The Market Forces of Supply and Demand

A collection of vocabulary flashcards covering the fundamental principles of supply, demand, and market equilibrium.

Market

A group of buyers and sellers of a particular good or service where firms supply the goods and consumers buy them for their own use.

Competitive market

A market characterized by many buyers and many sellers where the goods sold are similar and no individual has significant influence over the market price.

The invisible hand

The theory that, with little or no government interference, competitive markets allocate resources to their highest valued users as individuals motivated by self-interest push the market toward the best outcome.

Law of demand

The principle stating that, other things being equal, there is an inverse relationship between the price of a good and its quantity demanded.

Demand schedule

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

Demand curve

A graph representing the relationship between the price of a good and the quantity demanded.

Market demand

The horizontal sum of all quantities demanded by each buyer in the market at each price.

Change in quantity demanded

A movement along a demand curve caused explicitly by a change in the price of the good.

Change in demand

A shift of the entire demand curve to the left or right caused by changes in non-price factors.

Normal good

A good for which, other things being equal, an increase in income leads to an increase in quantity demanded.

Inferior good

A good for which, other things being equal, an increase in income leads to a decrease in quantity demanded.

Complements

Two goods for which a decrease in the price of one good leads to an increase in the demand for the other good.

Substitutes

Two goods for which a decrease in the price of one good leads to a decrease in the demand for the other good.

Quantity supplied

The amount of a good that sellers are willing and able to sell.

Law of supply

The principle stating that, other things being equal, the quantity supplied of a good rises when the price of the good rises.

Supply schedule

A table that shows the relationship between the price of a good and the quantity supplied.

Supply curve

A graph of the relationship between the price of a good and the quantity supplied.

Change in quantity supplied

A movement along a supply curve caused by a change in the price of the good.

Change in supply

A shift of the entire supply curve to the left or right caused by changes in non-price factors.

Equilibrium

A situation in which supply and demand have been brought into balance.

Equilibrium price

The price that balances quantity supplied and quantity demanded, often referred to as the price that clears the market.

Equilibrium quantity

The specific quantity supplied and quantity demanded at the equilibrium price.

Surplus

A market condition occurring when the quantity supplied is greater than the quantity demanded ($QS > QD$), typically at a price above equilibrium.

Shortage

A market condition occurring when the quantity demanded is greater than the quantity supplied ($QD > QS$), typically at a price below equilibrium.