Chapter 6 :Combining Supply and Demand Test

Equilibrium

The point of balance at which the quantity demanded equals the quantity supplied.

At equilibrium.

When is the market for a good stable?

How many equilibrium prices are there?

one

What does the market gradually move towards?

equilibrium

 What is the first shifter of demand?

Tastes/preferences

How does taste and preferences change demand?

Increased popularity raises demand; decreased popularity lowers demand.

What is the second shifter of demand?

Number of consumers

How does the number of consumers change demand?

More consumers increases demand; fewer consumers decreases demand.

What is the third shifter of demand?

Price of related goods

What is a substitute good?

A good that replaces another (ex: Coke instead of Pepsi).

How do substitutes affect demand?

If the price of one substitute rises, demand for the other rises.

What is a complement good?

A good used together with another (ex: shoes + socks).

How do complements affect demand?

If the price of one complement rises, demand for the other falls.

What is the fourth shifter of demand?

Income

How does income affect demand?

Higher income increases demand; lower income decreases demand.

What is the fifth shifter of demand?

Future price expectations

How do future price expectations change demand?

If people expect prices to rise, demand increases now; if they expect prices to fall, demand decreases now.

What is the first shifter of supply?

Price of resources

How do resource prices affect supply?

Higher resource costs decrease supply; lower resource costs increase supply.

What is the second shifter of supply?

Number of producers.

How does the number of producers affect supply?

More producers increase supply; fewer producers decrease supply.

What is the third shifter of supply?

Technology.

How does technology affect supply?

Better technology increases supply by making production cheaper and faster.

What is the fourth shifter of supply?

Taxes and subsidies

How do taxes affect supply?

Taxes increase production cost → supply decreases.

How do subsidies affect supply?

Subsidies lower production cost → supply increases.

What is the fifth shifter of supply?

Future price expectations

How do future price expectations affect supply?

Expect higher prices later → supply decreases now; expect lower prices later → supply increases now.

Shortage

When quantity demanded is greater than quantity supplied (price is too low).

Surplus

When quantity supplied is greater than quantity demanded (price is too high).

Price Floor

A government-imposed minimum price that is above equilibrium, causing a surplus.

Price Ceiling

A government-imposed maximum price that is below equilibrium, causing a shortage.

Elastic Demand

Demand is sensitive to price changes; consumers respond significantly.

Inelastic Demand

Demand is not sensitive to price changes; consumers respond very little.

Unit Elastic

When the percentage change in quantity equals the percentage change in price.

Black Market

Illegal market that forms when price ceilings or shortages prevent consumers from obtaining goods legally.

Minimum wage

A price floor on labor (causes surplus of labor = unemployment).

Incentive

Something that motivates buyers or sellers to take action.

Invisible Hand

Adam Smith’s idea that individuals acting in their own self-interest unintentionally promote the good of society and keep the market running efficiently.

The wealth of nations

The Wealth of Nations is Adam Smith’s book that explains how free markets, guided by the invisible hand, self-interest, and competition, efficiently allocate resources with minimal government interference.