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A A E Chapter 3
Demand, Supply, and Market Equilibrium
| Term | Definition |
|---|---|
| Demand | Statement of a buyer's plans or intentions with respect to purchasing a product |
| Law of Demand | Principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price |
| inverse Relationship | Price and quantity demanded |
| Explanation of Inverse Relationship | Law of Demand is consistent with common sense Diminishing marginal utility Income Effect and Substitution Effect |
| Income Effect | A change in the quantity demanded of a product that results from a change in real income (purchasing power) caused by change in product's price Lower prices = more buying |
| Substitution Effect | A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the good's own price |
| Demand Curve Slope | Downward |
| Market Demand | Found by adding quantities demanded by all customers at each possible price |
| Determinants of Demand | Consumers' tastes, number of buyers, consumers' income, price of related goods, and consumer expectations |
| Change in Demand | Change in one or more determinants changes demand |
| Superior Goods/Normal Goods | Good or service whose consumption increases when income increases and falls when income decreases, even as price remains constant |
| Inferior Goods | Good or service whose consumption declines as income rises, prices held constant |
| Inferior Goods Example | Microwave foods, retread tires, used cars, etc. Higher income means higher quality goods |
| Substitute Goods | Products or services that can be used in place of each other When price for one falls, demand for other falls |
| Substitute Goods Example | Ben & Jerrys and Haagen Dazs |
| Complementary Goods | Products and services that are used together Price of one falls, demand for the other increases |
| Complementary Goods Example | Smartphones and cellular service, snowboards and lift tickets, etc. |
| Change in Quantity Demanded | Change in Price Movement on the curve |
| Supply | Various amounts of products that producers are willing and able to make available for sale at each of a series of possible prices during a specific time |
| Law of Supply | Principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for decrease |
| Market Supply | Sum quantities supplied by each producer at each level Horizontally add supply curves of individual producers |
| Determinants of Supply | Resource prices, technology, taxes and subsidies, prices of other goods, producer expectation, and number of sellers in the market |
| Higher Resource Prices | Higher prices mean rise in prices for consumers |
| Prices of Other Goods | Firm producing one good can shift and produce a similar one if the prices for the new good are higher |
| Taxes | Increase production costs and reduce supply |
| Subsidies | Lower costs and increase supply |
| Producer Expectations | Changes in expectations about future prices of goods may affect producers current willingness to supply that product |
| Number of Sellers | Larger the number of sellers, the greater the market supply |
| Change in Quantity Supplied | Quantity supplied changes at every price Movement ALONG the curve |
| Equilibrium Price | Price in a competitive market at which the quantity demanded and quantity supplied are equal |
| Equilibrium Quantity | Quantity at which the intentions of buyers and sellers match |
| Surplus | Amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above equilibrium) price |
| Shortage | Amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below equilibrium) price |
| Rationing Function of Prices | Ability of forces of supply and demand to establish a price at which selling and buying decisions are constant |
| Productive Efficiency | The production of a good in the least costly way |
| Efficient Allocation | Competitive market rations goods to consumers and allocates society's resources efficiently to the particular product |
| Allocative Efficiency | The apportionment of resources among firms and industries to obtain the production of the products most wanted by society |
| MB = MC | At equilibrium: allocative efficiency |
| Increase in Demand | Price increases Quantity increases |
| Decrease in Demand | Price decreases Quantity decreases |
| Increase in Supply | Price decreases Quantity increases |
| Decrease in Supply | Price increases Quantity decreases |
| Supply Increase, Demand Decrease | Price decreases Quantity Indeterminate |
| Supply Decrease, Demand Increase | Price increases Quantity indeterminate |
| Supply Increase, Demand Increase | Price indeterminate Quantity increases |
| Supply Decrease, Demand Decrease | Price indeterminate Quantity decrease |
| Price Ceiling | Legally establishing a maximum price for a good or service Leads to shortages |
| Black Markets | Emerge in response to government intervention Place where good is illegally bought and sold at prices above legal limits |
| Price Floor | Minimum price for a good or service Creates surpluses Often used when the market system hasn't provided a sufficient income for certain groups of resource suppliers or producers |
Created by:
Eliana.s
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