Macro. Chap. 3

supply and demand model elements

1. The demand curve 2. The supply curve 3. The set of factors that cause the demand curve to shift and the set of factors that cause the supply curve to shift 4. The market equilibrium, which includes the equilibrium price and equilibrium quantity 5. The way the market equilibrium changes when the supply curve or demand curve shifts

principal factors that shift the supply curve

1. changes in input prices 2. changes in the prices of related goods or services 3. changes in technology 4. changes in expectations 5. changes in the number of producers

principal factors that shift the demand curve

1. changes in the prices of related goods or services 2. changes in income 3. changes in tastes 4. changes in expectations 5. changes in the number of consumers

finding the equilibrium price and quantity

1. put the supply curve and the demand curve on the same diagram 2. the price at which the two curves cross is the equilibrium price

inferior good

A good for which a rise in income increases the demand.

normal good

A good for which a rise in income increases the demand.

substitutes

A pair of goods are this if a rise in the price of one good makes consumers more willing to buy the other good. The goods usually serve a similar function.

complements

A pair of goods that are consumed together; a rise in the price of one good leads to a decrease in the demand for the other good.

market response to a change in demand

An increase in demand leads to a rise in both the equilibrium price and the equilibrium quantity. A decrease in demand leads to a fall in both the equilibrium price and the equilibrium quantity.

market response to a change in supply

An increase in supply leads to a fall in the equilibrium price and a rise in the equilibrium quantity. A decrease in supply leads to a rise in the equilibrium price and a fall in the equilibrium quantity.

Outcomes when the supply and demand curves shift in the same direction

When both demand and supply increase, the equilibrium quantity increases but the change in equilibrium price is ambiguous When both demand and supply decrease, the equilibrium quantity decreases but the change in equilibrium price is ambiguous

Outcomes when the supply and demand curves shift in opposite directions

When demand increases and supply decreases, the equilibrium price rises but the change in the equilibrium quantity is ambiguous When demand decreases and supply increases, the equilibrium price falls but the change in the equilibrium quantity is ambiguous

shift of the demand curve

a change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position, denoted by a new demand curve. i.e. the demand for X increased

shift of the supply curve

a change in the quantity supplied of a good or service at any given price, represented by the change of the original supply curve to a new position, denoted by a new supply curve. i.e. the supply for X increased

demand curve

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

supply curve

a graphical representation of the supply schedule, showing the relationship between quantity supplied and price

law of demand

a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service

decrease in demand

a leftward shift of the demand curve; at any given price, consumers demand a smaller quantity of the good or service than before

competitive market

a market in which there are many buyers and sellers of the same good or service; no individual's actions have a noticeable effect on the price at which the good or service is sold

market price

a price point where sales and purchases tend to converge in a well-established, ongoing market

increase in demand

a rightward shift of the demand curve; at any given price, consumers demand a larger quantity of the good or service than before

demand schedule

a table showing how much of a good or service consumers will want to buy at different prices

input

any good or service that is used to produce another good or service

changes in expectations

changes in the expected future price of a good can lead a supplier to supply less or more of the good today

movement along the demand curve

changes in the quantity demanded of a good that result from a change in that good's price

movements along the supply curve

changes in the quantity supplied of a good that result from a change in price

complements in production

goods that are produced as by-products from producing another good

substitutes in production

goods that are produced from the same raw materials

individual demand curve

illustrates the relationship between quantity demanded and price for an individual consumer

technology

methods that people can use to turn inputs into useful goods and services

supply schedule

shows how much of a good or service producers will supply at different prices

individual supply curve

shows the relationship between quantity supplied and price for an individual producer

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

law of supply

the claim that, other things being equal, the quantity supplied of a good increases when the price of that good rises

market demand curve

the horizontal sum of the individual demand curves of all consumers in that market; shows how the combined total quantity demanded by individual consumers in the market depends on the market price of that good

market supply curve

the horizontal sum of the individual supply curves of all producers; shows how the combined total quantity supplied by all individual producers in the market depends on the market price of that good

market-clearing price

the price that "clears the market" by ensuring that every buyer willing to pay that price finds a seller willing to sell at that price, and vice-versa; also known as the equilibrium price

equilibrium price

the price that matches the quantity supplied and the quantity demanded; also known as the market-clearing price

equilibrium quantity

the quantity bought and sold at the equilibrium price

shortage

when the quantity of a good or service demanded exceeds the quantity supplied; occurs when the price is below its equilibrium level. Also known as excess demand.

surplus

when the quantity of a good or service supplied exceeds the quantity demanded; occurs when the price is above its equilibrium level