Chapter 4: The Market Forces of Supply and Demand

A set of practice flashcards covering key concepts from Chapter 4: The Market Forces of Supply and Demand, including demand and supply basics, determinants, shifts, and market equilibrium.

What is a market?

A market is a group of buyers and sellers of a particular product.

What characterizes a competitive market?

Many buyers and sellers, each with negligible effect on price.

What is a perfectly competitive market?

All goods are identical; buyers and sellers are numerous; no one can affect the price; each is a price taker.

What is the Law of Demand?

The quantity demanded falls when the good’s price rises, other things equal.

What is a demand schedule?

A table showing the relationship between the price of a good and the quantity demanded.

What is the market demand curve?

The sum of the quantities demanded by all buyers at each price.

What is the difference between demand and quantity demanded?

Demand is the whole relationship (curve) that shifts with non-price determinants; quantity demanded is along the curve due to a price change.

What are the demand determinants (non-price determinants) that shift the demand curve?

Income, prices of related goods (substitutes and complements), preferences, number of buyers, and expectations.

What is a normal good?

A good whose demand increases with income.

What is an inferior good?

A good whose demand decreases as income rises (e.g., ramen noodles).

What are substitute goods?

Goods that can replace each other; a price change in one affects the demand for the other.

What are complementary goods?

Goods used together; a price change in one affects the demand for the other.

What causes the demand curve to shift?

Changes in non-price determinants, such as income, prices of related goods, and preferences.

What causes a movement along the demand curve?

A change in the price of the good itself.

What is the Law of Supply?

Quantity supplied rises when the price rises, other things equal.

What is a supply schedule?

A table showing the relationship between price and quantity supplied.

What is the supply curve?

A graph of the relationship between price and quantity supplied; it is upward-sloping.

What are supply determinants (non-price determinants)?

Input costs, technology, weather, wages, taxes, expectations, and other production conditions.

What causes a shift in the supply curve?

Changes in non-price determinants of supply.

What is equilibrium in a market?

The point where quantity supplied equals quantity demanded.

What is a surplus?

When QS > QD; the market price is above equilibrium, causing prices to fall.

What is a shortage?

When QD > QS; the market price is below equilibrium, causing prices to rise.

How are surpluses corrected?

Sellers lower prices to increase quantity demanded and reduce quantity supplied until equilibrium is restored.

How are shortages corrected?

Sellers raise prices to decrease quantity demanded and increase quantity supplied until equilibrium is restored.

What is the equilibrium price and quantity?

The price and quantity at which QS equals QD (P, Q).

What is the difference between a shift in supply vs movement along the supply curve?

Shift: a non-price determinant changes the curve; Movement along: a change in price causes a movement along the same curve.

What happens in the hybrid cars example when gas prices rise?

Demand shifts right (increases) while supply remains the same, leading to higher equilibrium price and quantity.

What effect does advertising have on demand?

Advertising generally shifts the demand curve to the right (increase in demand).

What happens if demand increases while supply is unchanged?

Equilibrium price and quantity rise.

How do prices of related goods affect demand for another good?

Substitutes: a price decrease of one increases demand for the other; Complements: a price decrease of one increases demand for the other.

What is market demand versus individual demand?

Market demand is the sum of all individual demands at each price.

What is the significance of equilibrium prices in allocating resources?

Prices act as signals to guide decisions and allocate scarce resources in a market economy.

What is the role of the demand curve in relation to income changes?

Income changes shift the demand curve (normal vs. inferior goods).