Microeconomics: Chapter 3

Terms in this set (32)

The model of demand and supply is the most important tool in economics. The model applies exactly only to perfectly competitive markets, where there are many buyers and sellers, all the products are identical, and there are no barriers to entry. But, the model can also be useful in analyzing markets that don't meet all these requirements. The quantity demanded is the amount of a good or service that a consumer is willing and able to purchase at a given price. A demand schedule is table showing the relationship between price of a product and quantity of a product demanded. A demand curve is a graph that shows the relationship between the price of a product and the quantity of the product demanded. Market demand is the demand by all consumers of a good or service. The law of demand states that - ceteris paribus - holding everything else constant - the quantity demanded of a product increases as price decreases and decreases when the price increases. Demand curves slope downward because of the substitution effect, which is the change in quantity demanded that results from a price change making one good more or less expensive relative to another good, and the income effect, which is the change in quantity demanded of a good of a good that results from the effect of a change in the good's price on consumer purchasing power. Changes in income, the prices of related goods, tastes, populations and demographics, and expected future prices all cause the demand curve to shift. Substitutes are goods that can be used for the same purpose. Complements are goods that are used together. A normal good is a good for which demand increases as income increases. An inferior is good for which demand decreases as income increases. Demographics refer to the characteristics of a population with respect to age, race, and gender. A change in demand refers to a shift of the demand curve. A change in quantity demanded refers to a movement along the demand curve as a result of a change in the product's price.