Chapter 4: The Market Forces of Supply and Demand

Market

A group of buyers and sellers of a particular good or service

Competitive Market

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

Perfectly Competitive Market

When the goods offered 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

Monopoly

When a market has one seller that 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 being equal, the quantity demanded of a good falls when the price of the good 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

Normal Good

A good for which other things being equal, an increase in income leads to an increase in demand

Inferior Good

A good for which, other things being equal, 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 being equal, the quantity supplied of a good rises when the price of the good rises

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

Equilibrium

A situation in which the market price has reached the level at which the quantity supplied=quantity demanded

Equilibrium Price

The price that balances the quantity supplied and the quantity demanded

Equilibrium Quantity

The quantity supplied and the quantity demanded at the equilibrium price

Law of Supply and Demand

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

Threshold Value

A specific price level where a market is in equilibrium

Ceteris Paribus

Holding all else constant

Relative Price

The price of a good compared to the price of other goods

Law of Diminishing Marginal Benefit

As more units of a good are consumed, additional units provide less benefit

Opportunity Cost of Production

The total economic cost of producing a good or service. The cost component includes the opportunity cost of all resources, including those owned by the firm. The opportunity cost is equal to the value of the production of other goods sacrificed as the result of producing the good

The Law of Increasing Opportunity Costs

To supply additional units of a good, producers have greater opportunity costs, so the price must rise to induce producers to supply greater quantities

Deriving Demand

The demand for a good or service that arises from the demand for another, related good or service

Individual Demand

Quantity of a good or service that a single consumer is willing and able to purchase at various prices during a specific period, assuming other factors remain constant

Market Demand

Total quantity of a good or service that all consumers in a market are willing and able to purchase at various price levels over a given period

Partial Equilibrium Analysis

An economic method for examining equilibrium in a single market or sector, assuming other markets remain unaffected

Change in Quantity Demanded

The change in the number of units consumers are willing and able to purchase at a specific price, caused solely by a change in the good's own price

Change in Demand

A complete shift of the entire demand curve, either to the left (a decrease) or to the right (an increase), caused by a change in a non-price determinant of demand, such as consumer income, tastes, or expectations, while the price of the good remains constant

Shift Factors of Demand

• Prices of related goods substitutes

• Changes in income

• Changes in expectations

• Changes in population

Individual Supply

Amount of a specific good or service that a single producer or firm is willing and able to offer for sale at various prices over a given time period, holding all other factors constant

Market Supply

Total quantity of a good or service that all producers in a market are willing and able to sell at various prices during a specific time period

Why Demand Slopes Downward

As the price of a good or service increases, the quantity demanded decreases, and vice versa

Why Supply Slopes Upward

As the price of a good or service increases, the quantity supplied by producers also increases

Change in Quantity Supplied

Movement along an existing supply curve caused solely by a change in the market price of a good or service

Change in Supply

Refers to a shift in the entire supply curve, meaning producers are willing and able to supply a different quantity of a good or service at every price point

Shift Factors of Supply

• Change in prices of factors of production

• Technology 

Input Prices

The costs of the resources, materials, and factors of production used to create goods and services

Substitutes in Production

Different goods that can be produced using the same limited resources

Complements in Production

Pairs of goods that are jointly produced from the same resource

Market Equilibrium

The state in an economic market where the quantity of a good or service that producers are willing to supply equals the quantity that consumers demand, resulting in a stable, market-clearing price

Shortage

Excess Demand

Surplus

Excess supply

Disequilibrium

A market situation where supply and demand are out of balance, leading to either excess supply or excess demand

Scalping

The practice of buying something and reselling or exchanging it for more than you paid

Price Gouging

The act of charging an excessive price for a necessary good or service

Comparative Statics Analysis

An economic analysis technique that compares two equilibrium states of a model to predict how a change in an exogenous variable (an external factor) affects the endogenous variables (internal factors) of the system, such as price or quantity

The Role of Prices

A signaling mechanism to allocate scarce resources, provide incentives for producers and consumers, and ration goods and services to those willing to pay the most

Alfred Marshall

Developed the supply and demand model that we currently use today