Chapter 3: Supply and Demand

Ceteris Paribus

Other things being equal. "Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal".

Demand Curve

A graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis.

Demand Schedule

A table that shows a range of prices for a certain good or service and the quantity demanded at each price.

Demand

Refers to the amount of some good or service consumers are willing and able to

purchase at each price.

Quantity Demanded

The total number of units of a good or service consumers are willing to purchase at a given price.

Shift in Demand

When a change in some economic factor (other than price) causes a different quantity to be demanded at every price (ex: drought is predicted and people stock up on water).

Law of Demand

The common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant. It's an inverse relationship between price and quantity demanded.

Normal Good

A good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls.

Complements

Goods that are often used together so that consumption of one good tends to enhance consumption of the other.

Substitutes

A good that can replace another to some extent, so that greater consumption of one good can mean less of the other.

Supply

The relationship between price and the quantity supplied of a certain good or service

Supply Curve

A line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis.

Supply Schedule

A table that shows a range of prices for a good or service and the quantity supplied at each price.

Quantity Supplied

The total number of units of a good or service producers are willing to sell at a given price.

Shift in Supply

When a change in some economic factor (other than price) causes a different quantity to be supplied

at every price.

Law of Supply

The common relationship that a higher price leads to a greater quantity supplied and a lower price

leads to a lower quantity supplied, while all other variables are held constant.

Inputs/factors of production

The combination of labor, materials, and machinery that is used to produce goods and services; also called

"factors of production".

Equilibrium

The situation where quantity demanded is equal to the quantity supplied; the point where the

supply curve (S) and the demand curve (D) cross.

Equilibrium Price

The price where quantity demanded is equal to quantity supplied.

Equilibrium Quantity

The quantity at which quantity demanded and quantity supplied are equal for a certain price level.

Excess Demand/Shortage

At the existing price, the quantity demanded exceeds the quantity supplied; also called a "shortage".

Excess Supply/Surplus

At the existing price, quantity supplied exceeds the quantity demanded; also called a surplus.

Price Ceiling

A legal maximum price. Keeps a price from rising above a certain level (the "ceiling").

Price Control

Government laws to regulate prices instead of letting market forces determine prices.

Price Floor

A legal minimum price. Keeps a price from falling below a certain level (the "floor").

Consumer Surplus

The extra benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid.

Producer Surplus

The extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept.

Social Surplus

The sum of consumer surplus and producer surplus.

Interest Rate

The "price" of borrowing in the financial market; a rate of return on an investment

Minimum Wage

A price floor that makes it illegal for an employer to pay employees less than a certain hourly rate