Chapter 3: Demand, Supply, and Market Equilibrium

Demand

Schedule/curve showing various amounts of product that consumers willing + able to buy at several possible prices during a specific period of time

Demand schedule

Illustrates quantity demanded of a good or service at different prices

Law of demand

Other things equal, as price falls, the quantity demanded rises (and vice versa)

Diminishing marginal utility

Each successive unit of product consumed → Buyers get less satisfaction

Income effect

Lower price increases purchasing power of income → Buyer can purchase more of product than before (and vice versa)

Substitution effect

Buyer has incentive to substitute less expensive products for similar products that are relatively more expensive

Demand curve

Quantity demanded on horizontal axis, price on vertical axis; downward slope reflects law of demand

Determinants of demand

Other factors besides price that affect purchases; shifts the demand curve

Normal goods

Rise in income causes increase in demand

Inferior goods

Rise in income causes decrease in demand

Substitute goods

Increase in price of one related good → Demand for other good increases

Complementary goods

Increase in price of one related good → Demand for other good decreases

Change in demand

Shift of demand curve to right/left

Change in quantity demanded

Movement from one point to another on a fixed demand curve

Supply

Schedule/curve showing various amounts of product that producers are willing + able to make available for sale at several possible prices during a specific period of time

Supply schedule

Illustrates quantity supplied of a good or service at different prices

Law of supply

Other things equal, as price rises, the quantity supplied rises (and vice versa)

Supply curve

Upward sloping; reflects law of supply

Determinants of supply

Other factors besides price that affect supply; shifts supply curve

Change in supply

Shift of supply curve to right/left

Change in quantity supplied

Movement from one point to another on a fixed supply curve

Equilibrium price

Price where quantity demanded = quantity supplied

Equilibrium quantity

Quantity demanded and quantity supplied at the equilibrium price

Surplus

Quantity supplied exceeds quantity demanded; drives prices down

Shortage

Quantity demanded exceeds quantity supplied; drives prices up

Productive efficiency

Production of a good in the least-costly way

Allocative efficiency

Production of the particular mix of goods and services most highly valued by society

Price ceiling

Maximum legal price a seller can charge for a good or service

Price floor

Minimum legal price a seller can charge for a good or service