Chapter 4: Demand And Supply

Front 1

Demand

Back 1

A relationship between price and the quantity demanded of a certain good or service

Front 2

Quantity Demanded

Back 2

The total number of units of a good or service purchased at a certain price.

Front 3

Law of demand

Back 3

The common relationship that a higher price leads to a lower quantity demanded of a certain good or service.

Front 4

Demand Schedule

Back 4

A table that shows a range of prices for a certain good or service and the quantity demanded at each price.

Front 5

Demand Curve

Back 5

A line that shows the relationship between price and quantity demanded of a certain good or service on a graph, with quantity on the horizontal axis and the price on the vertical axis.

Front 6

Supply

Back 6

A relationship between price and the quantity supplied of a certain good or service.

Front 7

Quantity Supplied

Back 7

The total number of units of a good or service sold at a certain price.

Front 8

Law of Supply

Back 8

The common relationship that a higher price is associated with a greater quantity supplied.

Front 9

Supply Schedule

Back 9

A table that shows a range of prices for a good or service and the quantity supplied at each price.

Front 10

Supply Curve

Back 10

A line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis, and price on the vertical axis.

Front 11

Equilibrium Price

Back 11

The Price where quantity demanded is equal to quantity supplied.

Front 12

Equilibrium Quantity

Back 12

The quantity at which quantity demanded and quantity supplied are at a certain price.

Front 13

Equilibrium

Back 13

The combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to shift.

Front 14

Excess Supply (Surplus)

Back 14

When at the existing price, quantity supplied exceeds the quantity demanded; also called a "Surplus."

Front 15

Excess Demand (Shortage)

Back 15

At the existing price, the quantity demanded exceeds the quantity supplied, also called a shortage.

Front 16

ceteris paribus

Back 16

Other things being equal

Front 17

Shift in Demand

Back 17

When a change in some economic factor related to demand caused a different quantity to be demanded at every price. Increased demand shift the demand curve to the right. Decreased demand shifts the curve to the left.

Front 18

Normal Goods

Back 18

Goods where the quantity demanded rises as income rises.

Front 19

Inferior Goods

Back 19

Goods where the quantity demanded falls as income rises.

Front 20

Substitutes

Back 20

Goods that can replace each other to some extent, so that a rise in the price of one good leads to a lower quantity consumed of another good, and vice versa.

Front 21

Complements

Back 21

Goods that are often used together, so that a rise in the price of one good tends to decrease the quantity consumed of the other good, and vice versa.

Front 22

Shift in Supply

Back 22

When a change in some economic factor related to supply causes a different quantity to be supplied at every price.

Front 23

Price Controls

Back 23

Government laws to regulate prices

Front 24

Price Ceilings

Back 24

A law that prevents a price from rising above a certain level. Do not shift supply or demand curve.

Front 25

Price Floor

Back 25

A law that prevents a prices from falling below a certain level. Do not shift supply or demand curve.

Front 26

Black Market

Back 26

An illegal market that breaks government rules on prices or sales.

Front 27

Consumer Surplus

Back 27

The benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus what they actually paid.

Front 28

Producer Surplus

Back 28

The benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept.

Front 29

Social Surplus

Back 29

The sum of consumer surplus and producer surplus.

Front 30

Deadweight Loss

Back 30

The loss in social surplus that occurs when a market produces an inefficient quantity.

Front 31

Factors that Shift the Demand Curve

Back 31

1. Change in Income: Higher incomes demand more goods and services. Shift right.

2. Changing Tastes: Music, Food, etc.

3. Changes in Expectations of the Future: Hurricane coming (batteries and bottled water,) coffee prices expected to rise (head to the store to stock up). Shift right.

4. Change in Price of Related Good, goods that are Substitutes: Price of tea rises, demand for coffee rises. Shift right.

5. Complement Goods: Consumption of one good increases consumption of the other. Breakfast cereal and milk, golf balls and golf clubs, gas and SUVs, and the ingredients of a BLT.

6. Change in Composition of Population: More old people = healthcare services, retirement communities, etc. More children = daycare centers, tricycles etc.

Price is NOT included. Price moves along the demand curve, it does not shift it.

Front 32

Factors that Shift the Supply Curve

Back 32

1. Changes in natural conditions: Drought shift supply curve of agricultural products to the left, good weather shifts to the right.

2. Change in price of a key input to production: Labor, materials, and machinery. Prices fall, supply shift to the right, prices rise, supply shift to the left.

3. New Technology: A tech improvement that reduces costs of production shifts the curve to the right.

4. Government Policies: Taxes, regulations and subsidies. Taxes and regulations = additional cost that shift curve to the left; subsidies reduce cost and increase supply, shift right.

Price does NOT shift. Moves along curve only.

Front 33

Shift in Equilirbrium Price and Quantity 4 Step process

Back 33

1. Sketch present curves Supply and Demand

2. Economic changes affect supply or demand?

3. Causes the curve to shift right or left? Sketch new curves.

4. Compare original equilibrium price and quantity to new equilibrium price and quantity.

Front 34

Many Margins for Action

Back 34

How households and firms react to circumvent government rules. Applied to Renting: Pay extra in cash, "side payments" (key deposit, cleaning deposit), quality adjustment (less maintenance = worse apartment), shifting whose involved in the transaction (subletting apartment.) And Black Markets