Macroeconomics Chapter 4: The market forces of supply and demand

market

a group of buyers and sellers of a particular group of service

what do buyers as a group determine

the demand for the product

what do sellers as a group determine

the supply of the product

competitive market

many buyers and many sellers, each has a negligible impact on market price

perfectly competitive market

all goods are exactly the same

quantity demanded

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

law of demand

other things equal. when the price of a good rises, the quantity demanded of a good falls. when the price falls, the quantity demanded rises.

demand schedule

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

demand curve

a graph of the relationship between the price of a good and the quantity demanded

market demand

sum of all the individual demands for a good or service

the demand curve

shows how price affects quantity demanded, other things being equal

increase in number of buyers

increases the quantity demanded at each price and shifts the demand curve to the right

decrease in number of buyers

decreases the quantity demanded at each price and shifts the demand curve to the left

normal good

an increase in income leads to an increase in demand and shifts demand curve to the right

inferior good

an increase in income leads to a decrease in demand and shifts demand cuve to the left

two goods are substitutes if _____________

an increase in the price of one leads to an increase in the demand for the other

ex; pizza and hamburgers

two goods are complements if ______________

an increase in the price of one leads to a decrease in the demand for the other

ex; smartphones and apps

quantity supplied

amount of a good; sellers are willing and able to sell

law of supply

other things equal; when the price of a good rises, the quantity supplied of a good rises, when the price falls, the quantity supplied falls

supply curve shifters

input prices, technology, number of sellers, expectations about the future

demand curve shifters

number of buyers, income, prices of related goods, tastes, expectations

input prices

wages, prices of raw materials

what does a fall in input prices do

makes production more profitable at each output price; firms supply a larger quantity at each price; the supply curve shifts to the right

an increase in the number of sellers _____________

increases the quantity supplied at each price and shifts supply curve to the right

equilibrium

price has reached the level where quantity supplied equal quantity demanded

price takers

so many buyers and sellers that no one can affect the market price

shifts in the demand curve are caused by changes in what?

number of buyers, income, prices of related goods, tastes, and expectations

when people expect an increase in income….

the current demand increases

when people expect higher prices….

the current demand increases

when does change in demand occur

when a non-price determinant of demand changes (like income or number of buyers)

when does change in the quantity demanded occur

when the price changes

technology

determines how much inputs are required to produce a unit of output

Surplus

excess supply; quantity supplied is greater than quantity demanded.

Shortage

excess demand; quantity demanded is greater than quantity supplied

suppose that demand for a good increases and, at the same time, supply of the good decreases. what would happen in the market for the good?

equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.

what can cause an increase in the supply of ceiling fans?

the number of sellers of ceiling fans increases.

if a decrease in income increases the demand for a good, then the good is…

an inferior good

If miguel expects to earn a higher income next month, he may choose to…

save less now and spend more of his current income on goods and services.

what is a characteristic of a perfectly competitive market?

there is no free entry or exit

two goods are substitutes when a decrease in the price of one good….

decreases the demand for the other good

what would not increase in response to a decrease in the price of ironing boards?

the quantity of irons supplied at each possible price of irons

what will a decrease in the price of pizza do to the supply curve

the supply curve won’t move

what will happen if a seller in a competitive market chooses to charge more than the going price?

buyers will make purchases from other sellers

if a surplus exists in the market, then we know that the actual price is…

above the equilibrium price, and quantity supplied is greater than quantity demanded

if baked potatoes and sour cream are complements, then an increase in the price of sour cream will…

decrease the demand for baked potatoes