Market Supply and Demand: Principles and Shifts in Economics

What determines the quantity of goods produced and their prices in a market economy?

Supply and demand

What is a market?

A group of buyers and sellers of a particular good or service.

What characterizes a competitive market?

Many buyers and sellers, each having a negligible impact on the market price.

What are the two main characteristics of a perfectly competitive market?

Goods offered for sale are identical, and no buyer or seller can influence the price.

What are buyers and sellers in a perfectly competitive market referred to as?

Price takers

What is a monopoly?

A market with only one seller.

What is the quantity demanded?

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

What does the law of demand state?

An increase in the price of a good reduces the quantity demanded, while a decrease in price increases it.

What is a demand schedule?

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

What does the demand curve represent?

A graph of the relationship between price and quantity demanded.

What happens to the demand curve when quantity demanded increases at each price?

It shifts to the right, indicating an increase in demand.

What factors can shift the demand curve?

Income, prices of related goods, tastes, expectations, and number of buyers.

What is a normal good?

A good for which an increase in income leads to an increase in demand.

What is an inferior good?

A good for which an increase in income leads to a decrease in demand.

What are substitutes?

Goods that can be used in place of one another.

What are complements?

Goods that are used together.

What is the quantity supplied?

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

What does the law of supply state?

An increase in the price of a good increases the quantity supplied, while a decrease reduces it.

What is a supply schedule?

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

What does the supply curve represent?

A graph of the relationship between price and quantity supplied.

What happens to the supply curve when quantity supplied increases at each price?

It shifts to the right, indicating an increase in supply.

What factors can shift the supply curve?

Input prices and production costs.

What is market demand?

The sum of the quantities demanded by all individual buyers at each price.

What is market supply?

The sum of the quantities supplied by all individual sellers at each price.

What is a decrease in demand?

When buyers decrease the quantity demanded at each price, shifting the demand curve to the left.

What is a decrease in supply?

When producers decrease the quantity supplied at each price, shifting the supply curve to the left.

What factors can shift supply curves?

Input prices, technology, expectations, and the number of sellers.

How does a decrease in input prices affect supply?

It makes production more profitable and increases supply.

What effect does improved technology have on supply?

It reduces costs, makes production more profitable, and increases supply.

What is the impact of expectations on supply?

Expectations about the future can affect the supply of a good today.

How does an increase in the number of sellers affect market supply?

It leads to an increase in market supply due to more individual supply curves.

What does a supply curve represent?

It shows the relationship between price (vertical axis) and quantity supplied (horizontal axis).

What does a change in the price of a good represent on the supply curve?

A movement along the supply curve.

What is market equilibrium?

The point where quantity supplied equals quantity demanded.

What is the equilibrium price?

The price that balances the quantity demanded and quantity supplied.

What happens when the price is above the equilibrium price?

There is a surplus, causing the price to fall until it reaches equilibrium.

What occurs when the price is below the equilibrium price?

There is a shortage, causing the price to rise until it reaches equilibrium.

What is the law of supply and demand?

The natural adjustment of price to balance quantity supplied and demanded.

What are the three steps to analyze the impact of an event on market equilibrium?

1. Decide if the event shifts supply, demand, or both. 2. Determine the direction of the shift. 3. Use the diagram to see how the shift changes equilibrium price and quantity.

What is a change in demand?

A shift in the entire demand curve caused by a change in a determinant of demand other than price.

What is a change in quantity demanded?

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

What is a change in supply?

A shift in the entire supply curve caused by a change in a determinant of supply other than price.

What is a change in quantity supplied?

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

What happens to the price of oranges if there is a frost that decreases supply?

The price of oranges increases and the quantity demanded decreases.

What is the outcome if demand increases while supply decreases?

The price will rise, but the impact on equilibrium quantity is ambiguous.

How do prices allocate resources in markets?

Prices signal the allocation of scarce resources to those willing to pay.

What is the relationship between supply and demand shifts?

If both supply and demand shift simultaneously, the changes in price and quantity can be ambiguous.

What is the significance of equilibrium prices?

They guide the allocation of resources and coordinate decentralized decision-making.

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

A change in demand is a shift of the entire curve; a change in quantity demanded is a movement along the curve.

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

A change in supply is a shift of the entire curve; a change in quantity supplied is a movement along the curve.