Chapter 3: Where Prices Come From, The Interaction of Demand and Supply
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.
Competitive market equilibrium
A market equilibrium with many buyers and many sellers.
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.
Technological change
A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.
Market equilibrium
A situation in which quantity demanded equals quantity supplied.
Shortage
A situation in which the quantity demanded is greater than the quantity supplied.
Surplus
A situation in which the quantity supplied is greater than the quantity demanded.
Demand schedule
A table that shows the relationship between the price of a product and the quantity of the product demanded.
Supply schedule
A table that shows 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.
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.
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.
Equilibrium ____ when demand shifts left more than supply.
falls
Equilibrium _____ when demand shifts left more than supply.
falls
An increase in the price of a complementary good shifts the demand curve _______ because ______.
left, consumers buy less of the complementary good and less of this good
An increase in income (and the good is inferior) shifts the demand curve _______ because ______.
left, consumers spend less of their higher incomes on the good
An increase in the expected future price of the product shifts the supply curve _______ because ______.
left, less of the good will be offered for sale today to take advantage of the higher price in the future
An increase in the price of a substitute in production shifts the supply curve _______ because ______.
left, more of the substitute is produced and less of the good is produced
An increase in the price of an input shifts the supply curve _______ because ______.
left, the cost of producing the good rises
Equilibrium falls when supply shifts right ______ than demand.
more
Equilibrium rises when demand shifts right ______ than supply.
more
Complements
Goods and services that are used together.
Substitutes
Goods and services that can be used for the same purpose.
Variables that shift market demand (5)
Income Prices of related goods Tastes Population and demographics Expected future prices
Variables that shift market supply (5)
Prices of inputs Technological change Prices of substitutes in production Number of firms in the market Expected future prices
Quantity demanded
The amount of a good or service that a consumer is willing and able to purchase a a given price.
Quantity supplied
The amount of a good or service that a firm is willing and able to supply at a given price.
Substitution effect
The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitues.
Income effect
The change in the quantity demanded of a good that results from the effect of change in the good's price on consumers' purchasing power.
Demographics
The characteristics of a population with respect to age, race, and gender.
Market demand
The demand by all the consumers of a given good or service.
An increase in population shifts the demand curve _______ because ______.
right, additional consumers result in a greater quantity demanded at every price
An increase in the number of firms in a market shifts the supply curve _______ because ______.
right, additional firms result in a greater quantity supplied at every price
An increase in taste for the good shifts the demand curve _______ because ______.
right, consumers are willing to buy a larger quantity of the good at every price
An increase in the price of a substitute good shifts the demand curve _______ because ______.
right, consumers buy less of the substitute good and more of this good
An increase in the expected price of the good in the future shifts the demand curve _______ because ______.
right, consumers buy more of the good today to avoid the higher price in the future
An increase in income (and the good is normal) shifts the demand curve _______ because ______.
right, consumers spend more of their higher incomes on the good
An increase in productivity shifts the supply curve _______ because ______.
right, the costs of producing the good falls
Equilibrium _____ when supply shifts left more than demand.
rises