Microeconomics Chapter 3: Where Prices Come From: The Interaction of Demand and Supply

Vocabulary flashcards covering key economic terms, definitions, laws, and market concepts from Chapter 3: Where Prices Come From: The Interaction of Demand and Supply.

Perfectively competitive market

A market with (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

Market demand

The demand by all the consumers of a given good or service.

Demand schedule

A table that shows the relationship between the price of a product and the quantity of the product demanded.

Demand curve

A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Quantity demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price.

Law of demand

A rule that states that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

Substitution effect

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in the good's price on a consumer's purchasing power, holding all other factors constant.

Ceteris paribus condition

The "all else equal" requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.

Normal good

A good for which the demand increases as income rises and decreases as income falls.

Inferior good

A good for which the demand increases as income falls and decreases as income rises.

Substitutes

Goods and services that can be used for the same purpose.

Complements

Goods and services that are used together.

Demographics

The characteristics of a population with respect to age, race, and gender.

Natural disaster (economic context)

A hurricane, flood, or similar act of nature that causes damage to stores, factories, or office buildings.

Pandemic (economic context)

A situation in which a disease becomes sufficiently widespread as to significantly affect economic activity.

Change in demand

A shift of the entire demand curve caused by a change in any variable other than the price of the product itself.

Change in quantity demanded

A movement along a fixed demand curve caused by a change in the price of the product being examined.

Market supply

The decisions of (generally) firms about how much of a product to provide at various prices.

Supply schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied.

Supply curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price.

Law of supply

A rule that states that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

Inputs

Anything used in the production of a good or service, such as plastic, labor, and transportation services.

Technological change

A positive or negative change in a firm's ability to produce a given level of output with a given quantity of inputs.

Substitutes in production

Alternative products that a single firm can produce and sell using its resources (such as corn versus soybeans for a farmer).

Complements in production

Two products that are necessarily produced together (such as beef and leather from cattle).

Change in supply

A shift of the entire supply curve caused by a change in any factor other than the price of the good itself.

Change in quantity supplied

A movement along a fixed supply curve caused specifically by a change in the price of the product being examined.

Market equilibrium

A situation in which quantity demanded equals quantity supplied.

Competitive market equilibrium

A market equilibrium that occurs specifically within a perfectly competitive market.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded, resulting from the market price being above equilibrium.

Shortage

A situation in which the quantity demanded is greater than the quantity supplied, resulting from the market price being below equilibrium.

Endogenous variable

A factor inside a model or system whose value is determined by relationships and interactions with other variables within that same system, such as equilibrium price ($P$) and equilibrium quantity ($Q$).

Exogenous variable

A variable whose measure is determined outside the model and is imposed in the model, such as taxes, consumer incomes, and input prices.

Comparative statics

The method of comparing an initial equilibrium with a new equilibrium after an exogenous variable (an outside factor) changes.