Chapter 3: Supply and Demand

There are five main factors that shift the demand curve:

"(1) A change in the prices of related goods or services, such as substitutes or complements. (2) A change in income: when income rises, the demand for normal goods increases and the demand for inferior goods decreases (3) A change in tastes (4) A change in expectations (5) A change in the number of consumers"

There are five main factors that shift the supply curve:

(1) A change in input prices; (2) A change in the prices of related goods and services (3) A change in technology; (4) A change in expectations; and (5) A change in the number of producers

The curve that shifts the greater distance has a (greater or lesser) effect on the changes in equilibrium price and quantity.?

Greater

surplus (and what does it do?)

The excess of a good or service that occurs when the quantity supplied exceeds the quantity demanded; surpluses occur when the price is above the equilibrium price. WHAT DOES IT DO? When the price is above its market-clearing level, there is a surplus that pushes the price down.

Can shifts of the demand curve and the supply curve happen simultaneously?

Yes.

Demand curve

a graphical representation of the demand schedule, showing the relationship between quantity demanded and price.

Individual demand curve

a graphical representation of the relationship between quantity demanded and price for an individual consumer.

Individual supply curve

a graphical representation of the relationship between quantity supplied and price for an individual producer.

The demand schedule

a list or table showing how much of a good or service consumers will want to buy at different prices. Is represented graphically by a demand curve. .

The supply schedule

a list or table showing how much of a good or service producers will supply at different prices. Is represented graphically by a supply curve. Supply curves usually slope upward.

Competitive market

a market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold.

The supply and demand model

a model of how a competitive market behaves.

A decrease in demand

causes a leftward shift of the demand curve.

A decrease in supply

causes a leftward shift of the supply curve

An increase in demand causes

causes a rightward shift of the demand curve.

An increase in supply

causes a rightward shift of the supply curve.

What does an INCREASE in DEMAND do to the equlibrium price and equilibrium quantity?

increases both the equilibrium price and the equilibrium quantity

What does a DECREASE in SUPPLY do to the equlibrium price and equilibrium quantity?

increases the equilibrium price and reduces the equilibrium quantity

The market demand curve for a good or service

is the horizontal sum of the individual demand curves of all consumers in the market.

The market supply curve for a good or service

is the horizontal sum of the individual supply curves of all producers in the market.

A movement along the demand curve

occurs when a price change leads to a change in the quantity demanded.

A movement along the supply curve

occurs when a price change leads to a change in the quantity supplied.

Complements

pairs of goods for which a decrease in the price of one good leads to an increase in the demand for the other good.

Substitutes

pairs of goods for which a decrease in the price of one of the goods leads to an decrease in the demand for the other good.

What does a DECREASE in DEMAND do to the equlibrium price and equilibrium quantity?

reduces both the equilibrium price and the equilibrium quantity

What does an INCREASE in SUPPLY do to the equlibrium price and equilibrium quantity?

reduces the equilibrium price and increases the equilibrium quantity

The law of demand

says that demand curves slope downward; that is, a higher price for a good or service leads people to demand a smaller quantity, other things equal.

When economists talk of increasing or decreasing demand, they mean

shifts of the demand curve—a change in the quantity demanded at any given price. An increase in demand causes a rightward shift of the demand curve. A decrease in demand causes a leftward shift.

When economists talk of increasing or decreasing supply, they mean

shifts of the supply curve—a change in the quantity supplied of a good or service at any given price.

supply curve

shows the relationship between quantity supplied and price.

Quantity demanded

the actual amount of a good or service consumers are willing to buy at some specific price.

Quantity supplied

the actual amount of a good or service producers are willing to sell at some specific price.

What happens when the demand curve and supply curve shift in opposite directions?

the change in equilibrium price is predictable but the change in equilibrium quantity is not

What happens when the demand curve and supply curve shift in the same directions?

the change in equilibrium quantity is predictable but the change in equilibrium price is not

shortage (and what does it do?)

the insufficiency of a good or service that occurs when the quantity demanded exceeds the quantity supplied; shortages occur when the price is below the equilibrium price. WHAT DOES IT DO? When the price is below its market-clearing level, there is a shortage that pushes the price up.

Market-clearing price

the price at which the market is in equilibrium, that is, the quantity of a good or service demanded equals the quantity of that good or service supplied; also referred to as the equilibrium price.

Equilibrium price

the price at which the market is in equilibrium, that is, the quantity of a good or service demanded equals the quantity of that good or service supplied; also referred to as the market-clearing price.

The supply and demand model is based on the principle that

the price in a market moves to its equilibrium price, or market-clearing price, the price at which the quantity demanded is equal to the quantity supplied (i.e. its equilibrium quantity)

Law of demand

the principle that a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service (i.e. they slope downward).

Equilibrium quantity

the quantity of a good or service bought and sold at the equilibrium (or market-clearing) price.