Markets: Demand, Supply, and Equilibrium

Flashcards covering key concepts from lecture notes on markets, demand, supply, equilibrium, and government interventions like price ceilings and floors.

What is a market in economic terms?

A place or system where buyers (demand) and sellers (suppliers) interact to exchange goods and services, facilitated by price and quantity.

What are the four primary components that characterize a market?

Demand, Supply, Price, and Quantity.

What is a demand schedule?

A table that shows the various quantities of a product that consumers are willing and able to purchase at a range of prices, assuming other things remain equal.

What kind of relationship exists between price and quantity demanded according to a demand schedule or curve?

An inverse, or negative, relationship.

State the Law of Demand.

As the price of a product falls, the quantity demanded rises; and as the price rises, the quantity demanded falls, assuming all other things remain equal.

What are the main reasons for the Law of Demand?

Common sense (high prices are obstacles), diminishing marginal utility, the income effect, and the substitution effect.

Explain the income effect in the context of the Law of Demand.

A lower price increases the purchasing power of a buyer's money income, enabling them to buy more of the product than before.

Explain the substitution effect in the context of the Law of Demand.

At a lower price, buyers have an incentive to substitute the now less expensive product for other products that are relatively more expensive, perceiving it as a 'better deal'.

How is market demand derived from individual demand?

Market demand is the sum of total quantities demanded by all individual buyers at each possible price.

What are the five basic determinants (shifters) of demand?

Consumer tastes, number of buyers in the market, consumer income, prices of related goods, and consumer expectations.

What is a 'change in demand' graphically?

A shift of the entire demand curve either to the right (increase in demand) or to the left (decrease in demand), caused by a change in one of the demand determinants.

What effect does an increase in the number of buyers have on market demand?

An increase in the number of buyers will generally lead to an increase in demand, shifting the demand curve to the right.

Distinguish between a 'normal good' and an 'inferior good' based on consumer income.

For normal goods, demand increases as income rises. For inferior goods, demand falls as income rises.

How do substitute goods affect demand?

If the price of one substitute good increases, the demand for the other substitute good (which is now relatively cheaper) will increase.

How do complementary goods affect demand?

If the price of one complementary good increases, the demand for the other complementary good will decrease (as they are typically consumed together).

What is the difference between a 'change in demand' and a 'change in quantity demanded'?

A change in demand is a shift of the entire demand curve, caused by a determinant of demand. A change in quantity demanded is a movement along a fixed demand curve, caused by a change in the product's own price.

What is a supply schedule?

A table that shows the various quantities of a product that producers are willing and able to offer for sale at a range of prices.

State the Law of Supply.

As the price of a product rises, the quantity supplied rises; and as the price falls, the quantity supplied falls, assuming all other things remain equal.

What kind of relationship exists between price and quantity supplied according to the Law of Supply?

A positive, or direct, relationship.

Why does the supply curve slope upwards?

The upward slope reflects the Law of Supply; producers offer more of a good, service, or resource for sale as its price rises because higher prices provide a greater incentive and can cover increased production costs for additional units.

What are the six basic determinants (shifters) of supply?

Resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, and the number of sellers in the market.

How do higher resource prices affect supply?

Higher resource prices increase production costs, which reduces supply (shifts the supply curve to the left).

How does improved technology affect supply?

Better technology allows for more output with fewer resources, lowering production costs and increasing supply (shifts the supply curve to the right).

How do taxes and subsidies affect supply?

Taxes raise production costs and decrease supply, while subsidies lower production costs and increase supply.

What is a 'change in supply' graphically?

A shift of the entire supply curve either to the right (increase in supply) or to the left (decrease in supply), caused by a change in one of the supply determinants.

What is the difference between a 'change in supply' and a 'change in quantity supplied'?

A change in supply is a shift of the entire supply curve, caused by a determinant of supply. A change in quantity supplied is a movement along a fixed supply curve, caused by a change in the product's own price.

What is market equilibrium?

The point where the quantity demanded by buyers equals the quantity supplied by sellers, resulting in no shortage or surplus.

What is the equilibrium price, also known as the market-clearing price?

The price at which the intentions of buyers and sellers match, meaning the quantity demanded exactly equals the quantity supplied.

What is a market surplus and what effect does it have on price?

A market surplus occurs when the quantity supplied exceeds the quantity demanded at a given price, usually leading to competitive pressure among sellers to lower prices.

What is a market shortage and what effect does it have on price?

A market shortage occurs when the quantity demanded exceeds the quantity supplied at a given price, usually leading to competitive pressure among buyers to bid prices up.

What is the rationing function of prices?

The ability of competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent, allocating goods to those willing and able to pay the equilibrium price.

What is productive efficiency?

The production of any good in the least costly way possible.

What is allocative efficiency?

The particular mix of goods and services most desired by society, occurring when an economy produces the right amount of each product based on marginal benefit equaling marginal cost.

If demand for a good increases while supply remains constant, what happens to the equilibrium price and quantity?

Both the equilibrium price and equilibrium quantity will increase.

If supply for a good increases while demand remains constant, what happens to the equilibrium price and quantity?

The equilibrium price will decrease, and the equilibrium quantity will increase.

Define a 'price ceiling'.

A maximum legal price that a seller might charge for a product or service, set below the equilibrium price, often leading to shortages.

Define a 'price floor'.

A minimum price fixed by the government, typically set above the equilibrium price, often leading to surpluses.

What is a quota in a market context?

A restriction or limit on the quantity of a good or service that can be sold in a market.