Demand, Supply, and Equilibrium

Practice vocabulary flashcards covering the fundamental concepts of markets, demand, supply, equilibrium, and government intervention based on the Chapter 4 lecture notes.

Perfectly competitive market

A market where (1) sellers all sell an identical good or service, and (2) any individual buyer or any individual seller isn’t powerful enough on his or her own to affect the market price of that good or service.

Market

An arrangement that brings together buyers and sellers and involves the exchange of goods and services.

Demand

Indicates how much of a good consumers are both willing and able to buy at each possible price during a given time period, other things constant.

Law of Demand

The law that says quantity demanded varies inversely with price, other things constant; meaning the higher the price, the lower the quantity demanded.

Demand Schedule

A table that shows the quantity demanded at different prices, holding all else equal.

Demand Curve

A downward-sloping curve that plots the relationship between the market price and the quantity of a good demanded by buyers.

Normal goods

Goods whose demand increases as income increases and vice versa, including luxuries and necessities.

Inferior goods

Goods whose demand increases as income decreases and vice versa, such as cheaper and second-hand goods.

Substitute goods

Goods that can replace each other because they both serve the same purpose, such as Pepsi and Coke or Tea and Coffee.

Complementary goods

Goods that are used together, such as car and petrol, printer and ink, or tea and sugar.

Change in Quantity Demanded

A movement from one point to another point along the same demand curve caused by a change in the price of the good.

Change in Demand

A shift of the entire demand curve to the right (increase) or left (decrease) caused by determinants like tastes, income, or number of buyers.

Supply

Indicates how much of a good producers are willing and able to offer for sale per period at each possible price, other things constant.

Law of Supply

The law stating that the quantity supplied is directly (positively) related to its price, meaning the lower the price, the lower the quantity supplied.

Supply Schedule

A table that shows the quantity supplied at different prices.

Supply Curve

An upward-sloping curve that plots the relationship between the market price and the quantity of a good supplied by sellers.

Input Prices

The costs of production components including wages, interest, rent, and the cost of raw materials.

Alternative Goods

Goods that use some of the same resources employed to produce the good under consideration.

Market Equilibrium

The point determined when quantity demanded equals quantity supplied ($Q_d = Q_s$).

Equilibrium Price

The price at which both the buyers and sellers agree, equating the quantity demanded and quantity supplied.

Equilibrium Quantity

The quantity bought and sold at the equilibrium price.

Surplus (Excess supply)

A market condition occurring when quantity supplied is greater than quantity demanded ($Q_s > Q_d$), usually when the price is above equilibrium.

Shortage (Excess demand)

A market condition occurring when quantity supplied is less than quantity demanded ($Q_s < Q_d$), usually when the price is below equilibrium.

Price Ceiling

A maximum price set by the government below the equilibrium price to help the majority of society afford basic necessities.