Chapter 2 - Demand, Supply, and Market Equilibrium

market equilibrium

a condition in which the separately formulated plans of buyers and sellers of some good exactly mesh when tested in the marketplace, so that the quantity supplied is exactly equal to the quantity demanded at the prevailing price; determined by supply and demand

inferior good

a good for which an increase/decrease in the income of buyers causes and leftward/rightward shift in the demand curve

normal good

a good for which an increase/decrease in the income of buyers causes and rightward/leftward shift in the demand curve

demand curve

a graphical representation of the relationship between the price of a good and the quantity of it demanded

supply curve

a graphical representation of the relationship between the price of a good and the quantity of it supplied

complements

a pair of goods for which an increase/decrease in the price of one causes a decrease/increase in the demand for the other, other things being equal

substitutes

a pair of goods for which an increase/decrease in the price of one causes an increase/decrease in the demand for the other, other things being equal (i.e. increase in price of chicken, demand for beef shifts to the right - increase in demand)

equilibrium

a position which if you attain it, there is no incentive to change

demand

a relation showing the various maximum amount of a commodity that buyers would be willing able to purchase at different prices, during a given period of time, holding all other factors the same (ceteris paribus)

demand schedule

a table showing the quantity of a good demanded at various prices

supply schedule

a table showing the quantity of a good supplied at various prices

shortage

as used in economics, an excess quantity demanded at a given price; buyers willing to buy at a faster rate than what is being put on the market; rising prices to adjust, quantity demanded exceeds quantity supplied, excess demand, seller's market

surplus

as used in economics, an excess quantity supplied at a given price; excess inventory; lowering prices, buyer's market, quantity supplied exceeds quantity demanded

law of diminishing marginal utility

as you increase the consumption of good x, the marginal utility will eventually decline; i.e. beer; the more of an item you have, the more you get of it, satisfaction goes down

changes in quantity supplied

change price, move along supply curve; increase in quantity supplied, move along curve to right; decrease in quantity supplied, decrease price, move along curve to left

changes in quantity demanded

change price; price goes up, decrease in quantity demanded; price goes down, increase in quantity demanded (move along demand curve)

changes in supply

changing anything else besides price; increase in supply, curve shifts to the right; decrease in supply, curve shifts to the left

changes in demand

factors other than price, changing one of more of the conditions that are held constant, shifts actual demand curve; increase in demand, shifts to the right, decrease in demand, curve shifts to the left

determinants of demand

factors that cause a change in demand (shift demand curve); PYNTE P - prices of related goods (substitutes and complements) Y - income (inferior and normal goods) N - number of consumers T - tastes and preferences E - expectations

determinants of supply

factors that cause a change in supply (shift in the supply curve) TIPTEN T - taxes and subsidies; taxes are the equivalent of an increase in input prices which would cause a decrease in supply; subsidies are the equivalent of a decrease in input prices and would cause an increase in supply I - input prices and availability; increase in input prices causes a decrease in supply (leftward shift) P - price of substitutes in production; relative profitability that producers could produce (different options for production decisions) T - technology; changes in technology lower the price of production E - expectations; on the part of seller N - number of suppliers and nature (storms, disease, drought, etc.)

normal good when price changes

lowering the price means that there is a greater quantity demanded as a result of the substitution and income effect

substitution effect

other factors the same, you always consume more of the relatively inexpensive good

demand decreases

price decreases, equilibrium decreases

supply increases

price decreases, equilibrium increases

supply decreases

price increases, equilibrium decreases

demand increases

price increases, equilibrium increases

inferior good when price changes

raising the price means that there is a smaller quantity demanded as a result of the substitution and income effect

excess quantity demanded

the amount by which the quantity of a good demanded exceeds the quantity supplied when the price of the good is below the equilibrium level

excess quantity supplied

the amount by which the quantity of a good supplied exceeds the quantity demanded when the price of the good is above the equilibrium

marginal utility

the extra utility gained from a one-unit increase in the consumption of a good or service; the change in total utility when you increase the consumption of good x by one unit = the change in total utility/change in quantity

law of demand

the law that the quantity demanded of a good by buyers tends to increase as the price of the good decreases and tends to decrease as the price increases, other things being equal

law of supply

the law that the quantity supplied of a good by sellers tends to increase as the price of the good increases and tends to decrease as the price decreases, other things being equal

utility

the pleasure or satisfaction gotten from consuming goods and services

effective demand

the quantity of a good that purchasers are willing and able to buy at a particular price, other factors the same

marginal utility per dollar spent

the ratio of the marginal utility of good x to its price; the ratio indicates the extra utility obtained by consuming one extra unit of good x

supply

the relation showing various maximum amounts of a commodity that sellers would be willing and able to make available for sale at alternative prices during a given period of time, all other factors remaining the same (ceteris paribus)

income effect

when the price of x changes, so does the purchasing power of the consumer's income