Principles of Microeconomics Chapter 3 Supply and Demand

market

consists of all buyers or sellers of that good

demand curve

a schedule or graph showing the quantity of a good that buyers wish to buy at each price

substitution effect

the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes

income effect

the change in the quantity demanded of a good that results because the change in the price of a good changes the buyers purchasing power.

buyer's reservation price

the largest $ amount that a buyer would be willing to pay for a good.

supply curve

a graph or schedule showing the quantity of a good that sellers wish to sell at each price.

seller's reservation price

the smallest $ amount for which a seller would be willing to sell an additional until, generally equal to marginal cost

equilibrium

there is no tendency for change

equilibrium price and quantity

the values of price and quantity for which quantity supplied and quantity demanded are equal

market equilibrium

occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price

excess supply

the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price.

excess demand

the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price.

price ceiling

a max. allowable price, specified by law.

change in the quantity demanded

a movement along the demand curve that occurs in response to a change in price

change in demand

a shift in the entire demand curve

change in supply

a shift in the entire supply curve

change in the quantity supplied

a movement along the supply curve which occurs in response to a change in price.

complements

an increase in the price of one causes a leftward shift in the demand curve for the other (or a decrease causes a rightward shift)

substitutes

an increase in the price of one causes a rightward shift in the demand for the other (of if a decrease causes a leftward shift)

normal good

demand curve shifts rightward when the incomes of buyers increase and a leftward shift when the incomes of buyers decrease.

inferior good

demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease

buyer's surplus

the difference between the buyer's reservation price and the price he or she actually pays

seller's surplus

the difference between the price received by the seller and his or her reservation price

total surplus

the difference between the buyer's reservation price and the seller's reservation price

cash on the table

economic metaphor for unexploited gains from exchange

socially optimal quantity

the quantity of a good that results in the max. possible economic surplus from producing and consuming the good

efficiency

occurs when all goods and services are produced and consumed at their respective socially optimal levels.

Efficiency Principle

When the economic pie grows larger, everyone can have a larger slice

Equilibrium Principle

a market that leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action

market supply

the sum of all of the Q supplied of all individual firms in the market for each price level.