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Economics Today (the Macro View): Chapter 3

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Terms in this set (...)

Market
All of the arrangements that individuals have for exchanging with one another.
Demand
A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant.
Law of Demand
The observation that there is a negative. or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant.
-"When the price of a good goes up, people buy less of it, other things being equal. When the price of a good goes down, people buy more of it, other things being equal.
Relative Price
The money price of one commodity divided by the money price of another commodity.
Money Price
The price that we observe today, expressed in today's dollars.
-Also called the absolute or nominal price.
Demand Curve
A graphical representation of the demand schedule; A negatively sloped line showing the inverse relationship between the price and the quantity demanded (other things being equal).
Market Demand
The demand of all of consumers in the market place for a particular good or service.
-The summation at each point of the quantity demanded by each individual.
Ceteris Paribus Conditions
Determinants of the relationship between price and quantity that are unchanged along a curve; changes in these factors cause the curve to shift.
- Income (Normal goods and Inferior goods)
-Tastes and Preferences
-The prices of related goods (Substitutes and Compliments)
-Future Expectations
-Market size (Number of buyers)
5 Determinants of Demand
Normal Goods
Goods for which demand rises as income rises. Most goods are _______ goods.
-Ex: shoes, computers, dvds
Inferior Goods
Goods for which demand falls as income rises.
-Ex: As households get richer, they tend to purchase fewer and fewer beans and purchase more and more meat. Beans are the inferior good in this scenario.
Substitutes
Two goods are substitutes when a change in the price of one causes a shift in the demand for the other in the same direction as the price change.
-Ex: Butter vs Margarine
Complements
Two goods are complements when a change in the price of one causes an opposite shift in the demand for the other.
-Ex: Peanut butter and Jelly
-Change in Demand results in a shift of the entire demand curve.
-Change in Quantity Demand results in movement of one point to another along the demand curve.
Changes in Demand vs Changes in Quantity Demand
Supply
A schedule showing the relationship between price and quantity supplied for a specified period of time, other things being equal.
Law of Supply
The observation that the higher the price of a good, the more of that good sellers will make available over a specified period, other things being equal.
-Supply quantity of higher priced goods>Supply quantity of lower priced goods.
Supply Curve
The graphical representation of the supply schedule; a line (curve) showing the supply schedule, which generally slopes upward (has positive slope), other things being equal.
Subsidy
A negative tax.
-Payment to a producer from the government, usually in the form of a cash grant per unit.
-Cost of inputs
-Technology and Productivity
-Taxes and Subsidies
-Price Expectations
-Number of Firms
5 Determinants of Supply
Cost of inputs
Which Determinant of Supply does this describe?
-If one or more input price fall, production costs fall, and the supply curve will shift to the right, the opposite will happen.
Technology and Productivity
Which Determinant of Supply does this describe?
-When a better production technique becomes available, production costs decrease, and supply curve will shift to the right.
Taxes and Subsidies
Which Determinant of Supply does this describe?
-Certain taxes, like per unit tax, raise production costs shifting supply curve to the left. Subsidies decrease cost of production which will cause the supply curve to shift to the right.
Price Expectations
Which Determinant of Supply does this describe?
-A change in the expectations of a future relative price of a product can effect a producers willingness to supply, just as a price expectations affect a current consumers willingness to purchase.
Number of firms
Which Determinant of Supply does this describe?
-If the # of firms increases, the supply curve will shift to the right, if the number decreases, it will shift to the left.
-A change or shift in supply is a movement of the entire curve.
-A change in the price leads to a change in the quantity supplied, which leads to a movement along the curve.
Changes in Supply vs Changes in Quantity Supplied
Equilibrium Price or Market Clearing Price
Price at which quantity demanded equals quantity supplied. The price where the demand curve intersects the supply curve.
Equilibrium
The situation when quantity supplied equals quantity demanded at a particular price.
-Market price will tend to gravitate towards it because there is no better outcome than it.
Shortages
A situation in which quantity demanded is greater than quantity supplied at a price below the market clearing price.
Surplus
A situation in which quantity supplied is greater than quantity demanded at a price above the market clearing price.
Unfettered Market
Markets in which price changes are free to occur.
-Place where shortages and surpluses are resolved.