Where Prices Come From: The Interaction of Supply and Demand

A set of vocabulary flashcards covering key concepts related to supply and demand in economics.

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.

Ceteris Paribus

A condition meaning 'all else equal,' used to analyze the relationship between 2 variables by holding other variables constant.

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

Holding everything else constant, when the price of a product falls, the quantity demanded increases; when the price rises, the quantity demanded decreases.

Substitution Effect

The change in the quantity demanded of a good due to a change in price, making the good more or less expensive relative to other goods.

Income Effect

The change in the quantity demanded of a good that results from a change in the good’s price affecting consumers' purchasing power.

Normal Goods

Goods for which demand increases as income rises and decreases as income falls.

Inferior Goods

Goods for which demand increases as income falls and decreases as income rises.

Substitutes

Goods and services that can be used for the same purpose. For example, a Big Mac and a Whopper.

Complements

Goods and services that are used together, such as a Big Mac and McDonald's fries.

Market Equilibrium

The point where quantity demanded equals quantity supplied.

Surplus

Occurs when quantity supplied exceeds quantity demanded.

Shortage

Occurs when quantity demanded exceeds quantity supplied.

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.

Law of Supply

Holding everything else constant, increases in price cause increases in quantity supplied, and decreases in price cause decreases in quantity supplied.

Technological Change

A positive or negative change in a firm's ability to produce a given level of output with a given quantity of inputs.

Variables That Shift Market Demand

Factors such as income, prices of related goods, tastes, population and demographics, and expectations that can lead to a shift in demand.

Variables That Shift Market Supply

Factors such as prices of inputs, technological change, prices of substitutes in production, number of firms in the market, and expected future prices that can lead to a shift in supply.

Directional Changes

Predictions made about how changes in demand or supply affect the prices and quantities traded in a market.

Change in Demand

A shift of the demand curve, which occurs when a variable other than the product's price changes.

Change in Quantity Demanded

A movement along the demand curve, which occurs in response to a change in the product's price.

Change in Supply

A shift of the supply curve, which occurs when a variable other than the product's price changes.

Change in Quantity Supplied

A movement along the supply curve, which occurs in response to a change in the product's price.

Price Ceiling

A legally determined maximum price that sellers may charge.

Price Floor

A legally determined minimum price that sellers may receive.

Consumer Surplus

The difference between the highest price a consumer is willing to pay and the actual price paid.

Producer Surplus

The difference between the lowest price a firm would be willing to accept and the price it actually receives.

Deadweight Loss

The reduction in economic surplus resulting from a market not being in competitive equilibrium.

Economic Efficiency

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.