Ch.4 - The Market Forces of Supply and Demand

Market

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

Supply and Demand

Refers to the behavior of people as they interact with one another in markets

Competitive Market

A market in which there are many buyers and many sellers so that each has a negligible impact on the market price

Perfectly Competitive Markets

1. Goods being sold are all the same

2. There are many buyers and sellers, so neither can influence the market price

Price Takers

Buyers and sellers in a competitive market who must accept the price the market determines

Monopoly

A market with only one seller. That seller sets the price.

Oligopoly

A market that has a few sellers that do not always compete aggressively

Monopolistically Competitive

A market that contains many sellers, but each offers a slightly different product. Each seller has some ability to set the price for its own product.

Quantity Demanded

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

Law of Demand

The claim that, other things equal, the quantity demanded of a good falls when the price of a good 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

The sum of all the individual demands for a particular good or service

Increase in Demand

Shifts the demand curve to the Right

Decrease in Demand

Shifts the demand curve to the Left

Normal Good

A good for which, other things equal, an increase in income leads to an increase in demand

Inferior Good

A good for which, other things equal, an increase in income leads to a decrease in demand

Substitutes

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

Complements

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

Determinants of Demand

Income, Prices of Related Goods, Tastes, Expectations, and Number of Buyers

Quantity Supplied

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

Law of Supply

The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

Supply Schedule

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

Supply Curve

A graph of the relationship between the price of a good and the quantity supplied

Market Supply

The sum of the supplies of all sellers

Increase in Supply

Shifts the supply curve to the Right

Decrease in Supply

Shifts the supply curve to the Left

Determinants of Supply

Input Prices, Technology, Expectations, and Number of Sellers

Equilibrium

A situation in which the price has reached the level where quantity supplied equals quantity demanded

Equilibrium Price

The price that balances quantity supplied and quantity demanded

Also called the "Market Clearing Price"

Equilibrium Quantity

The quantity supplied and the quantity demanded at the equilibrium price

Surplus

A situation in which quantity supplied is greater than quantity demanded.

Sellers are unable to sell all they want at the going price.

Excess Supply

Shortage

A situation in which quantity demanded is greater than quantity supplied.

Consumers are unable to buy all they want at the going price.

Excess Demand

Law of Supply and Demand

The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

Shift in Supply/Demand Curve

Called "A change in supply/demand"

Movement Along a Fixed Supply/Demand Curve

Called "A change in quantity supplied/quantity demanded"

Prices

The signals that guide economic decisions and thereby allocate scarce resources.