Market Forces of Supply and Demand Explained

What is a Market?

A group of buyers and sellers of a particular good or service.

What is a Competitive Market?

A market with many buyers and sellers, each with negligible impact on price.

What does the Law of Demand state?

As price falls, quantity demanded rises.

What is a Demand Schedule?

A table showing the relationship between price and quantity demanded.

What is the Shape of a Demand Curve?

Downward-sloping.

What is Market Demand?

The sum of all individual demands for a good.

What would shift the demand curve to the right?

An increase in the price of a substitute good.

What is a normal good?

A good for which demand rises when income rises

What are Substitutes?

Goods that can replace each other in consumption.

What are compliments?

Goods that are used together.

What does the Law of Supply state?

As price rises, quantity supplied rises

What is Supply schedule?

A table showing the relationship between price and quantity supplied

What is the shape of a Supply Curve?

upward-sloping.

What is Market Supply?

The sum of all individual supplies for a good.

What would shift the Supply Curve to the LEFT?

An increase in the price of inputs

What is Equilibrium?

A situation where quantity supplied equals quantity demanded.

What is the Equilibrium Price?

The price where quantity supplied equals quantity demanded.

What is a Surplus?

A situation where quantity supplied exceeds quantity demanded.

What is a Shortage?

A situation where quantity demanded exceeds quantity supplied.

What happens to the equilibrium price and quantity when demand increases?

Price rises, quantity rises

What happens to the equilibrium price and quantity when supply decreases?

Price rises, quantity falls

What is the role of prices in a market economy?

To allocate scarce resources

What is the invisible hand?

The idea that prices guide buyers and sellers to equilibrium

What is Price Gouging?

A situation where prices rise during emergencies

What is the effect of a decrease in the price of a complement good on demand?

Demand Increases

What is the effect of an increase in consumer income on the demand for an inferior good?

Demand Decreases

What is the effect of an improvement in technology on supply?

Supply Increases

What is the effect of an increase in the number of sellers on supply?

Supply Increases

What is the effect of a decrease in the price of inputs on supply?

Supply would increase

What is the effect of an increase in the price of a substitute good on demand?

Demand would increase

EXPLAIN The Law of Demand (SR)

The law of demand states that, other things being equal, as the price of a good falls, the quantity demanded rises, and as the price rises, the quantity demanded falls.

What is the difference between a movement along the demand curve and a shift in the demand curve? (SR)

A movement along the demand curve occurs when the price of the good changes, leading to a change in quantity demanded. A shift in the demand curve occurs when a factor other than price (e.g., income, tastes) changes, leading to a change in demand at every price.

What is the difference between a normal good and an inferior good? (SR)

A normal good is one for which demand increases as income rises, while an inferior good is one for which demand decreases as income rises

EXPLAIN The Law of Supply (SR)

The law of supply states that, other things being equal, as the price of a good rises, the quantity supplied rises, and as the price falls, the quantity supplied falls.

What is the difference between a movement along the supply curve and a shift in the supply curve? (SR)

A movement along the supply curve occurs when the price of the good changes, leading to a change in quantity supplied. A shift in the supply curve occurs when a factor other than price (e.g., input prices, technology) changes, leading to a change in supply at every price

What is equilibrium in a market? (SR)

Equilibrium is the point where the supply and demand curves intersect, and the quantity supplied equals the quantity demanded

What happens to the equilibrium price and quantity when demand increases? (SR)

When demand increases, the equilibrium price and quantity both rise

What happens to the equilibrium price and quantity when supply decreases? (SR)

When supply decreases, the equilibrium price rises, and the equilibrium quantity falls.

What is the role of prices in a market economy? (SR)

Prices allocate scarce resources by guiding buyers and sellers to equilibrium, ensuring that supply equals demand

What is price gouging, and why does it occur in emergencies? (SR)

Price gouging is a situation where prices rise significantly during emergencies due to increased demand or reduced supply. It occurs because sellers respond to shortages by raising prices to balance supply and demand