Chapter 3: Introduction to Supply and Demand

demand

the amount of good or service consumers are willing and able to purchase at each price

What is demand fundamentally based on?

needs, wants, and the ability to pay

price

what a buyer pays for a unit of the specific good or service

What is the term “quantity demanded”?

the total number of units that consumers would purchase at that price

What happens to the quantity demanded when price rises?

it decreases

What happens to the quantity demanded when price falls?

it increases

What is the relationship between price and demand called?

law of demand

What is the name for a table that displays the quantity demanded at each price?

a demand schedule

What is the purpose of a demand curve?

it shows the relationship between price and quantity demanded on a graph

What feature do almost all demand curves share?

the slope is from left to right

supply

the amount of good or service a producer is willing to supply at each price

What does a rise in price almost often lead to?

an increase in the quantity supplied

What does a fall in price almost often lead to?

a decrease in the quantity supplied

law of supply

a higher price leads to a higher quantity supplied; a lower price leads to a lower quantity supplied

What is a supply schedule?

a table that shows the quantity supplied at a range of different prices

What is a supply curve?

a illustration of the relationship between price (which is shown on the vertical axis) and quantity (shown on the horizontal axis)

What is the equilibrium?

the point where the supply curve and demand curve cross

What is the equilibrium price?

the price point where both the consumers and producers agree; the amount of the product consumers want to buy is equal to the amount producers want to sell

What is a surplus?

the quantity supplied exceeds the quantity demanded when at an above-equilibrium price

What happens when a price is above the equilibrium?

Incentives will create pressures for the price to fall toward the equilibrium

What is a shortage?

the quantity demanded exceeds the quantity supplied when the price is below equilibrium

What are the two factors that affect demand?

willingness to purchase and ability to purchase

What is a demand curve and supply curve?

a relationship between quantity and price

What is ceteris paribus?

other things being equal

What is considered a normal good?

a product whose demand rises when income rises; a product whose demand falls when income falls

What is an inferior good?

a product whose demand falls when incomes rises; a product whose demand rises when income falls

What factors can shift a demand curve?

income, tastes and preferences, the composition/size of a population, the prices of related goods, and expectations

What is a subsitute?

a good or service that we can use in place of another good or service

What is a complement?

two goods that are often used together

When does a shift in demand happen?

a change in some economic factor (besides price) that causes a different quantity to be demanded at every price

What is a shift in supply?

a change in the quantity supplied at every price

What motivates firms?

profits

What are inputs/factors of production?

producing goods and services using combinations of labor, materials, and machinery

What factors can affect supply?

changes in weather/natural conditions, new technologies, and government policies

What is a subsidy?

a payment or a tax reduction from the government to a firm

What is the first step to modeling how an event will affect the equilibrium price and quantity?

sketch a supply and demand diagram to think about what the market looked like before the event

What is the second step to modeling how an event will affect the equilibrium price and quantity?

decide whether the event will affect supply and demand

What is the third step to modeling how an event will affect the equilibrium price and quantity?

decide whether the effect on supply or demand is positive or negative, and draw the appropriate curve

What is the fourth step to modeling how an event will affect the equilibrium price and quantity?

compare the new equilibrium price and quantity to the old equilibrium price and quantity

What are price controls?

government laws that are used to regulate prices

What are price ceilings?

a type of price control that keeps a price from rising above a certain level

What is a price floor?

a type of price control that keeps a price from moving below a given level

What is a downside to price ceilings?

a shortage can occur if the market price is not allowed to rise to the equilibrium level, making sellers and buyers of the product suffer; quality of the product is likely to deteriorate

What is the purpose of a price support?

to prevent swings in income and prices

What is the most common way that price supports work?

the government enters the market and buys up the product, which adds to demand to keep prices high

What is a consumer surplus?

the amount that individuals would have been willing to pay, minus the amount that they actually paid

What is a producer surplus?

the extra benefit producers receive from selling a good or service, which is measured by the price the producer actually received minus the price the producer would have been willing to accept

What is the social surplus?

the sum of consumer surplus and producer surplus

What type of surplus has a larger equilibrium price and quantity compared to others?

social surplus

What happens to consumer surplus and producer surplus when both at an efficient level of output?

one cannot be increased without decreasing the other

What is deadweight loss?

the loss in social surplus that occurs when the economy produces at an inefficient quantity