Chapter 3 - Demand, Supply, and Market Equilibrium Flashcards
firm
An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.
entrepreneur
A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.
households
The consuming units in an economy.
product or output
markets
The markets in which goods and services are exchanged.
input or factor markets
The markets in which the resources used to produce goods and services are exchanged.
labor market
The input/factor market in which households supply work for wages to firms that demand labor.
capital market
The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.
land market
The input/factor market in which households supply land or other real property in exchange for rent.
factors of production
The inputs into the production process. Land, labor, and capital are the three key factors of production.
quantity demanded
The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.
demand schedule
A table showing how much of a given product a household would be willing to buy at different prices.
demand curve
A graph illustrating how much of a given product a household would be willing to buy at different prices.
law of demand
The negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as price falls, quantity demanded increases.
income
The sum of all a household’s wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.
wealth or net worth
The total value of what a household owns minus what it owes. It is a stock measure.
normal goods
Goods for which demand goes up when income is higher and for which demand goes down when income is lower
inferior goods
Goods for which demand tends to fall when income rises.
substitutes
Goods that can serve as replacements for one
another; when the price of one increases, demand for the other increases.
perfect substitutes
Identical products
complements, complementary goods
Goods that “go together”; a decrease in the price of one results in an increase in demand for the other and vice versa.
shift of a demand curve
The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions.
movement along a demand curve
The change in quantity demanded brought about by a change in price.
market demand
The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.
profit
The difference between revenues and costs.
quantity supplied
The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.
supply schedule
A table showing how much of a product firms will sell at alternative prices.
law of supply
The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.
supply curve
A graph illustrating how much of a product a firm will sell at different prices.
movement along a supply curve
The change in quantity supplied brought about by a change in price.
shift of a supply curve
The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.
market supply
The sum of all that is supplied each period by
all producers of a single product.
equilibrium
The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.
excess demand or shortage
The condition that exists when quantity demanded exceeds quantity supplied at the current price.
excess supply or surplus
The condition that exists when quantity supplied exceeds quantity demanded at the current price.
