Macroeconomics Chapter 3: Demand and Supply

Vocabulary terms and definitions from Chapter 3 of Michael Parkin's Macroeconomics, Fourteenth Edition, focusing on the fundamental principles of competitive markets, demand, supply, and equilibrium.

Market

Any arrangement that enables buyers and sellers to get information and do business with each other.

Competitive market

A market that has many buyers and many sellers so no single buyer or seller can influence the price.

Money price

The amount of money needed to buy a good.

Relative price

The ratio of a good's money price to the money price of the next best alternative good, which represents its opportunity cost.

Demand

The outcome of wanting a good, being able to afford it, and having made a definite plan to buy it.

Quantity demanded

The amount that consumers plan to buy during a particular time period and at a particular price.

Law of Demand

The principle that, other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the larger is the quantity demanded.

Substitution effect

The reduction in quantity demanded that occurs when a rise in the relative price of a good leads people to seek substitutes for it.

Income effect

The reduction in quantity demanded that occurs when a rise in the price of a good relative to income makes people unable to afford all the things they previously bought.

Demand curve

A curve showing the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same.

Marginal benefit

The benefit received from consuming one more unit of a good or service, measured by the willingness to pay for it.

Substitute

A good that can be used in place of another good.

Complement

A good that is used in conjunction with another good.

Normal good

A good for which demand increases as income increases.

Inferior good

A good for which demand decreases as income increases.

Quantity supplied

The amount that producers plan to sell during a given time period at a particular price.

Law of Supply

The principle that, other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.

Supply curve

A curve showing the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same.

Marginal cost

The lowest price at which someone is willing to sell an additional unit, which rises as the quantity produced increases.

Substitute in production

Another good that can be produced using the same resources.

Complements in production

Goods that must be produced together.

Equilibrium price

The price at which the quantity demanded equals the quantity supplied.

Equilibrium quantity

The quantity bought and sold at the equilibrium price.

Shortage

A situation that occurs at prices below the equilibrium price where quantity demanded exceeds quantity supplied.

Surplus

A situation that occurs at prices above the equilibrium price where quantity supplied exceeds quantity demanded.