Chapter 3 Microeconomics: Supply and Demand

Vocabulary flashcards covering fundamental concepts of demand, supply, market equilibrium, and government price controls.

Market

Any place or mechanism where buyers and sellers interact and where the price of a good or service is determined.

Local Market

A geographically limited market, such as a farmer’s market, where buyers and sellers interact within a small area.

National Market

A market that spans an entire country, e.g., the U.S. real estate market.

International Market

A market that crosses national borders, such as the New York Stock Exchange.

Demand

A schedule or curve showing the quantities consumers are willing and able to purchase at various prices, holding other factors constant.

Individual Demand

The demand schedule or curve of a single consumer.

Market Demand

The horizontal summation of all individual demand curves for a good or service.

Law of Demand

Ceteris paribus, quantity demanded rises as price falls and falls as price rises.

Substitution Effect

The tendency for consumers to switch to relatively cheaper goods when the price of a good falls.

Income Effect

The change in consumers’ real purchasing power caused by a price change, affecting the quantity demanded.

Law of Diminishing Marginal Utility

Each additional unit of a good adds less to total satisfaction than the previous unit, underpinning the downward-sloping demand curve.

Change in Demand

A shift of the entire demand curve due to non-price determinants (tastes, income, etc.).

Change in Quantity Demanded

Movement along a demand curve caused solely by a price change.

Determinants of Demand

Factors that shift demand: tastes, number of buyers, income, prices of related goods, and expectations.

Normal Goods

Goods for which demand increases when consumer income rises.

Inferior Goods

Goods for which demand decreases as consumer income rises.

Substitute Goods

Goods that can replace each other; a price rise in one increases demand for the other.

Complementary Goods

Goods consumed together; a price decline in one raises demand for the other.

Supply

A schedule or curve showing the quantities producers are willing and able to sell at various prices, ceteris paribus.

Individual Supply

The supply schedule or curve of a single producer.

Market Supply

The horizontal summation of individual supply curves of all producers.

Law of Supply

Ceteris paribus, quantity supplied rises as price rises and falls as price falls.

Change in Supply

A shift of the entire supply curve due to non-price determinants (technology, taxes, etc.).

Change in Quantity Supplied

Movement along a supply curve caused solely by a price change.

Determinants of Supply

Factors that shift supply: resource prices, technology, number of sellers, taxes/subsidies, prices of other goods, expectations.

Law of Diminishing Marginal Product

As additional units of a variable input are added to fixed inputs, the extra output eventually declines, raising costs.

Market Equilibrium

The price-quantity pair where quantity demanded equals quantity supplied; the intersection of demand and supply curves.

Surplus

A situation where quantity supplied exceeds quantity demanded at a given price.

Shortage

A situation where quantity demanded exceeds quantity supplied at a given price.

Rationing Function of Prices

The ability of market prices to adjust to eliminate shortages or surpluses, guiding the market toward equilibrium.

Price Ceiling

A legally established maximum price set below equilibrium, leading to shortages and potential black markets.

Black Market

An illegal market that develops when a price ceiling creates a shortage, allowing sales above the legal maximum.

Price Floor

A legally established minimum price set above equilibrium, resulting in chronic surpluses.

Minimum Wage

An example of a price floor applied to labor, setting the lowest legal wage employers can pay.

Simultaneous Shift Analysis

A framework for predicting price and quantity changes when both demand and supply shift; either price or quantity may be indeterminate.