Chapter 3
Surplus (excess suply)
a situation in which the quantity supplied is greater than the quantity demanded. This occurs when the current price in the market is above the equilibrium price.
The law of demand
The inverse relationship between price and Quantity demanded, ceteris paribus.
Shortage (excess demand)
a situation in which the quantity demanded is greater than the quantity supplied. This occurs when the price in the market is below the equilibrium price.
The law of supply
the tendency for the quantity supplied of a good in a market to increase as its price rises.
What are the non price determinants of demand
Consumer's tastes and preferences Consumer's information Consumer's income Normal goods Inferior goods Number of consumers in the market Consumer's expectations of future prices Prices of related goods Substitute goods Complimentary goods
Equilibrium quantity
the quantity traded at the equilibrium price.
What are the non price determinants of supply
Technology Weather conditions The price of inputs used in production The number of sellers in the market Expectations of future prices Government taxes, subsidies, regulations
Movement along vs shift in supply
Movement along the supply curve: occurs when a change in the quantity supplied of a good is brought along by a change in its price. A shift in the supply curve: occurs when a change is brought along by any source other than the price.
Movement along vs shift in demand
A movement along the demand curve is caused by a change in PRICE of the good or service. A shift in the demand curve is caused by a change in any non-price determinant of demand. The curve can shift to the right or left.
Equilibrium price
the price at which the quantity that sellers are willing to sell equals the quantity that consumers are willing to purchase.
Effects of a change in demand
An increase in demand will shift the demand curve to the right, resulting in a higher equilibrium price and quantity. A decrease in demand will shift the demand curve to the left, resulting in a lower equilibrium price and quantity.
Effects of a change in supply
An increase in supply will shift the supply curve to the right, resulting in a lower equilibrium price and a higher equilibrium quantity. A decrease in supply will shift the supply curve to the left, resulting in a higher equilibrium price and a lower equilibrium quantity.