Economics: Supply and Demand Model

Flashcards covering key economic concepts related to the supply and demand model, including definitions, laws, market dynamics, and applications.

Economics

The study of how consumers and producers make decisions with scarce income and the outcomes of those decisions.

Supply and Demand Model

A framework used to understand markets, explaining price and quantity changes based on the interaction of buyers and sellers.

Ceteris Paribus

(Latin) All other things being equal.

Market Assumptions (Supply and Demand Model)

Key simplifications include: only one market, identical goods, same price for all goods with shared information, and many buyers and sellers.

Demand

A relationship between price and the quantity demanded.

Price

The amount of money or other goods that one must pay to obtain a particular good.

Quantity Demanded

The quantity of a good that people want to buy at a given price during a specific time period.

Law of Demand

The tendency for the quantity demanded of a good to decline as its price rises, resulting in a downward-sloping demand curve.

Veblen Goods (Luxury/Status Goods)

Goods where higher prices make them more desirable as a signal of wealth or status; demand may rise as the price rises (violation of law of demand).

Speculative/Expectations-driven Demand

When people expect prices to rise further, they may demand more at higher prices (violation of law of demand).

Giffen Goods

During economic hardship, if the price of basic staples rises, households may buy more of the staple to meet minimum calorie needs because they can no longer afford pricier alternatives (violation of law of demand).

Movement Along Demand Curve

Occurs when the price of a good changes, causing a change in the quantity demanded.

Shift in Demand Curve

Occurs due to factors other than price (e.g., preferences, number of consumers, income, expectations, price of related goods), causing an increase or decrease in demand at every price.

Supply

A relationship between price and the quantity supplied, all other things equal.

Quantity Supplied

The quantity of a good that sellers are willing to sell at a given price during a specific time period.

Law of Supply

The tendency for the quantity supplied of a good in a market to increase as its price rises, resulting in an upward-sloping supply curve.

Backward-bending Labor Supply Curve

At very high wages, some workers may prefer more leisure over supplying more labor, so higher wages can lead to less labor supplied (violation of law of supply).

Movement Along Supply Curve

Occurs when the price of a good changes, causing a change in the quantity supplied.

Shift in Supply Curve

Occurs due to factors other than price (e.g., technology, weather, number of firms, input prices, expectations, government taxes/subsidies/regulations), causing an increase or decrease in supply at every price.

Equilibrium Price

The price at which the quantity that sellers are willing to sell equals the quantity that consumers are willing to purchase.

Equilibrium Quantity

The quantity traded at the equilibrium price.

Market Equilibrium

The situation where the market price equals the equilibrium price and the quantity traded equals the equilibrium quantity, with no tendency for change.

Shortage (Excess Demand)

A situation in which the quantity demanded is greater than the quantity supplied, occurring when the market price is below the equilibrium price, causing prices to rise.

Surplus (Excess Supply)

A situation in which the quantity supplied is greater than the quantity demanded, occurring when the market price is above the equilibrium price, causing prices to fall.

Vernon Smith (1962) Double Auction Experiment

An experiment demonstrating that equilibrium price and quantity can emerge even with a small number of traders in a competitive market setting.

Index Inclusion/Exclusion

An application showing how liquidity pressure from investors adjusting portfolios due to a stock being added or removed from an index can temporarily push share prices up or down, reverting once adjustments are complete.