Chapter 3 - Demand, Supply, and Market Equilibrium

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27 Terms

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Demand

The quantity of a good or service that consumers are willing and able to buy at different prices

There must be desire and ability to pay

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Demand Schedule

A table showing how much consumers will buy at various prices

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Law of Demand

As price falls, quantity demanded rises

when price rises, people would buy less

When price decreases, people would buy more

Reason: Substition effect, income effect, and diminishing marginal utility

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Diminishing marginal activity

Each additional unit of a good gives less extra satisfaction than the one before

Example: The first slice of pizza tastes amazing; by the fourth, you full and it won’t taste as good as your first slice

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Income effect

When prices fall, consumers feel “richer” and can buy more

When prices rise, they feel poorer and buy less

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Substitution effect

When the price of one good rises, people switch to a cheaper alternative

Example: if Coke prices rises, people will buy more Pepsi

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demand curve

A graph showing the relationship between price and quantity demanded

Downward sloping because of the law of demand

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Determinant of demand

Factors that shift the entire demand curve

T- taste and preferences 

R- related goods (substitutes and complements)
I- income (normal and inferior goods)

P- population (number of buyers)

E - expectations (future prices, income)

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Normal goods

Goods that people buy more of when income rises

Example: clothing restaurants meals, vacation

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Inferior goods

Goods that people buy less of when income rises

Example: ramen noodles, bus rides, thrift stores clothes

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Substitute good

Goods that can replace each other

Example: Coke Pepsi, butter margarine.

Price ↑ of one → Demand ↑ for the other.

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Complementary good

Goods that are used together

Example: Peanut butter + jelly

Price ↑ of one → Demand ↓ for the other.

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Change in demand

The whole demand curve shifts ( TRIPE)

Price ↑ of one → Demand ↓ for the other

Example: If income rises (normal good), demand shifts right

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Change in quantity demanded

Movement along the same curve caused by a change in price only

Price goes down → move down the curve → buy more.

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Supply

The amount of a good or service that producers are willing and able to sell at different prices

As price ↑, quantity supplied ↑ (because producers want more profit).

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Supply schedule

A table showing how much producers will supply at different prices

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Law of Supply

Direct relationship between price and quantity supplied

When price increases, producers supply more

When price decreases, producer supply less

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Supply curve

Slope upward from left to right (↑)

Each point=one price-quantity combo from the supply schedule

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Determinant of supply. (Shifters)

Factors that shift the entire supply curve, not just move along it

Resource (input) prices ↑ costs = ↓ supply.

Technology better tech = ↑ supply.

Number of sellers more sellers = ↑ supply.

Taxes and subsidies taxes ↓ supply; subsidies ↑ supply.

Expectations future higher prices = ↓ current supply.

Price of other goods - if producers can make something more profitable, they shift resources

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Change in Supply

A shifter of the entire supply curve due to a determinant

  • Right shift = ↑ supply.

  • Left shift = ↓ supply.

Example: New machine make production faster → Supply increase

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Change in quantity supplied

A movement along the same supply curve caused only by a change in price

Example: If price goes from $10 to $15, producers make more - but the curve doesn’t move

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Equilibrium price

The price where quantity demanded = quantity supplied

No surplus or shortage at this point

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Equilibrium quantity

The quantity brought and sold at the equilibrium pirce

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Surplus

When quantity supplied > quantity demanded (too much product)\

Happened when prices are too high

Fix: Seller lower prices

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Shortage

Happens when quantity demanded > quantity supplied.

Means there’s not enough product — consumers want more than what’s available.

Cause: The price is too low.

Fix: Sellers will raise prices until the market reaches equilibrium.

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Price Ceiling

A max legal price set BELOW EQUILIBRIUM

Cause SHORTAGES because demand > supply

Example: Rent Control

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Price Floor

A minimum legal price set ABOVE EQUILIBRIUM

Causes surpluses because supply > demand

Example: minimum wage