Chapter 3: Demand, Supply, and Market Equilibrium

Supply Decrease; Demand Increase

-A decrease in supply and an increase in demand both increase price. -Increase in equilibrium price greater than that caused by either separately -If the decrease in supply is larger than the increase in demand, the equilibrium quantity will decrease.

Increase or decrease in demand

-A favorable change in consumer tastes -An increase in the number of buyers -Rising incomes if the product is a normal good -Falling incomes if the product is an inferior good -An increase in the price of a substitute good -A decrease in the price of a complementary good -A new consumer expectation that either prices or income will be higher in the future

Supply Increases; Demand Decrease

-Both changes decreases price, so the net result is a price drop greater than that resulting from either change alone. -The increase in supply increases equilibrium quantity, but the decrease in demand reduces it -If the increase in supply is larger than the decrease in demand, the equilibrium quantity will increase

Determinants of supply

1) Resource prices 2) Technology 3) Taxes and subsidies 4) Prices of other goods 5) Producer expectations 6) Number of sellers in the market

Determinants of demand (Demand shifters)

1) consumers' tastes (preferences) 2) the number of buyers in the market 3) consumers' incomes 4) the prices of related goods 5) consumer expectations

Change in demand

A change in the demand schedule or, graphically, a shift in the demand curve

Change in supply

A change in the schedule and a shift of the curve.

The demand curve

A downwards slope, reflects the law of demand-people buy more of a product, service, or resource as its price falls. Horizontal axis- quantity demanded Vertical axis-price

Price floor

A minimum price fixed by the government. A price at or above the price floor is legal; a price below it is not.

Change in quantity supplied

A movement from one point to another on a fixed supply curve.

Change in quantity demanded

A movement from one point to another point-from one price-quantity combination to another- on a fixed demand curve.

Demand

A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time. Shows the quantities of a product that will be purchased at various possible prices, other things equal.

Supply

A schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible pries during a specific period.

Supply Increase Demand Increase

A supply increase drops equilibrium price, while a demand increase boosts it. If the increase in supply is greater than the increase in demand, the equilibrium price will fall. The increases in supply and demand both raise the equilibrium quantity.

Law of supply

As price rises, the quantity supplied rises; as price falls, the quantity supplied falls -To a supplier, price represents revenue, which serves as an incentive to produce and sell a product

The substitution effect

At a lower price, buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive.

Individual demand -> Market demand

By adding the quantities demanded by all consumers at each of the various possible prices

Inferior goods

Goods whose demand varies inversely with money income

Changes in demand

If demand increases it raises both equilibrium price and equilibrium quantity and the new intersection of the supply and demand curves is at higher values on both the price and the quantity axes.

Changes in supply

If supply increases, it reduces equilibrium price but increases equilibrium quantity and the new intersection of supply and demand is located at a lower equilibrium price but at a higher equilibrium quantity.

Supply Decrease; Demand Decrease

If the decrease in supply is greater than the decrease in demand, equilibrium price will rise. The equilibrium quantity will fall since decreases in supply and demand each reduce it.

Diminishing marginal utility

In any specific time period, each buyer of a product will derive less satisfaction (or benefit, or utility) from each successive unit of the product consumed Ex. The second Big Mac will yield less satisfaction to the consumer than the first.

The income effect

Indicates that a lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more of the product than before.

A substitute good

One that can be used in place of another good

A complementary good

One that is used together with another good

Law of Demand

Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. Negative or inverse relationship between price and quantity demanded.

Normal goods (superior goods)

Products whose demand varies directly with money income

Price ceiling

Sets the maximum legal price a seller may charge for a product of service. A price at or below the ceiling is legal; a price above it is not.

Market supply

Sum the quantities supplied by each producer at each price

Rationing function of prices

The ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent.

Marginal cost

The added cost of producing one more unit of output

Allocative efficiency

The particular mix of goods and services most highly valued by society (minimum-cost production assumed)

Equilibrium price (market-clearing price)

The price where the intentions of buyers and sellers match Where quantity demanded equals quantity supplied

Productive efficiency

The production of any particular good in the least costly way.

Equilibrium quantity

The quantity at which the intentions of buyers and sellers match, so that the quantity demanded and the quantity supplied are equal

Supply curve

The upward slope of the curve reflects the law of supply-producers offer more of a good, service, or resource for sale as its price rises. -The relationship between price and quantity supplied is direct or positive

Independent goods

The vast majority of goods are not related to one another

Shortage (excess demand)

When quantity demanded exceeds quantity supplied

Surplus (excess supply)

When quantity supplied exceeds quantity demanded