Macroeconomics: Supply & Demand

Economics (Textbook Definition)

The study of how humans make decisions in the face of scarcity.

Scarcity

When human wants for goods, services, and resources exceed what is available.

Microeconomics

The branch of economics that focuses on individual agents like households, workers, and businesses.

Macroeconomics

The branch of economics that focuses on broad issues like growth, unemployment, inflation, and trade balance.

Demand

The amount of some good or service consumers are willing and able to purchase at each price.

Law of Demand

The inverse relationship between prices and quantity demanded, keeping all other variables constant.

Supply

The amount of some good or service a producer is willing to supply at each price.

Law of Supply

A higher price leads to a higher quantity supplied, assuming all other variables are held constant.

Equilibrium

The combination of price and quantity where quantity demanded equals quantity supplied.

Ceteris paribus

Latin phrase meaning "other things being equal," used as an assumption for economic curves.

Quantity Demanded

The total number of units of a good or service consumers are willing to purchase at a given price.

Demand Schedule

A table that shows a range of prices for a certain good or service and the quantity demanded at each price.

Demand Curve

A graphic representation of the relationship between price and quantity demanded, with quantity on the horizontal axis and price on the vertical axis.

Quantity Supplied

The total number of units of a good or service producers are willing to sell at a given price.

Supply Schedule

A table that shows the quantity supplied at a range of different prices.

Supply Curve

A graphic illustration of the relationship between price on the vertical axis and quantity on the horizontal axis.

Equilibrium Price

The price where quantity demanded is equal to quantity supplied.

Equilibrium Quantity

The quantity at which quantity demanded and quantity supplied are equal for a certain price level.

Surplus (Excess Supply)

A situation where quantity supplied exceeds the quantity demanded at the existing price.

Shortage (Excess Demand)

A situation where quantity demanded exceeds the quantity supplied at the existing price.

Substitute

A good or service that can be used in place of another good or service.

Complements

Goods or services often used together so that consumption of one enhances consumption of the other.

Inputs (Factors of Production)

The combination of labor, materials, and machinery used to produce goods and services.

Four-Step Process

A method to determine how an economic event affects equilibrium price and quantity: model before change, decide curve affected, sketch shift, and identify new equilibrium.

Movements vs. Shifts

A shift in one curve causes a movement along the second curve, but a shift in one never causes a shift in the other.

Price Ceiling

A legal maximum price that can be charged for a good or service.

Price Floor

A legal minimum price that can be charged for a good or service.

Consumer Surplus

The extra benefit consumers receive from buying a good or service, measured by what they would have been willing to pay minus the amount they actually paid.

Producer Surplus

The extra benefit producers receive from selling a good or service, measured by the price they received minus the minimum price they would have been willing to accept.

Social Surplus

The sum of consumer surplus and producer surplus, also known as economic surplus or total surplus.

Deadweight Loss

The loss in social surplus that occurs when a market produces an inefficient quantity.

Normal Good

A good in which the quantity demanded increases as income rises.

Inferior Good

A good in which the quantity demanded decreases as income rises.