Chapter 3 - Where Prices Come From: The Interaction of Supply and Demand Flashcards
Normal good
A good for which the demand increases as income rises. Visa-versa.
Inferior good
A good for which the demand increases as income falls. Visa-versa.
Complements
Goods and services that are used together.
Substitutes
Goods and services that can be used for the same purpose.
Income effect
The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power.
Demand schedule
A table that shows the relationship between the price of a product and the quantity of the product demanded.
Quantity demanded
The amount of a good or service that a consumer is willing and able to purchase at a given price.
“Ceteris Paribus” (all else equal) condition
The requirement that when analyzing the relationship between two variables, other variables must be held constant.
Market demand
The demand by all the customers of a given good or service.
Law of demand
The rule that, Ceteris Paribus, when the price of a product falls, the quantity demanded will increase. Visa-versa.
Demand curve
A curve that shows the relationship between the price and the quantity of the product demanded.
Substitution effect
The change in the quantity demanded of a good that results from the change in price relative to other goods.
Demographics
The characteristics of a population with respect to age, race, and gender.
Perfectly competitive market
A MKT with many buyers and sellers, all firms sell identical products, and there are no barriers to entry.
What variables shift MKT demand?
Income Price of related goods Tastes Population and demographics Expectations
Supply curve
A curve that shows the relationship between the price of a product and the quantity of the product supplied.
Quantity supplied
The amount of a good or service that a firm is willing and able to supply at a given price.
Law of supply
Increases in price cause increases in the quantity supplied. Visa-versa; ceteris paribus.
Supply schedule
A table that shows the relationship between the price of a product and the quantity of the product supplied.
Technological change
A change in the quantity of output a firm can produce using a given quantity of inputs.
What variables shift MKT supply?
- Price of inputs
- Technological change
- Prices of substitutes in production
- Number of firms in the market
- Expected future prices
Surplus
A situation in which the quantity supplied is greater than the quantity demanded.
Shortage
A situation in which he quantity demanded is greater than the quantity supplied.
Market equilibrium
A situation in which quantity demanded equals quantity supplied.
Competitive market equilibrium
A market equilibrium with many buyers and sellers
