Chapter 3
Market demand
The demand by all the consumers of a given good or service.
equilibrium quantity
the quantity at the equilibrium point is know as the equilibrium quantity.
Demand schedule
A table showing the relationship between the price of a product and the quantity of the product demanded.
increase in demand
When consumers increase the quantity of a product they wish to buy at all prices, the entire demand curves shifts from Upper D1 to Upper D 2 D2. This is called an "increase in demand."
Supply decreases
a shortage develops at the original price equilibrium price will rise and equilibrium will fall
price of the product changes
there is a movement along the supply curve, which is an increase or a decrease in the quantity supplied.
shift in the entire curve
A change in demand or supply is the result of changes in factors other than the good's own price and causes a shift in the entire curve.
change in demand
A change in demand refers to a shift of the demand curve. A shift occurs if there is a change in one of the variables, other than the price of the product, that affects the willingness of consumers to buy the product.
movement along the curve
A change in quantity demanded or quantity supplied is the result of a change in the good's own price and causes a movement along the curve.
change in quantity demanded
A change in quantity demanded refers to a movement along the demand curve as a result of a change in the product's price.
Demand curve
A curve that shows the relationship between the price of a product and the quantity of the product demanded.
Supply curve
A curve that shows the relationship between the price of a product and the quantity of the product supplied.
Inferior good
A good for which the demand increases as income falls and decreases as income rises.
Normal good
A good for which the demand increases as income rises and decreases as income falls.
Perfectly competitive market
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market. The model of demand and supply assumes that we are analyzing a perfectly competitive market. In a perfectly competitive market, there are many buyers and sellers, all the products sold are identical, and there are no barriers to new firms entering the market. These assumptions are very restrictive and apply exactly to only a few markets, such as the markets for wheat and other agricultural products. Experience has shown, however, that the model of demand and supply can be very useful in analyzing markets where competition among sellers is intense, even if there are relatively few sellers and the products being sold are not identical.
Quantity supplied
The amount of a good or service that a firm is willing and able to supply at a given price.
decrease in demand
When consumers decrease the quantity of a product they wish to buy at all prices, the entire demand curves shifts from Upper D 1 to Upper D 3 D3. This is called a "decrease in demand."
What would cause the supply curve for HP printers to shift to the right?
a decrease in the price of a substitute in production and a positive technological change
If demand increases by more than supply
the equilibrium price rises. If demand increases by less than supply, the equilibrium price falls.
A perfectly competitive market is a market that meets the conditions of
(1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
Quantity demanded
The amount of a good or service that a consumer is willing and able to purchase at a given price.
variables other than price affect demand
The five most important are: 1. Income of consumers. If demand increases (decreases) when income increases (decreases), the good is considered "normal." If demand decreases (increases) when income increases (decreases), the good is considered "inferior." 2. Prices of substitutes (goods used for the same purpose) and complements (goods used together). 3. Consumer tastes and preferences.
equilibrium price
The price at the point of market equilibrium is known as the equilibrium price
market clearing price
The price at which quantity demanded equals quantity supplied and at which the demand curve intersects the supply curve is called the market clearing price.
Law of supply
The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied. There is a positive relationship between price and quantity supplied. Therefore, the supply curve slopes upward. A change in quantity supplied is shown as a movement along the supply curve from one point to another.
The distinction between a normal and an inferior good is
when income increases, demand for a normal good increases while demand for an inferior good falls.
Factors other than the price of the good that affect the amount demanded are
(1) income, (2) tastes and preferences, (3) the prices of related goods, (4) expectations, and (5) market size (the number of buyers). This change represents a change in the price of a related good since wireless internet access is a substitute for cable Internet access.
shift in the demand curve and/or the supply curve changes the equilibrium price
the resulting price change does not cause a further shift in the demand or supply curve. Changes in the price of a good or service only affect the quantity supplied or the quantity demanded. Changes in price do not affect the supply and demand curves.
According to the law of demand,
there is an inverse relationship between price and quantity demanded.
Consider the following statement: "An increase in supply decreases the equilibrium price. The decrease in price increases demand." The statement is
false: decreases in price affect the quantity demanded, not demand.
Changes in supply
(shifts in the entire supply curve) are the result of changes in variables other than the good's own price. Changes in the following variables cause a shift in the entire supply curve: 1. Prices of inputs. When input prices increase (decrease), the amount of the good or service that firms are willing and able to supply decreases (increases) due to a change in the cost of production. 2. Technological change. Technological advances often streamline the production process and increase the amount of the product firms are able to produce at all prices. 3. Prices of substitutes in production. If a firm can produce similar goods, it might shift production resources into the good that has the higher market price. 4. Number of firms in the market. If there are more (fewer) firms in the market, supply increases (decreases). 5. Expected future prices. A firm might postpone production of a good or service to wait for higher expected future prices. As a result, current supply falls.
increase or decrease in supply
If any other variable that affects the willingness of firms to supply a good changes, the supply curve will shift,
Law of Demand
The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease. That is, there is an inverse relationship between price and quantity demanded. This is shown as a movement along the demand curve from any point to another.
Market equilibrium
A situation in which quantity demanded equals quantity supplied. The purpose of markets is to bring buyers and sellers together. Notice that the demand curve crosses the supply curve at only one point. Only at this point is the quantity of goods consumers are willing to buy equal to the quantity of goods firms are willing to sell. This is the point of market equilibrium. Only at market equilibrium will the quantity demanded equal the quantity supplied. The price at the point of market equilibrium is known as the equilibrium price, and the quantity at the equilibrium point is know as the equilibrium quantity.
Supply schedule
A table showing the relationship between the price of a product and the quantity of the product supplied.
Ceteris paribus ("all else equal") condition
The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant. That is, we assume that the only event that affects our consumption of a good or service is the price. In reality, the economy is much more complex. However, in order to create models—simplified versions of the economy—and make distinct statements about the effect of changes in price on amount consumed, we hold other factors that affect consumption constant.
Indicate whether the following events would cause an "increase or a decrease in demand" or an "increase or a decrease in the quantity demanded" for cable-based Internet access service, which is a normal good. a. Firms providing wireless (an alternative to cable) Internet access services reduce their prices. This will cause a(n) b. Firms providing cable-based Internet access services reduce their prices. This will cause a(n) c. There is a decrease in the incomes earned by consumers of cable-based Internet access services. This will cause a(n) d. Consumers' tastes shift away from using wireless Internet access in favor of cable-based Internet access services.
a. decrease in demand. b. increase in quantity demanded. c. decrease in demand. d. increase in demand.
Consider the market for economics textbooks. Explain whether the following events would cause an increase or a decrease in supply or an increase or a decrease in the quantity supplied. a. The market price of paper increases. This will cause a(n) b. The market price of economics textbooks increases. This will cause a(n) c. The number of publishers of economics textbooks increases. This will cause a(n) d. Publishers expect that the market price of economics textbooks will increase next month. This will cause a(n)
a. decrease in supply. b. increase in quantity supplied c. increase in supply d. decrease in supply.
In general, the term "ceteris paribus" means
all else equal.
Market price is determined by
both supply and demand. The interaction of supply and demand determines equilibrium price. Without both curves, we can only speculate on the price.