Chapter 3

inferior goods

demand falls as income rises; (beans to fish)

demand

schedule showing how much of a good or service people will purchase at any price during a specific time period, other things being constant.

supply

schedule showing the relationship between price and quantity supplied for a specified period of time-other things being equal

Law of demand

inverse relationship price up=demand down -the observation that there is a negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factor constant. price goes up-people by less...other things being equal price goes down-people by more... other things being equal

market demand curve

is derived by summing the quantity demanded by individuals at each price.

supply curve

line showing the supply schedule, which generally slopes upward (positive slope)-shows a direct relationship between P&Q supplied

influences Demand

1. income 2. tastes & preferences 3. Price of related goods (substitutes & complements) 4.Expectations - what will happen if price goes down 5.Market size-potential buyers

complements

2 goods are complements when a change in the price of one causes an opposite shift in the demand for the other.

substitutes

2 goods are substitutes when a change in the price on one causes a shift in demand for the other in the same direction as the price change. ex butter & margarine

Market

all of the arrangements that individuals have for exchanging with one another. ex labor mkt, auto mkt, credit mkt

market demand

demand of all consumers in the marketplace for a particular good or service. The summation at each price of the quantity demanded by each individual.

normal goods

demand rises as income rises; (shoes, computers )

change in demand vs change in quantity demanded

demand-schedule of planned rates of purchase and ceteris paribus conditions - whenever there is a change in ceteris paribus there will be a change in demand. Quantity demanded is a specific quantity at a specific price, represented by a single point on a demand curve. Change is quantity demanded comes about when there is a change in the price of the good. such a change in quantity demanded involves an movement ALONG a given demand curve.

ceteris paribus conditions

determinants of the relationship between price and quantity that are unchanged along a curve. Changes in these factors cause the curve to shift; consumers' income; tastes and preferences; the prices of related goods; expectations regarding future prices and future incomes; and mkt size (#number of potential buyers)

Law of supply

direct relationship higher price = higher profit=higher supply --observation that the higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal.

demand curve

graphical representation of the demand schedule. negative slope line showing the inverse relationship between the price and the quantity demanded(other things begin equal)

subsidy

negative tax; a pmt to a producer from the govt, usually in the form of a cash grant per unit

relative price

price of any commodity is its price in terms of another commodity.--- money price of one commodity divided by the commodity price of another commodity; the number of unites of one commodity that must be sacrificed to purchase one unit of another commodity.

Market clearing or Equilibrium price

price that clears the market, at which quantity demanded equals quantity supplied; the price where the demand curve intersects the supply curve.

Money price

price you pay in dollars and cents for any good or service at any point in time-- the price expressed in today's dollars; also called the absolute or nominal price.

shortage

situation in which quantity demanded is greater than quantity supplied at a price below the market clearing price.

surplus

situation in which quantity supplied is greater than quantity demanded at a price above the market clearing price.

Equilibrium

situation when quantity supplied equals quantity demanded at a particular price.

supply curve will shift if ceteris paribus conditions change

such as: technology & productivity taxes and subsidies expectations of future relative prices number of firms in the industry