Principles of Macroeconomic
Mankiw Chap 4
Terms in this set (36)
What is a market?
a group of buyers and sellers of a particular good or service
Who determines the demand for a product?
the buyers determine the demand
Who determines the supply of a product?
the sellers determine the supply
What are some highly organized markets?
markets for many agricultural commodities are highly organized; in these markets buyers and sellers meet at a specific time and place, where an auctioneer helps set up prices and arrange sales
What are some less organized markets?
an example of a less organized market is the market for ice cream; each seller posts a price for ice cream and each buyer decides how much ice cream to buy
What is a competitive market?
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price; each seller has limited control over the prices they can charge for a product; no single buyer can influence the price of a product
What are the assumptions of a perfectly competitive market?
(1) the goods offered for sale are all exactly the same (2) the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price
What is a price taker?
buyers and sellers in a perfectly competitive market that must accept the price the market determines
What is a monopoly?
a market with only one seller, and this seller gets the price
Why do economists assume perfectly competitive markets?
it is useful for simplification of the complex market and are easier to analyze
What is the quantity demanded?
the amount of a good that buyers are willing and able to purchase; the price of a good is sometimes a determinant of the quantity demanded
What is the law of demand?
The claim that, other things equal, the quantity demanded of a good falls when the price of a good rises
What is a demand schedule?
a table that shows the relationship between the price of a good and the quantity demanded
What is a demand curve?
a graph of the relationship between the price of a good and the quantity demanded
What is market demand?
the sum of all the individual demands for a particular good or service
What happens when the demand is raised?
at any given price, buyers would want more quantity of the good or service and the demand curve would shift to the right
What are 5 variables that can shift the demand curve?
(1) income (2) prices of related goods (3) tastes (4) expectations (5) number of buyers
What is a normal good?
a good for which, other things equal, an increase in income leads to an increase in demand
What is an inferior good?
a good for which, other things equal, an increase in income leads to a decrease in demand; the demand for a good increases when there is a decrease in income
What are substitutes?
two goods for which an increase in the price of one leads to an increase in the demand for the other; an example is frozen yogurt and ice cream
What are compliments?
two goods for which an increase in the price of one leads to a decrease in the demand for the other; pairs of goods that are used together
What happens to the demand curve if the price of the good changes?
that would be represented by a movement along the curve, rather than a shift in the curve
What is quantity supplied?
the amount of a good that sellers are willing and able to sell
What is the law of supply?
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
What is a supply schedule?
a table that shows the relationship between the price of a good and the quantity supplied
What is a supply curve?
a graph of the relationship between the price of a good and the quantity supplied
What happens when the supply curve is raised?
the supply curve will shift to the right
What are the 4 variables that can shift the supply curve?
(1) input prices (2) technology (3) expectations (4) number of sellers
What happens to the supply curve if the price of a good changes?
that represents a movement along the supply curve
What is an equilibrium?
a situation in which the market price has reached the level at which quantity supplied equals the quantity demanded
What is the equilibrium price?
the price that balances quantity supplied and the quantity demanded; at this price, the quantity of the good that buyers are willing and able to buy are exactly equal the the quantity that sellers are willing and able to sell
What is equilibrium quantity?
the quantity supplied and the quantity demanded at the equilibrium price
What is a surplus?
a situation in which quantity supplied is greater than the quantity demanded; when there is excess supply in the market
What is a shortage?
a situation in which the quantity demanded is greater than quantity supplied
What is the law of supply and demand?
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance; the belief that prices eventually move towards their equilibrium levels
What are the 3 steps for analyzing changes in equilibrium?
(1) decide whether the event shifts the supply or demand cure or both (2) decide in which direction the curve shifts (3) use the supply and demand diagram to see how the shift changes the equilibrium price and quantity