Chapter 4

If there is a shortage, buyers must pay a higher price to get more. Sellers are pleased to take the higher price, so the price rises. Because a shortage arises when the price is below the equilibrium price, a rising price is exactly what is needed to restore equilibrium.

A shortage is a situation in which the quantity demanded exceeds the quantity supplied

If there is a surplus, suppliers must cut the price to sell more. Buyers are pleased to take the lower price, so the price falls. Because a surplus arises when the price is above the equilibrium price, a falling price is exactly what the market needs to restore equilibrium.

A surplus is a situation in which the quantity supplied exceeds the quantity demanded.

But an increase in demand increases the quantity, and a decrease in supply decreases the quantity

An increase in demand or a decrease in supply raises the equilibrium price, so combined, these changes raise the price.

So when demand and supply increase together, the quantity increases

An increase in demand or an increase in supply increases the equilibrium quantity. So when demand and supply increase together, the quantity increases

A good that can be consumed in place of another good.

Substitute The demand for a good and the price of one of its substitutes move in the same direction The demand for a good increases if the price of one of its substitutes rises and decreases if the price of one of its substitutes falls.

The price at which the quantity demanded equals the quantity supplied.

Equilibrium price

The quantity bought and sold at the equilibrium price.

Equilibrium quantity

A good for which demand decreases when income increases and demand increases when income decreases.

Inferior good

The sum of the demands of all the buyers in the market.

Market demand At a given price, the quantity demanded on the market demand curve equals the horizontal sum of the quantities demanded on the individual demand curves.

When the quantity demanded equals the quantity supplied—buyers' and sellers' plans are in balance.

Market equilibrium

The sum of the supplies of all the sellers in the market.

Market supply At a given price, the quantity supplied on the market supply curve equals the horizontal sum of the quantities supplied on the individual supply curves.

A good for which demand increases when income increases and demand decreases when income decreases.

Normal good

The main influences on selling plans that change supply are

Prices of related goods • Prices of resources and other inputs • Expected future prices • Number of sellers • Productivity

is output per unit of input. An increase in productivity lowers the cost of producing the good and increases its supply. A decrease in productivity has the opposite effect and decreases supply.

Productivity

The amount of any good, service, or resource that people are willing and able to buy during a specified period at a specified price.

Quantity demanded The quantity demanded is measured as an amount per unit of time. If the price of bottled water rises when other things remain the same, the quantity demanded of bottled water decreases and there is a movement up along the demand curve D0. If the price falls when other things remain the same, the quantity demanded increases and there is a movement down along the demand curve D0.

Predicting Price Changes: Three Questions

1. Does the event influence demand or supply? 2. Does the event increase or decrease demand or supply—shift the demand curve or the supply curve rightward or leftward? 3. What are the new equilibrium price and equilibrium quantity and how have they changed?

So when demand and supply decrease together, the quantity decreases.

A decrease in demand or a decrease in supply decreases the equilibrium quantity. So when demand and supply decrease together, the quantity decreases

But a decrease in demand decreases the quantity, and an increase in supply increases the quantity

A decrease in demand or an increase in supply lowers the equilibrium price, so combined, these changes lower the price.

A good that is produced along with another good.

Complement in production The supply of a good increases if the price of one of its complements in production rises; and the supply of a good decreases if the price of one of its complements in production falls. That is, the supply of a good and the price of one of its complements in production move in the same direction.

A change in the quantity of a good that people plan to buy that results from a change in the price of the good with all other influences on buying plans remaining the same.

Change in Quantity Demanded

A change in the quantity that people plan to buy when any influence on buying plans other than the price of the good changes.

Change in demand When demand decreases, the demand curve shifts leftward to D1 When demand increases, the demand curve shifts rightward to D2

A good that is consumed with another good.

Complement The demand for a good and the price of one of its complements move in opposite directions The demand for a good decreases if the price of one of its complements rises and increases if the price of one of its complements falls.

The relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same.

Demand The quantity demanded is one quantity at one price. If some influence on buyers' plans other than the price of bottled water changes, there is a change in demand. When the demand for bottled water decreases, the demand curve shifts leftward to D1. When the demand for bottled water increases, the demand curve shifts rightward to D2.

A graph of the relationship between the quantity demanded of a good and its price when all the other influences on buying plans remain the same.

Demand curve The downward slope of the demand curve illustrates the law of demand. Along the demand curve, when the price of the good falls, the quantity demanded increases.

A list of the quantities demanded at each different price when all the other influences on buying plans remain the same.

Demand schedule is a list of the quantities demanded at each different price when all the other influences on buying plans remain the same

A rise in the expected future price of a good increases the current demand for that good and a fall in the expected future price decreases current demand

Expected Future Prices

The amount of any good, service, or resource that people are willing and able to sell during a specified period at a specified price.

Quantity supplied If the price of the good changed, then quantity supplied changed.

A good that can be produced in place of another good.

Substitute in production The supply of a good decreases if the price of one of its substitutes in production rises; and the supply of a good increases if the price of one of its substitutes in production falls. That is, the supply of a good and the price of one of its substitutes in production move in opposite directions.

The relationship between the quantity supplied and the price of a good when all other influences on selling plans remain the same.

Supply

A graph of the relationship between the quantity supplied of a good and its price when all the other influences on selling plans remain the same.

Supply curve The upward slope of the supply curve illustrates the law of supply. Along the supply curve, when the price of the good rises, the quantity supplied increases. And when the price falls, the quantity supplied decreases

A list of the quantities supplied at each different price when all the other influences on selling plans remain the same.

Supply schedule

Other things remaining the same, if the price of a good rises, the quantity demanded of that good decreases; and if the price of a good falls, the quantity demanded of that good increases.

The law of demand If the price of one item falls and the prices of all other items remain the same, the item with the lower price is a better deal than it was before, so some people buy more of this item.

When there is a surplus, the price falls; and when there is a shortage, the price rises.

The law of market forces When equilibrium is disturbed, market forces restore it

Other things remaining the same, if the price of a good rises, the quantity supplied of that good increases; and if the price of a good falls, the quantity supplied of that good decreases.

The law of supply

When you are thinking about the influences on demand, try to get into the habit of asking: Does this influence change the quantity demanded or does it change demand?

The test is: Did the price of the good change or did some other influence change? If the price changed, then quantity demanded changed. If some other influence changed and the price remained constant, then demand changed.