Supply and Demand: Key Concepts and Market Equilibrium

Supply

The amount of product producers/suppliers are willing and able to bring to the market at various prices.

Supply Schedule

A chart listing specific prices and the specific quantity supplied by sellers.

Law of Supply

There is a direct relationship between the change in price and the change in the quantity supplied.

Quantity of Supply

The specific amount of product supplied by sellers at a specific price.

Supply Curve

A graph/model showing specific quantities supplied at specific prices.

Determinant of Supply/Change in supply

Situations that cause an inward or outward shift in a supply curve that has nothing to do with the price of the product.

Change in the price of inputs

The cost of resources used to make a product.

Change in the number of firms

The change in the number of sellers in the market or industry.

Change in business taxes

The alteration in taxes imposed on businesses.

New technology

Innovations that can affect production processes.

Change in subsidies

Adjustments in financial support provided by the government to producers.

Producers expectations

The anticipations of producers regarding future market conditions.

Change in government regulations

Modifications in laws that govern business operations.

Change in productivity

Variations in the efficiency of production.

Law of Diminishing returns

Eventually the rate of output will diminish (slow down) as one more unit of input is added.

Supply elasticity

The way in which producers respond to a change in the price of the product they offer on the market for sale.

Elasticity of Supply

If producers can change production easily then supply will be elastic; if changing production is difficult then supply will be inelastic.

Equilibrium price

The price that clears the market where QS=QD.

Equilibrium quantity

When the quantity supplied is equal to the quantity demanded.

Market Equilibrium

The point on the supply and demand model where the supply and demand curves intersect.

Shortage

At a specific price the quantity demanded is greater than the quantity supplied.

Surplus

At a specific price the quantity supplied is greater than the quantity demanded.

Price Ceiling

A maximum sale price set by the government for a particular good or service.

Price Floor

A minimum purchase price set by the government for a particular good or service.

Rationing

A way in which the government determines distribution of a product or products that has nothing to do with price.

Black Market

Sometimes called an 'underground market' where illegal goods are sold or goods are sold at illegally 'high' prices.

Alfred Marshall

Introduced the idea of market equilibrium price and quantity in analyzing the interaction between buyers and sellers pursuing their own best interests.

Law of Demand

There is an indirect (inverse) relationship between the change in price and the change in the quantity demanded.

Marginal Utility

The degree or amount of satisfaction one gets from consuming one more unit of product.

Law of Diminishing Marginal Utility

States that eventually the satisfaction of consuming one more unit of product will lessen with each additional unit purchased.

Change in Quantity Demanded

The Quantity of demand is a point on the demand curve at a specific price. When the price changes the quantity of demand will also change shown by the point's movement along the curve. (ONLY A CHANGE IN PRICE CAN CAUSE THE POINT TO MOVE).

Income Effect

Real income is affected by increases in the price of a product (as the price of a product increases the value of one's income decreases).

Substitution Effect

If two similar products satisfy the same need and one increases in price, buyers will purchase the other product.

Determinants of Demand

Something other than a change in the price of the product that causes an increase or decrease in demand resulting in a shift of the curve to the right or left.

Change in one's income

There is a direct relationship between the change in individuals' income and the shift in the Demand Curve. As incomes rise the Demand Curve moves outward or to the right; as incomes decrease the curve moves inward or to the left.

Change in one's taste or preference

The demand Curve for a product will shift as people's preference for that particular product changes.

Change in the price of a substitute good (related good)

There is a direct relationship between the change in price of goods that consumers will substitute for one another and the Demand curve for the related good.

Change in the price of a complementary good (related good)

There is an indirect relationship between the change in price of a complementary good and the demand curve for the related good.

Change in consumer expectations

When consumers look at past and current prices of a particular good it causes consumers to speculate/guess what they think the price may do in the future.

Change in the number of consumers in the market

An increase in the number of consumers in the market for a particular product will cause the demand curve to shift outward or to the right or vice versa.

Elasticity (Demand Elasticity)

The amount or degree of responsiveness that buyers have to a change in the price of a product.

Elastic Demand

When a small change in price causes a significant change in the quantity demanded.

Inelastic Demand

When a significant change in prices cause little change in the quantity demanded.

Perfectly Elastic Demand

Regardless of how small the change in price there is a significant change in Qd.

Perfectly Inelastic Demand

Regardless of how large the change in price there is an insignificant change in Qd.

Unitary Elastic Demand

There is a one to ratio between the change in price and the change in Qd.

Total Expenditures formula (also known as the TR formula)

Price x Quantity = Total Revenue. Compare the change in price to the change in Total Revenue to determine whether a product is elastic, inelastic, or unitary elastic in demand.