Supply & Demand

Direct Demand Function

A table, a graph, or an equation that shows how quantity demanded is related to product price, holding constant the five other variables that influence demand: Qd=f(P).

Demand Price

The maximum price consumers will pay for a specific amount of a good or service.

Ceiling Price

The maximum price the government permits sellers to charge for a good. When this price is below equilibrium, a shortage occurs.

Supply Price

The minimum price necessary to induce producers to offer a given quantity for sale.

Floor Price

The minimum price the government permits sellers to charge for a good. When this price is above equilibrium, a surplus occurs.

Market Clearing Price

The price of a good at which buyers can purchase all they want and sellers can sell all they want at that price. This is another name for the equilibrium price.

General Demand Function

The relation between quantity demanded and the six factors that affect quantity demanded: Qd=f(P, M, PR, 7, PE, N).

General Supply Function

The relation between quantity supplied and the six factors that jointly affect quantity supplied: Qs=f(P, PI, Pr, T, Pe, F).

Technology

The state of knowledge concerning the combination of resources to produce goods and services.

Complements

Two goods are complements if an increase (decrease) in the price of one of the goods causes consumers to demand less (more) of the other good, all other things held constant.

Direct Supply Function

A table, a graph, or an equation that shows how quantity supplied is related to product price, holding constant the five other variables that influence supply: Qs=f(P).

Substitutes

Two goods are substitutes if an increase (decrease) in the price of one of the goods causes consumers to demand more (less) of the other good, holding all other factors constant.

Changes in Demand (Supply Constant)

When demand increases and supply is constant, equilibrium price and quantity both rise. When demand decreases and supply is constant, equilibrium price and quantity both fall.

Changes in Supply (Demand Constant)

When supply increases and demand is constant, equilibrium price falls and equilibrium quantity rises. When supply decreases and demand is constant, equilibrium price rises and equilibrium quantity falls.

Decrease in Demand

A change in the demand function that causes a decrease in quantity demanded at every price and is reflected by a leftward shift in the demand curve.

Increase in Demand

A change in the demand function that causes an increase in quantity demanded at every price and is reflected by a rightward shift in the demand curve.

Excess Demand (Shortage)

Exists when quantity demanded exceeds quantity supplied.

Producer Surplus

For each unit supplied, the difference between market price and the minimum price producers would accept to supply the unit (its supply price).

Slope Parameters

Parameters in a linear function that measure the effect on the dependent variable (Qd) of changing one of the independent variables (P, M, PR, 7, PE, and N) while holding the rest of these variables constant.

Inverse Demand Function

The demand function when price is expressed as a function of quantity demanded: P=f(Qd).

Consumer Surplus

The difference between the economic value of a good (its demand price) and the market price the consumer must pay.

Economic Value

The maximum amount any buyer in the market is willing to pay for the unit, which is measured by the demand price for the unit of the good.

Equilibrium Price

The price at which Qd=Qs.

Social Surplus

The sum of consumer surplus and producer surplus, which is the area below demand and above supply over the range of output produced and consumed.

Inverse Supply Function

The supply function when price is expressed as a function of quantity supplied: P=f(Qs).

Demand increases and supply increases

Price may rise or fall Quantity rises

Demand increases and supply decreases

Price rises Quantity may rise or fall

Law of Demand

Quantity demanded increases when price falls, and quantity demanded decreases when price rises, other things held constant.

Indeterminate

Term referring to the unpredictable change in either equilibrium price or quantity when the direction of change depends upon the relative magnitudes of the shifts in the demand and supply curves.

Equilibrium Quantity

The amount of a good bought and sold in market equilibrium.

Quantity Demanded

The amount of a good or service consumers are willing and able to purchase during a given period of time (week, month, etc.).

Quantity Supplied

The amount of a good or service offered for sale during a given period of time (week, month, etc.).

Decrease in Supply

A change in the supply function that causes a decrease in quantity supplied at every price, and is reflected by a leftward shift in the supply curve.

Increase in Supply

A change in the supply function that causes an increase in quantity supplied at every price, and is reflected by a rightward shift in the supply curve.

Quantitative Forecast

A forecast that predicts both the direction and the magnitude of the change in an economic variable.

Qualitative Forecast

A forecast that predicts only the direction in which an economic variable will move.

Inferior Good

A good or service for which an increase (decrease) in income causes consumers to demand less (more) of the good, all other factors held constant.

Normal Good

A good or service for which an increase (decrease) in income causes consumers to demand more (less) of the good, holding all other variables in the general demand function constant.

Demand Curve

A graph showing the relation between quantity demanded and price when all other variables influencing quantity demanded are held constant.

Supply Curve

A graph showing the relation between quantity supplied and price, when all other variables influencing quantity supplied are held constant.

Change in Quantity Demanded

A movement along a given demand curve that occurs when the price of the good changes, all else constant.

Change in Quantity Supplied

A movement along a given supply curve that occurs when the price of a good changes, all else constant.

Change in Demand

A shift in demand, either leftward or rightward, that occurs only when one of the five determinants of demand changes.

Market Equilibrium

A situation in which, at the prevailing price, consumers can buy all of a good they wish and producers can sell all of the good they wish. The price at which Qd=Qs .

Demand Schedule

A table showing a list of possible product prices and the corresponding quantities demanded.

Supply Schedule

A table showing a list of possible product prices and the corresponding quantities supplied.

Excess Supply (Surplus)

Exists when quantity supplied exceeds quantity demanded.

Substitutes in Production

Goods for which an increase in the price of one good relative to the price of another good causes producers to increase production of the now higher priced good and decrease production of the other good.

Complements in Production

Goods for which an increase in the price of one good, relative to the price of another good, causes producers to increase production of both goods.

Demand decreases and supply increases

Price falls Quantity may rise or fall

Demand decreases and supply decreases

Price may rise or fall Quantity falls

Determinants of Supply

Variables that cause a change in supply (i.e., a shift in the supply curve).

Determinants of Demand

Variables that change the quantity demanded at each price and that determine where the demand curve is located: M, PR, 7, PE, and N.

Simultaneous Shifts in Both Demand and Supply

When demand and supply both shift simultaneously, if the change in quantity (price) can be predicted, the change in price (quantity) is indeterminate. The change in equilibrium quantity or price is indeterminate when the variable can either rise or fall depending upon the relative magnitudes by which demand and supply shift.