Chapter 3: Demand, Supply, and Market Equilibrium Flashcards
What is a market?
any institution or mechanism that brings together buyers (“demanders”) and sellers (“suppliers”) of a particular good or service.
What is demand?
a schedule of prices and the quantities that buyers would purchase at each of these prices during a selected period of time
What does the law of demand state?
that there is an inverse or negative relationship between price and quantity demanded. Other things equal, as price increases, buyers will purchase fewer quantities and as price decreases they will purchase more quantities
What are 3 possible explanations for the law of demand?
diminishing marginal utility, income effect, substitution effect
What is diminishing marginal utility?
After a point, consumers get less satisfaction or benefit from consuming more and more unit
What is the income effect?
a hihger price for a good decreases the purchasing power of consumers’ incomes so they can’t buy as much of the good
What is the substitution effect?
a higher price for a good encourages consumers to search for cheaper substitutes and thus buy less of it
What is a demand curve?
a line with a downward slope and is a graphical representation of the law of demand
What is market demand?
a sum of all the demands of all consumers of that good at each price
What are the determinants of demand?
consumer tastes, the number of buyers in the market, consumer’s income, the prices of related goods, and consumer expectations
What is a normal good?
a good where income and demand are positivey related
What is an inferior good?
a good where income and demand are inversely related
What is a substitute good?
a good that can be used in place of another
What is a complementary good
A good that is used with another good
What does a change in demand mean?
that the entire demand curve or schedule has changed because of a change in one of the determinants of demand
What does a change in the quantity demanded mean?
that there has been a movement along an existing demand curve or schedule because of a change in price
What is supply?
a schedule of prices and the quantities that sellers will sell at each of these prices during some period of time
What does the law of supply show?
a positive relationship between price and quantity supplied. Other things equal, as the price of the good increases more quantities will be offered for sale and that as the price of te good decreaes, fewer quantities will be offered for sale
What is the supply curve?
a graphhic representation of supply and the law of supply; it has an upward slop indicating the positive relationship between price and quantity supplied
What are the determinants. of supply?
resource prices, technology, taxes and subsidies, prices of other goods, price expectation, and the number of sellers in a market
What does a change in supply mean?
the entire supply curve or schedule has changed because of a change in one of the determinants of supply
What does a change in quantity supplied mean?
there has been a movement along an existing supply curve or schedule because of a change in price
What is the equilibrium price of a product?
the price at whcih quantity demanded and quantity supplied are equal
When is there a surplus?
when the price of a product is above the market equilibrium price
When is there a shortage?
if the price of a product is below the market equilibrium price
What is the rationing function of prices?
the elimination of surpluses and shortages of a product
What is productive efficiency?
when the goods and services society desires are being produced in the least costly way
What is allocative efficiency?
when resources are devoted to the production of goods and services society most highly values
What does a price ceilign do?
prevents price from performign its rationing function in a market system, and creates a shortage at the gocernment set price
What does a price floor do?
creates a surplus at the fized price
