Ch. 4: Supply, Demand, Equilibrium Flashcards
Market
A group of economic agents who are trading a good or service plus the rules and arrangements for trading.
Market price
If all sellers and all buyers face the same price
Perfectly competitive market
1) Sellers all sell an identical good or service
2) Any individual buyer or any individual seller isn’t powerful enough on his or her own to affect the market price.
Price-takers
Buyers and sellers accept the market price and can’t bargain for a better price.
Quantity demanded
At a given price, the amount of the good or service that buyers are willing to purchase
Demand schedule
Table reports the quantity demanded at different prices
Holding all else equal
Implies that everything else in the economy is held constant
Demand curve
Plots the relationship between prices and quantity demanded (holding all else equal). Each dot plots a single point from the demand schedule.
Negatively related
The price of gasoline and the quantity demanded are negatively related, which means that they move in opposite directions. In other words, when one goes up, the other goes down, and vice versa.
Demand
Law of demand
The quantity demanded rises when the price falls (holding all else equal).
Willingness to pay
The highest price that a buyer is willing to pay for an extra unit of a good.
Diminishing marginal benefit
As you consume more of a good, your willingness to pay for an additional unit declines
Aggregation
The process of adding up individual behaviors
Market demand curve
It is the sum of the individual demand curves of all potential buyers.
Plots the relationship between the total quantity demanded and the market price, holding all else equal
Downward sloped
Demand curve shifts when (5 things)
1) Tastes and preferences
2) Income and wealth
3) Availability and prices of related goods
4) Number and scale of buyers
5) Buyers’ beliefs about the future (expectations)
Demand curve shifts…
only when the quantity demanded changes at a given price
When one of the five factors changes
Movement along the demand curve
If a good’s own price changes and its demand curve hasn’t shifted, the own price change produces a movement along the demand curve
When price of good changes
Normal good
An increase in income shifts the demand curve to the right, causing buyers to purchase more of the good.
Income up, Demand up
Ex: Gas
Inferior good
If rising income shifts the demand curve for a good to the left
Income up, demand down
Ex: Spam, income up people will buy more fresh food and less canned food
Substitutes
When price of one increases, demand for other increases
When price of one decreases, demand for other decreases
Ex: Apples and oranges
Complements
Wen price in one increases, demand for other decreases
When price of one decreases, demand for other increases
Inversely related
Ex: Tennis balls and tennis racket
Quantity supplied
At a given price, the amount of the good or service that sellers are willing to supply
Supply schedule
A table that reports the quantity supplied at different prices, holding all else equal.
Supply curve
Plots the quantity supplied at different prices. In other words, a supply curve plots the supply schedule.
Positively related
The variables move in the same direction—when one variable goes up, the other goes up, too.
Supply
Law of supply
The quantity supplied rises when price rises
Ex: An increase in the market price of MP3 players causes an increase in the production of MP3 players.
Willingness to accept
The lowest price that a seller is willing to get paid to sell an extra unit of a good.
Market supply curve
Plots the relationship between the total quantity supplied and the market price, holding all else equal.
Supply curve shifts when (3 things)
- State of technology
- Cost of inputs
- Price of other goods
Movement along the supply curve
If a good’s own price changes and its supply curve hasn’t shifted, the own price change produces a movement along the supply curve
Competitive equilibrium
Crossing point of supply and demand curves
Competitive equilibrium price
The price at which quantity supplied and quantity demanded are the same.
Competitive equilibrium quantity
This is the quantity that corresponds to the competitive equilibrium price.
Excess supply
When the market price is above the competitive equilibrium price, quantity supplied exceeds quantity demanded
Surplus
Excess demand
When market price is below the competitive equilibrium price, quantity demanded exceeds quantity supplied
Shortage
