Chapter 3: Demand, Supply, and Market Equilibrium

firm

An organization that comes into being when a person or a group of people decides to produce a good or service to meet a perceived demand.

entrepreneur

A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business

households

The consuming units in an economy.

product or output markets

The markets in which goods and services are exchanged.

input or factor markets

The markets in which the resources used to produce goods and services are exchanged.

labor market

The input/factor market in which households supply work for wages to firms that demand labor.

capital market

The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

land market

The input/factor market in which households supply land or other real property in exchange for rent.

factors of production

The inputs into the production process. Land, labor, and capital are the three key factors

of production.

quantity demanded

The amount (number of units) of a product that a household would buy in a given period if it

could buy all it wanted at the current market price.

demand schedule

Shows how much of a given product a household would be willing to buy at different prices for a given time period.

demand curve

A graph illustrating how much of a given product a household would be willing to buy at different

prices.

when price goes up, quantity demanded goes?

down

price goes down, quantity demanded goes?

up

law of demand

The negative relationship between price and quantity demanded

income

The sum of all a household’s wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

wealth or net worth

The total value of what a household owns minus what it owes. It is a stock measure

normal goods

Goods for which demand goes up when income is higher and for which demand goes down when

income is lower.

inferior goods

Goods for which demand tends to fall when income rises.

substitutes

Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.

perfect substitutes

Identical products.

complements, complementary goods

Goods that “go together”; a decrease in the price of one results in an increase in demand for the other and vice versa.

shift of a demand curve

The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions.

movement along a demand curve

The change in quantity demanded brought about by a change in price.

market demand

The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

profit

The difference between revenues and costs.

quantity supplied

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

supply schedule

Shows how much of a product firms will sell at alternative prices.

law of supply

The positive relationship between price and quantity of a good supplied

supply curve

A graph illustrating how much of a product a firm will sell at different prices

movement along a supply curve

The change in quantity supplied brought about by a change in price.

shift of a supply curve

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions

market supply

The sum of all that is supplied each period by all producers of a single product.

equilibrium

The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change

excess demand or shortage

The condition that exists when quantity demanded exceeds quantity supplied at the current price.

excess supply or surplus

The condition that exists when quantity supplied exceeds quantity demanded at the current price.