Chapter 3: Demand and Supply
Inferior Goods
Goods for which demand falls as income rises. Ex: As incomes rise people purchase fewer beans and more fish because apparently, fish are fancier...
Normal Goods
Goods for which demand rises as income rises. (These are most goods)
The supply curve is drawn with other things held constant. If these ceteris paribus conditions of supply change, the supply curve will shift. The major ceteris paribus conditions are ____, ____, ____, ____, and ____.
input prices...technology and productivity...taxes and subsidies...expectations of future relative prices...the number of firms in the industry
Change in quantity demanded is...
...a specific point on the same demand curve usually affected by the change in the price of a good.
Change in demand is...
...an entire curve shift to the left or right. (Affected by increase in income, etc.)
Complements
A change in the price of one good causes an opposite shift in the demand for the other. Ex: Rise in price of cars= less demand for GPS
Substitutes
A change in one price causes a shift in demand for the other in the same direction Ex: Butter and margarine
Market
All the arrangements people have for exchanging with one another Ex: Labor or automobile market
Money Price
Price in today's dollars; price consumers are willing to pay for a product Ex: iPhone
Shortage
Quantity demanded is greater than quantity supplied (Below market clearing)
Surplus
Quantity supplied is greater than quantity demanded (Above market clearing)
Demand
Shows how much of a good or service people will purchase at any price during a time period, all things being constant
Ceteris Paribus conditions
Relationship between price and quantity that are unchanged along a curve.
A shift to the ___ is an increase in the demand curve.
Right
A shift to the ____ is an increase in supply.
Right
Market Supply
Sum of ALL manufacturer's quantity supplied over a specific time.
Market Demand
The demand of ALL consumers in the marketplace for a particular good, whereas the demand curve shows ONE person.
Relative Price
The price of one commodity compared to the other; (Divide money price of one over the other to get relative price)
Market Clearing Price
The price the market clears for.
Equilibrium
The situation when quantity supplied equals quantity demanded; Where demand and supply curve intersect
Law of supply
There is a direct relationship; The higher the price of a good, the more of that good sellers will make over a specified period of time
Law of Demand
There is an inverse relationship between price and quantity demanded (all factors held constant)
Supply
Total amount of product available at any time
Demand curves are drawn with determinants other than the price of the good held constant. These other determinants, called ceteris paribus conditions, are _____, _____, _____, _____, and _____ at any given price. If any one of these determinants changes, the demand curve will shift to the right or to the left.
income...tastes and preferences...prices of related goods...expectations about future prices and incomes...market size(# of potential buyers in market)
