The Market Forces of Supply and Demand

Flashcards covering the fundamental concepts of demand and supply, including factors influencing them, market equilibrium, and the effects of shifts in curves.

What is "demand" in economics?

The quantity of a good that buyers are willing and able to purchase.

What does the "law of demand" state?

All else equal, when the price of a good rises, the quantity demanded falls, and when the price of a good falls, the quantity demanded rises.

How is "market demand" calculated?

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

What causes a shift in the demand curve?

A change in something other than price that affects quantity demanded.

What visually represents an increase in demand?

A shift in the demand curve to the right, showing a higher quantity demanded at every price.

What visually represents a decrease in demand?

A shift in the demand curve to the left, showing a lower quantity demanded at every price.

How do changes in consumer tastes or preferences affect demand?

They can increase or decrease demand for a good (e.g., changing views on baby diapers or greenhouse gases).

How does an increase in income affect the demand for a "normal good"?

Demand for the normal good will increase.

How does an increase in income affect the demand for an "inferior good"?

Demand for the inferior good will decrease.

Define "complement goods" and explain how a price change in one affects demand for the other.

Goods that are used together. If the price of one complement increases, demand for the other complement will decrease.

Define "substitute goods" and explain how a price change in one affects demand for the other.

Goods that are used in place of one another. If the price of one substitute increases, demand for the other substitute will increase.

How do consumer expectations about future income or prices affect current demand?

If higher income is expected, current demand may increase; if a price decrease is expected, current demand may decrease.

How does a change in the number of buyers affect market demand?

More buyers increase demand; fewer buyers decrease demand.

What is the distinction between a "change in quantity demanded" and a "change in demand"?

A change in quantity demanded is caused by a change in price, while a change in demand is caused by a change in any other factor than price.

What is "supply" in economics?

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

What does the "law of supply" state?

When the price of a good rises, the quantity supplied of the good rises, and when the price of a good falls, the quantity supplied falls.

How is "quantity supplied in the market" determined?

It is the sum of the quantities supplied by all sellers at each price.

What factors, other than price, affect supply?

Price of inputs, production technology, expectations of producers, and number of producers.

What does an "increase in supply" visually represent?

A shift in the supply curve to the right, indicating a higher quantity supplied at every price.

What does a "decrease in supply" visually represent?

A shift in the supply curve to the left, indicating a lower quantity supplied at every price.

How do changes in input prices affect supply?

Falling input prices increase supply (shift right); rising input prices decrease supply (shift left).

How does an improvement in production technology affect supply?

It lowers costs and shifts the supply curve to the right (increases supply).

How do producer expectations about future prices affect current supply?

If a price increase is expected, sellers might decrease current supply; if a price decrease is expected, sellers might increase current supply.

How does a change in the number of sellers affect market supply?

More sellers increase supply; fewer sellers decrease supply.

What is the distinction between a "change in quantity supplied" and a "change in supply"?

A change in quantity supplied is caused by a change in price, while a change in supply is caused by a change in any other factor than price.

What defines a "competitive market"?

A group of buyers and sellers of a particular product where each has a negligible effect on price (price takers).

What are the characteristics of a "perfectly competitive market"?

Many buyers and sellers, all goods are exactly the same, and buyers/sellers are price takers.

What is "equilibrium" in a market?

A state where price has no tendency for change, and quantity demanded equals quantity supplied.

What is a "shortage" (or "excess demand")? When does it occur?

A situation where quantity demanded exceeds quantity supplied. It occurs when the market price is below the equilibrium price.

What is a "surplus" (or "excess supply")? When does it occur?

A situation where quantity supplied exceeds quantity demanded. It occurs when the market price is above the equilibrium price.

What happens to equilibrium price and quantity if demand increases?

Equilibrium price increases and equilibrium quantity increases.

What happens to equilibrium price and quantity if supply decreases?

Equilibrium price increases and equilibrium quantity decreases.

If both demand and supply increase, what is the impact on equilibrium price and quantity?

Equilibrium quantity will increase, but the impact on equilibrium price is ambiguous and depends on which shift is larger.

How do you algebraically find the equilibrium price and quantity in a market?

Set the quantity demanded (Qd) equation equal to the quantity supplied (Qs) equation (Qd = Qs) and solve for P, then substitute P back into either equation to find Q.

If market supply decreases (shifts left), how does this affect equilibrium price and quantity?

Equilibrium price increases and equilibrium quantity decreases.