Chapter 2-supply and demand

Market

an institution that brings together a buyer(s) and seller(s)

demand

the range of quantities of a commodity that a buyer is willing and able to purchase at different prices in a specific period of time.

demand curve

a schedule or graph showing showing the quantity of a good the buyers wish to buy at each price. Price on Y, quantity on X. 

increase in demand 

curve shifts to the right 

decrease in demand

the curve shifts to the left

determinates of demand 

income 

number of buyers

price of related good 

expectations 

taste/preferences 

taxes/subsides 

wealth 

price of the good (movement along the curve) 

Law of Demand

the law of demand states that there is an inverse relationship between the price of a good and the quantity demanded of that good

substitution effect

the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes

income effect

the change in the quantity demanded of a good that results because a change in the price of a good changes the buyers purchasing power 

Buyers reservation price

the largest dollar amount the buyer would be willing to pay for a good

supply curve

a graph or schedule showing the quantity of a good that sellers wish to sell at each price

sellers reservation price 

the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost

equilibrium

a balanced or unchanging situation in which all forces at work within a system are canceled by others

equilibrium price and quantity

the price and quantity at the intersection of the supply and demand curves

market equilibrium 

occurs in a market when all buyers are sellers are satisfied with their respective quantities at the market price 

surplus

the amount by when quantity supplied exceeds quantity demanded when the price of the good equals the equilibrium price. 

shortage

the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price

price ceiling 

a meximum allowance price, specified by law 

change in the quantity demanded

a movement along the demand curve that occurs in response to a change in price

change in demand

a shift of the entire demand curve

change in supply 

a shift of the entire supply curve 

change in the quantity supplied

a movement along the the supply curve that occurs in response to a change in price

complements

two goods are this in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift)

substitutes 

two goods are this in consumption if an increase in the price of one causes a rightward shift of the demand curve for the other (or if a decrease causes a leftward shift)

income

an increase in this shifts the demand curve for normal goods to the right

normal good

a good whose demand curve shifts rightward when the incomes of buyers increase and leftward when the income of buyers decrease

inferior goods 

a good whose demand shifts leftward when the income of buyers increase and rightward when the income of buyers decrease 

increase in the cost of goods

when input prices rise, supply, shifts left, causing equilibrium price to rise and equilibrium quantity to fall. If they fall, supply shifts right

factors that cause an increase in demand

1) decrease in the price of complements

2)an increase in the price of substitutes

3) an increase in income for a normal good

4)an increased preference by demanders for the good or service

5) an increase in population of potential buyers

6)an expectation of higher prices in the future

factors that cause an increase in supply 

1) a decrease in the cost of materials, labour, or other inputs used in the production of the good or service 

2)an improvement in technology that reduces the cost of producing the good or service 

3)an improve in the weather (for agricultural goods)

4)an increase in the number of supplies

5)an expectation of lower prices in the future 

relative magnitude

the effects of the shift in equilibrium quantitiy cannot be determined without knowing this of the shifts

Buyers surplus

the difference between the buyers reservation price and the price he or she actually pays

sellers surplus 

the difference between the price received by the seller and his or her reservation price 

total surplus

the difference between the buyers reservation price and the sellers reservation price

cash on the table

an economic metaphor for unexploited gains for exchange

socially optimal quantity 

the quality of a good that results in the maximum possible economic surplus from producing and consuming goods 

efficiency 

a condition that occurs when all goods and services are produced and consumed at thier respective socially optimal level