Chapter 3 (Markets)

Market Economy

An economy where individuals and businesses make decisions through markets.

Market

A group of buyers and sellers who exchange goods or services.

Competitive Market

A market with many buyers and sellers where no individual can control the price.

Price Taker

A buyer or seller who accepts the market price and cannot influence it.

Standardized Good

A good that buyers consider essentially the same regardless of who sells it.

Transaction Costs

The costs of completing an exchange, such as time, effort, or money.

Quantity Demanded

The amount of a good buyers are willing and able to buy at a specific price.

Law of Demand

As price rises, quantity demanded falls; as price falls, quantity demanded rises, all else equal.

Demand Schedule

A table showing quantity demanded at different prices.

Demand Curve

A graph showing the relationship between price and quantity demanded.

Substitutes

Goods that can be used in place of each other.

Complements

Goods that are typically used together.

Normal Goods

Goods for which demand increases when income increases.

Inferior Goods

Goods for which demand decreases when income increases.

Quantity Supplied

The amount of a good sellers are willing and able to sell at a specific price.

Law of Supply

As price rises, quantity supplied rises; as price falls, quantity supplied falls, all else equal.

Supply Schedule

A table showing quantity supplied at different prices.

Supply Curve

A graph showing the relationship between price and quantity supplied.

Equilibrium

The point where quantity demanded equals quantity supplied.

Equilibrium Price

The price at which quantity demanded equals quantity supplied.

Equilibrium Quantity

The quantity bought and sold at the equilibrium price.

Surplus (Excess Supply)

When quantity supplied is greater than quantity demanded.

Shortage (Excess Demand)

When quantity demanded is greater than quantity supplied.

What happens to price during a shortage?

Qd > Qs, so price tends to rise.

What happens to price during a surplus?

Qs > Qd, so price tends to fall.

What happens when demand increases?

Equilibrium price rises and equilibrium quantity rises.

What happens when demand decreases?

Equilibrium price falls and equilibrium quantity falls.

What happens when supply increases?

Equilibrium price falls and equilibrium quantity rises.

What happens when supply decreases?

Equilibrium price rises and equilibrium quantity falls.

What causes movement along a demand or supply curve?

A change in the good's own price.

What causes a demand or supply curve to shift?

A change in a factor other than the good's own price.