How can we help?

You can also find more resources in our Help Center.

Supply and Demand: Theory

Chapter 3
STUDY
PLAY
Market
any place people come together to trade
demand
the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period
Law of Demand
as the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises, ceteris paribus; the inverse relationship between price of a good and quantity demanded
Demand Schedule
the numerical tabulation of the quantity demanded of a good at different prices; is the numerical representation of the law of demand
demand curve
the graphical representation of the law of demand
Law of diminishing marginal utility
for a given time period, the marginal (or additional) utility of satisfaction gained by consuming equal successive units of a good; declines as the amount consumed increases
Own price
the price of a good
Inferior good
a good for which demand falls (rises) as income rises (falls)
neutral good
a good for which demand does not change as income rises or falls
substitutes
two goods that satisfy similar needs or desires; the demand for one rises as the price of the other rises (or the demand for one falls as the price of the other falls).
compliments
two goods that are used jointly in consumption; the relationship between two goods with the relationship of contrast (the demand for one falls as the price of the other rises)
Supply
the willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period
Law of Supply
as the price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of the good falls
Upward-sloping Supply curve
The graphical representation of the law of supply
Supply schedule
the numerical tabulation of the quantity supplied of a good at different prices; the numerical representation of the law of supply
Subsidy
a monetary payment by government to a producer of a good or service
Surplus (excess supply)
a condition in which the quantity supplied is greater than the quantity demanded. occurs only at prices above equilibrium price
Shortage (excess demand)
a condition in which the quantity demanded is greater than the quantity supplied. occurs only at prices below equilibrium price
Equilibrium quantity
the quantity that corresponds to equilibrium price. The quantity at which the amount of the good that buyers are willing and able to buy equals the amount that sellers are willing and able to sell, and both equal the amount actually bought and sold
Equilibrium
means "at rest", in a market is the price-quantity combination from which buyers or sellers do not tend to move away. Graphically, it's the intersection point of the supply and demand curves
Disequilibrium price
a price other than equilibrium price. A price at which the quantity demanded does not equal the quantity supplied
Disequilibrium
a state of either surplus or shortage in a market
Consumer's Surplus (CS)
the difference between the maximum price a buyer is willing and able to pay for a good or service and the price actually paid. CS=Maximum buying price - Price paid
Producers' surplus (PS)
the difference between the price sellers receive for a good and the minimum or lowest price for which they would have sold the good. PS=Price received - minimum selling price
Total Surplus (TS)
the sum of consumers' surplus and producers' surplus. TS=CS+PS
Quantity demanded
the number of units of a good that individuals are willing and able to buy at a particular price
change in quantity demanded
the movement from one point to another point on the same demand curve caused by a change in the price of the good
change in demand
shift in demand curve
increase in demand
rightward shift in the demand curve; means that individuals are willing and able to buy more of a good at each and every price
decrease in demand
leftward shift in the demand curve; means that individuals are willing and able to buy less of a good at each and every price
Normal good
a good for which demand rises (falls) as income rises (falls)
variables of demand curve
1. income
2. preferences
3. prices of related goods
4. the number of buyers
5. expectations of future prices
factors that can change supply (causes of shifting supply curve)
1. prices of relevant resources
2. technology
3. prices of other goods
4. the number of sellers
5. expectations of future prices
6. taxes and subsidies
7. government restrictions