Chapter 3: "Demand, Supply, and Market Equlibrium"

factors influencing a firm's decision about what quantity of output, or product, to supply

1. The price of a good or service., 2. The cost of producing the product, which in turn depends on (a.) The price of required inputs (labor, capital, and land; (b.) The technologies that can be used to produce the product., 3. The prices of related products.

Factors that determine a household's decision about what quantity of a particular output, or product, to demand

1. The price of the product in question., 2. The income available to the household., 3. The household's amount of accumulated wealth., 4. The prices of other products available to the household., 5. The household's tastes and preferences., 6. The household's expectations about future income, wealth, and prices.

properties of demand curves

1. They have a negative slope. An increase in proce is likely to lead to a decrease in quantity demanded, and a decrease in price is likely to lead to an increase in quantity demanded., 2. They intersect the quantity (X-) axis, a result of time limitations and diminishing marginal utility., 3. They intersect the price (Y-) axis, a result of limited income and wealth.

factors determining costs of production

1. the kinds of inputs needed to produce the product, 2. the amount of each input required, and 3. the prices of inputs.

demand curve

A graph illustrating how much of a given product a household would be willing to buy at different prices.

supply curve

A graph illustrating how much of a product a firm will sell at different prices.

entrepreneur

A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

demand schedule

A table showing how much of a given product a household would be willing to buy at different prices.

supply schedule

A table showing how much of a product firms will sell at alternate prices.

firm

An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

quantity demanded vs. demand

Changes in the price of a product affect the quantity demanded per period. Changes in any other factor, such as income or preferences, affect demand.

normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

inferior goods

Goods for which demand tends to fall when income rises.

complements, complementary goods

Goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa.

substitutes

Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.

perfect substitutes

Identical products.

Features of Input and Output markets

Input and output markets are connected through the behavior of both firms and households. Firms determine the quantities and character of outputs produced and the types and quantities of inputs demanded. Households determine the types and quantities of products demanded and the quantities and types of inputs supplied.

quantity demanded

The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

quantity supplied

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

movement along a demand curve

The change in quantity demanded brought about by a change in price.

movement along a supply curve

The change in quantity supplied brought about by a change in price.

shift of demand curve

The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought by a change in the original conditions.

shift of a supply curve

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.

excess demand or shortage

The condition that exists when quantity demanded exceeds quantity supplied at the current price.

equilibrium

The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.

excess supply or surplus

The condition that exists when quantity supplied exceeds quantity demanded at the current price.

households

The consuming units in an economy. A household may consist of any number of people.

profit

The difference between revenues and costs.

land market

The input/factor market in which households supply land or other real property in exchange for rent

capital market

The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods

labor market

The input/factor market in which households supply work for wages to firms that demand labor

factors of production

The inputs into the production process. Land, labor, and capital are the three key factors of production.

product or output markets

The markets in which goods and services are exchanged. Firms supply and households demand.

input or factor markets

The markets in which the resources used to produce goods and services are exchanged. Households supply resources and firms demand

law of demand

The negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as price falls, quantity demanded increases.

law of supply

The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

income

The sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

market supply

The sum of all that is supplied each period by all producers of a single product.

market demand

The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

wealth or net worth

The total value of what a household owns minus what it owes. It is a stock measure: it is measured at a given point in time.

tastes and preferences

They are volatile and they are idiosyncratic.

price rationing

When quantity demanded exceeds quantity supplied, price tends to rise. When the price in a market rises, quantity demanded falls and quantity supplied rises until an equilibrium is reached at which quantity demanded and quantity supplied are equal.

changes in equilibrium

When quantity supplied exceeds quantity demanded at the current price, the price tends to fall. When price falls, quantity supplied is likely to decrease and quantity demanded is likely to increase until an equilibrium price is reached where quantity supplied and quantity demanded are equal.

determinants of an individual household demand curve

income, wealth or net worth, normal goods, inferior goods, substitutes, perfect substitutes, complementary goods, tastes and preferences, and expectations.