Chapter 4: The Market Forces of Supply and Demand

Vocabulary flashcards covering key definitions, principles, and diagrams of supply and demand from Mankiw's Principles of Economics.

Supply and Demand

The forces that make market economies work, referring to the behavior of people as they interact with one another in competitive markets.

Market

A group of buyers and sellers of a particular good or service, where buyers as a group determine the demand and sellers as a group determine the supply.

Competitive Market

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

Perfectly Competitive Market

A market where goods offered for sale are all exactly the same, and buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.

Price Takers

Buyers and sellers in a perfectly competitive market who must accept the market price as given, buying or selling all they want at that price.

Monopoly

A market structure with only one seller who sets the price.

Quantity Demanded

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

Law of Demand

The claim that, other things equal, when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded 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, plotted with price on the vertical axis and quantity on the horizontal axis.

Market Demand

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

Normal Good

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

Inferior Good

A good for which, other things constant, 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 the 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.

Quantity Supplied

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

Law of Supply

The claim that, other things equal, when the price of a good rises, the quantity supplied also rises, and when the price falls, the quantity supplied falls as well.

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, plotted with price on the vertical axis and quantity on the horizontal axis.

Market Supply

The sum of the supplies of all sellers for a good or service.

Equilibrium

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

Equilibrium Price

The price that balances quantity supplied and quantity demanded, also known as the market-clearing price.

Equilibrium Quantity

The quantity supplied and quantity demanded at the equilibrium price.

Surplus

A situation in which quantity supplied is greater than quantity demanded, creating excess supply.

Shortage

A situation in which quantity demanded is greater than quantity supplied, creating excess demand.

Law of Supply and Demand

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

Change in Demand

A shift in the demand curve caused by a non-price variable such as income, prices of related goods, tastes, expectations, or number of buyers.

Change in Quantity Demanded

A movement along a fixed demand curve in response to a change in the price of the good itself.

Change in Supply

A shift in the supply curve caused by a non-price variable such as input prices, technology, expectations, or number of sellers.

Change in Quantity Supplied

A movement along a fixed supply curve in response to a change in the price of the good itself.

Market Equilibrium Diagram

Graph showing the point where the supply and demand curves intersect to establish equilibrium price and quantity.

Excess Supply and Excess Demand Diagram

Diagram illustrating excess supply (surplus) when market price is above equilibrium and excess demand (shortage) when market price is below equilibrium.

Simultaneous Supply and Demand Shift Diagram

Graphs illustrating how simultaneous shifts in demand and supply affect equilibrium price and quantity depending on the relative magnitude of the shifts.