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

Surplus

A situation in which the quantity supplied is greater than the quantity demanded

Shortage

A situation in which the quantity demanded is greater than the quantity supplied

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 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