Chapter 3 (part of CH 3) +4 Microeconomics Exam 2

Market Equilibrium

A situation where quantity demanded equals quantity supplied

Competitive market equilibrium

markets with many buyers and sellers where the quantity demanded equals the quantity supplied

Substitute goods

Alternative goods that consumers can use in place of another good

Complement goods

Products that are used or consumed together, where the demand for one increases alongside the popularity or price drop of another

Normal goods

When income increases, the demand for the good increases, and when income decreases, the demand for the good decreases

Inferior goods

When income increases, the demand for the good decreases, and when income decreases, the demand for the good increases

Shifts in equilibrium

A change in a good's own price causes a movement along a curve rather than a shift. An entire curve shifts only when non-price external factors change

Demand shifters

1. Income (Normal goods, inferior goods)

2. Price of substitutes

3. Price of complements

4. Taste & preferences

5. Number of buyers

6. 
   

Supply Shifters

1. Price of inputs

2. Technological change

3. Prices of substitutes in production

4. Number of firms in the market

5. Expected future prices

Change in demand vs. quantity demanded

A change in demand is a shift of the curve, and a movement along the curve is a change in quantity demanded

Change in supply vs. quantity supplied

A shift of the supply curve is a change in supply, and a movement along the curve is a change in quantity supplied

Price ceiling

A legally determined maximum price that sellers may charge

Price floor

A legally determined minimum price that sellers may receive

Binding constraints

A binding floor is set above the constraints restricting the market from equilibrium by creating a surplus or shortage

Nonbinding constraint

A nonbinding floor is set at or below equilibrium and does not change the market outcome

Consumer surplus

The difference between the highest price a consumer is willing to pay and what they actually pay

Producer surplus

The difference between the lowest price a firm is willing to accept and what they actually receive

Total economic surplus

The sum of consumer surplus plus producer surplus

Deadweight loss

The loss of total economic welfare or surplus that happens when a market is not at its most efficient equilibrium

Economic efficiency

An efficient market produces the greatest possible combined benefit for buyers and sellers