Economics- Ch 3

Markets

Institutions that bring buyers and sellers together so they can interact and transact with each other.

Price system

A name given to the market economy because prices provide considerable information to both buyers and sellers.

Demand

The maximum amount of a product that buyers are willing and able to purchase over some timer period at various prices, holding all other relevant factors constant.

Law of demand

Holding all other relevant factors constant, as price increases, quantity demanded falls, and as price decreases, quantity demanded rises.

Demand Curve

Demand schedule information translated to a graph.

Horizontal summation

Market demand and supply curves are found by adding together how many units of the product will be purchased or supplied at each price.

Determinants of demand

Other nonprice factors that affect demand including tastes and preferences, income, price of related goods, number of buyers, and expectations.

Normal good

A good where an increase in income results in rising demand.

Inferior good

A good where an increase in income results in declining demand.

Substitute good

Good consumers will substitute for one another depending on their relative prices.

Complementary goods

Goods that are typically consumed together.

Change in demand

Occurs when one or more of the determinants of demand changes, shown as a shift in the entire demand curve.

Change in quantity demanded

Occurs when the price of the product changes, and is shown as a movement along an existing demand curve.

Supply

The max amount of a product that sellers are willing and able to provide for sale over some time period at various prices, holding all other relevant factors constant.

Law of supply

Holding all other relevant factors constant, as price increases, quantity supplied will rise, and as price declines, quantity supplied will fall.

Supply curve

Supply schedule information translated to a graph.

Determinants of supply

Other nonprice factors that affect supply including production technology, costs of resources, prices of other commodities, expectations, number of sellers, and taxes and subsides.

Change in supply

Occurs when one or more of the determinants of supply change, shown as a shift in the entire supply curve.

Change in quantity supplied

Occurs when the price of the product changes, and is shown as a movement along an existing supply curve.

Equilibrium

Market forces are in balance where the quantities demanded by consumers just equal quantities supplied by producers.

Equilibrium price

The price that results when quantity demanded is just equal to quantity supplied.

Equilibrium quantity

The output that results when quantity demanded is just equal to quantity supplied.

Surplus

Occurs when the price is above market equilibrium price, and quantity supplied exceeds quantity demanded.

Shortage

Occurs when the price is below market equilibrium price, and quantity demanded exceeds quantity supplied.