The market for any good consists of all buyers or sellers of that good.
A schedule or graph showing the quantity of a good that buyers wish to buy at each price. It is downward sloping with respect to price.
The change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes.
The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power.
Buyer's Reservation Price
The largest dollar amount the buyer would be willing to pay for a good.
A graph or schedule showing the quantity of a good that sellers wish to sell at each price.
Low Hanging - Fruit Principle
As we expand the production of an item, we turn first to those whose opportunity costs of producing the item are lowest, and only then to others with higher opportunity costs.
Seller's Reservation Price
The smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost.
A system is in equilibrium when there is no tendency for it to change.
Equilibrium Price and Equilibrium Quantity
The values of price and quantity for which quantity supplied and quantity demanded are equal.
Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price.
The amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price.
The amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price.
A maximum available price, specified by law.
Change in the Quantity Demanded
A movement along the demand curve that occurs in response to achange in price.
Change in the Quantity Supplied
A movement along the supply curve that occurs in response to a changein price.
Two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift).
Two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift).
One whose demand curve shifts rightward when the incomes of buyers increase and leftward when the income of buyers decrease.
One whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease.
Factors that cause an increase (rightward or upward shift) in demand:
1. A decrease in the price of complements to the good or service. 2. An increase in the price of substitutes for the good or service. 3. An increase in income (for a normal good). 4. An increase preference by demanders for the good or service. 5. An increase in the population of potential buyers. 6. An expectation of higher prices in the future.
Factors that increase (rightward or downward shift) in supply:
1. A decrease in the cost of materials, labor, or other inputs used in the production of the good or service. 2. An improvement in technology that reduces the cost of producing the good or service. 3. An improvement in the weather (especially for agricultural products). 4. An increase in the number of suppliers. 5. An expectation of lower prices in the future.
Four Simple Rules
1. An increase in demand will lead to an increase in both the equilibrium price and quantity 2. A decrease in demand will lead to a decrease in both the equilibrium price and quantity 3. An increase in supply will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity. 4. A decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity.
The difference between the buyer's reservation price and the price he or she actually pays.
The difference between the price received by the seller and his or her reservation price.
The sum of the buyer's surplus and the seller's surplus. Also equal to the difference between the buyer's reservation price and the seller's reservation price.
Cash on the Table
Economic metaphor for unexploited gains from exchange.
Socially Optimal Quantity
The quantity of a good that results in the maximum possible economic surplus from producing and consuming the good.
Occurs when all goods and service are produced and consumed at their respective socially optimal levels.
The Efficiency Principle:
Efficiency is an important social goal, because when the economic pie grows larger, everyone can have a larger slice.
The Equilibrium Principle:
A market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action.