Market equilibrium

The point of intersection between the market supply curve and the market demand curve.

Equilibrium price (Market-clearing price)

The price at which the quantity of a good buyers are willing and able to buy exactly balances the quantity sellers are willing and able to sell.

Equilibrium quantity

The quantity supplied and demanded at the equilibrium price.

Surplus (Excess supply)

A condition occurring when the price is higher than the equilibrium price, resulting in quantity supplied exceeding quantity demanded.

Shortage (Excess demand)

A condition occurring when the price is lower than the equilibrium price, resulting in quantity demanded exceeding quantity supplied.

Law of supply and demand

The principle that the price of any good automatically adjusts to bring the quantity supplied and quantity demanded into balance.