Microeconomics Chapter 3: Where Prices Come From: The Interaction of Demand and Supply

Flashcards covering key vocabulary and concepts from Microeconomics Chapter 3, focusing on demand, supply, and market equilibrium.

Perfectly competitive market

A market with (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

Market demand

The demand by all the consumers of a given good or service.

Demand schedule

A table that shows the relationship between the price of a product and the quantity of the product demanded.

Demand curve

A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Quantity demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price.

Law of demand

A rule that states that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

Substitution effect

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in the good’s price on a consumer’s purchasing power, holding all other factors constant.

Ceteris paribus ('all else equal') condition

The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.

Normal good

A good for which the demand increases as income rises and decreases as income falls.

Inferior good

A good for which the demand increases as income falls and decreases as income rises.

Substitutes

Goods and services that can be used for the same purpose.

Complements

Goods and services that are used together.

Demographics

The characteristics of a population with respect to age, race, and gender.

Natural disaster (in an economic context)

A hurricane, flood, or similar act of nature that causes damage to stores, factories, or office buildings.

Pandemic (in an economic context)

A situation in which a disease becomes sufficiently widespread as to significantly affect economic activity.

Change in quantity demanded

A movement along the demand curve caused by a change in the price of the product being examined.

Change in demand

A shift in the entire demand curve caused by something other than a change in the product's price.

Market supply

The decisions of firms about how much of a product to provide at various prices.

Supply schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied.

Supply curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price.

Law of supply

A rule that states that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

Technological change

A change in a firm's ability to produce a given level of output with a given quantity of inputs, either positive (more efficient) or negative.

Substitutes in production

Alternative products that firms can produce and sell.

Complements in production

Products that are necessarily produced together.

Change in quantity supplied

A movement along the supply curve caused by a change in the price of the product being examined.

Change in supply

A shift in the entire supply curve caused by something other than a change in the product's price.

Market equilibrium

A situation in which quantity demanded equals quantity supplied.

Competitive market equilibrium

A market equilibrium in a perfectly competitive market.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded.

Shortage

A situation in which the quantity demanded is greater than the quantity supplied.