Chapter 4 - The Market Forces of Supply and Demand

Vocabulary
Market


 * Definition: A group of buyers and sellers of a particular good or service.


 * What It Means:

Competitive Market


 * Definition: A market in which there are many buyers and sellers so that each has a negligible impact on the market price.


 * What It Means:

Quantity Demanded


 * Definition: The amount of a good that buyers are willing and able to purchase.


 * What It Means:

Law of Demand


 * Definition: The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.


 * What It Means:

Demand Schedule


 * Definition: A table that shows the relationship between the price of a good and the quantity demanded.


 * What It Means:

Demand Curve


 * Definition: A graph of the relationship between the price of a good and the quantity demanded.


 * What It Means:

Normal Good


 * Definition: A good for which, other things equal, an increase in income leads to an increase in demand.


 * What It Means:

Inferior Good


 * Definition: A good for which, other things equal, an increase in income leads to a decrease in demand.


 * What It Means:

Substitutes


 * Definition: Two goods for which an increase in the price of one leads to an increase in the demand for the other.


 * What It Means:

Complements


 * Definition: Two goods for which an increase in the price of one leads to a decrease in the demand for the other.


 * What It Means:

Quantity Supplied


 * Definition: The amount of a good that sellers are willing and able to sell.


 * What It Means:

Law of Supply


 * Definition: The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.


 * What It Means:

Supply Schedule


 * Definition: A table that shows the relationship between the price of a good and the quantity supplied.


 * What It Means:

Supply Curve


 * Definition: A graph of the relationship between the price of a good and the quantity supplied.


 * What It Means:

Equilibrium


 * Definition: A situation in which the market price has reached the level at which quantity supplied equals quantity demanded.


 * What It Means:

Equilibrium Price


 * Definition: The price that balances quantity supplied and quantity demanded.


 * What It Means:

Equilibrium Quantity


 * Definition: The quantity supplied and the quantity demanded at the equilibrium price.

Surplus
 * What It Means:


 * Definition: A situation in which quantity supplied is greater than quantity demanded.


 * What It Means:

Shortage


 * Definition: A situation in which quantity demanded is greater than quantity supplied.


 * What It Means:

Law of Supply and Demand


 * Definition: The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.


 * What It Means:

Shifts
-in demand: If something happens to change the quantity demanded at any given price, the demand curve shifts. If ice cream suddenly cures cancer, the demand for ice cream goes up, at any given price. Graphically, the supply line does not move, but the demand curve shifts. An increase in demand is a positive shift, in which the demand curve shifts to the right. A decrease in demand is a negative shift, in which the demand curve shifts to the left. The major factors that determine the demand curve are Income, Prices of Related Goods, Tastes, Expectations, and Number of Buyers.



-in supply: If the production of a product becomes more efficient or more profitable, the supply of that product increases. If the price of sugar falls, an input into producing ice cream, the supply of ice cream will increase, because it is now cheaper to produce ice cream. A change that raises quantity supplied, such as the fall in the price of sugar, shifts the supply curve to the right. This is called an increase in supply. Any change that reduces the quantity supplied shifts the supply curve to the left. This is called a decrease in supply. The major factors that determine the supply curve are Input Prices, Technology, Expectations, and Number of Sellers.



Movements
-in demand: If the price of a good increases, the demand does not negatively shift, as one might expect. Remember, this is EconVille. Realistically, people would buy less if the prices increased, but that's not relevant to this scenario. The scenario makes no mention of demand, only price. Instead, there would be a movement along the demand curve, to reflect the increase in price. Graphically, price is along the y axis. Thus, if the y axis is increasing, it must be a movement to the left on the demand curve (The left side of the demand curve is the highest side). Inversely, if the price of a good decreases, there will be a movement along the demand curve to the right.