Chapter 3- Demand, Supply, and the Market Process

law of demand
the inverse relationship between the price of a good and the quantity consumers are willing to purchase / as prices rise demand lowers
trade-offs
alternatives that must be given up when one is chosen rather than another
law of diminishing marginal utility
the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
market demand schedule
a table that lists the quantity of a good all consumers in a market will buy at various prices
demand curve
a graph of the relationship between the price of a good and the quantity demanded
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
elastic demand
a change in price leads to a relatively large change in quantity demanded / demand will be this way when close substitutes for the good are readily available
inelastic demand
a change in price leads to a relatively small change in quantity demanded / demand will be inelastic when few, if any, close substitutes are available
change in demand
consumers demand different amounts at every price, causing the demand curve to shift to the left or the right
change in quantity demanded
movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price
1. changes in consumer income
2. change in the number of consumers
3. change in the price of a related good
4. changes in expectations
5. demographic changes
6. changes in consumer tastes and preferences
demand curve shifters
economic cost
the value people place on a good or service
accounting cost
actual expenses plus depreciation charges for capital equipment
profit
a financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something
law of supply
the principle that suppliers will normally offer more for sale at higher prices and less at lower prices
producer surplus
the amount a seller is paid for a good minus the seller’s cost of providing it
elastic supply
quantity supplied is sensitive to changes in price thus a change in price leads to a relatively large change in quantity supplied
inelastic supply
quantity supplied is not sensitive to changes in price thus, a change in price leads to only a relatively small change in quantity supplied
change in supply
a change in the quantity supplied of a good or service at every price; a shift of the supply curve to the left or right
change in quantity supplied
a movement along the supply curve that occurs in response to a change in price
market equilibrium
when quantity demanded = quantity supplied
excess supply
when quantity supplied is more than quantity demanded
excess demand
when quantity demanded is more than quantity supplied
equilibrium price
the price that balances quantity supplied and quantity demanded
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
net gains
the expected values of a course of action minus the costs associated with it
equilibrium output level
the consumer’s valuation of the marginal unit and the producer’s opportunity cost of the resources necessary to bring that unit to market are equal
effects of changes in demand
1. when demand decreases - the equilibrium price and quantity will fall
2. when demand increases – the equilibrium price and quantity will rise
effects of changes in supply
1. when supply decreases - the equilibrium price will rise and the equilibrium quantity will fall
2. when supply increases – the equilibrium price will fall and the equilibrium quantity will rise
invisible hand
a phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all
competitive markets
a market composed of large numbers of sellers and buyers acting independently, so that no one individual seller or small group of sellers has the ability to control the price of the product sold
market order
a request that a security be purchased or sold at the current market price
1. the presence of competitive markets.
2. well-defined and enforced private property rights
efficiency of market organization is dependent on