Demand, Supply, and Market Equilibrium
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| Demand | Statement of a buyer's plans or intentions with respect to purchasing a product
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| Law of Demand | Principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price
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| inverse Relationship | Price and quantity demanded
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| Explanation of Inverse Relationship | Law of Demand is consistent with common sense
Diminishing marginal utility
Income Effect and Substitution Effect
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| Income Effect | A change in the quantity demanded of a product that results from a change in real income (purchasing power) caused by change in product's price
Lower prices = more buying
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| Substitution Effect | A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the good's own price
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| Demand Curve Slope | Downward
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| Market Demand | Found by adding quantities demanded by all customers at each possible price
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| Determinants of Demand | Consumers' tastes, number of buyers, consumers' income, price of related goods, and consumer expectations
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| Change in Demand | Change in one or more determinants changes demand
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| Superior Goods/Normal Goods | Good or service whose consumption increases when income increases and falls when income decreases, even as price remains constant
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| Inferior Goods | Good or service whose consumption declines as income rises, prices held constant
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| Inferior Goods Example | Microwave foods, retread tires, used cars, etc.
Higher income means higher quality goods
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| Substitute Goods | Products or services that can be used in place of each other
When price for one falls, demand for other falls
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| Substitute Goods Example | Ben & Jerrys and Haagen Dazs
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| Complementary Goods | Products and services that are used together
Price of one falls, demand for the other increases
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| Complementary Goods Example | Smartphones and cellular service, snowboards and lift tickets, etc.
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| Change in Quantity Demanded | Change in Price
Movement on the curve
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| Supply | Various amounts of products that producers are willing and able to make available for sale at each of a series of possible prices during a specific time
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| Law of Supply | Principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for decrease
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| Market Supply | Sum quantities supplied by each producer at each level
Horizontally add supply curves of individual producers
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| Determinants of Supply | Resource prices, technology, taxes and subsidies, prices of other goods, producer expectation, and number of sellers in the market
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| Higher Resource Prices | Higher prices mean rise in prices for consumers
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| Prices of Other Goods | Firm producing one good can shift and produce a similar one if the prices for the new good are higher
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| Taxes | Increase production costs and reduce supply
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| Subsidies | Lower costs and increase supply
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| Producer Expectations | Changes in expectations about future prices of goods may affect producers current willingness to supply that product
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| Number of Sellers | Larger the number of sellers, the greater the market supply
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| Change in Quantity Supplied | Quantity supplied changes at every price
Movement ALONG the curve
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| Equilibrium Price | Price in a competitive market at which the quantity demanded and quantity supplied are equal
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| Equilibrium Quantity | Quantity at which the intentions of buyers and sellers match
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| Surplus | Amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above equilibrium) price
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| Shortage | Amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below equilibrium) price
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| Rationing Function of Prices | Ability of forces of supply and demand to establish a price at which selling and buying decisions are constant
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| Productive Efficiency | The production of a good in the least costly way
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| Efficient Allocation | Competitive market rations goods to consumers and allocates society's resources efficiently to the particular product
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| Allocative Efficiency | The apportionment of resources among firms and industries to obtain the production of the products most wanted by society
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| MB = MC | At equilibrium: allocative efficiency
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| Increase in Demand | Price increases
Quantity increases
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| Decrease in Demand | Price decreases
Quantity decreases
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| Increase in Supply | Price decreases
Quantity increases
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| Decrease in Supply | Price increases
Quantity decreases
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| Supply Increase, Demand Decrease | Price decreases
Quantity Indeterminate
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| Supply Decrease, Demand Increase | Price increases
Quantity indeterminate
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| Supply Increase, Demand Increase | Price indeterminate
Quantity increases
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| Supply Decrease, Demand Decrease | Price indeterminate
Quantity decrease
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| Price Ceiling | Legally establishing a maximum price for a good or service
Leads to shortages
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| Black Markets | Emerge in response to government intervention
Place where good is illegally bought and sold at prices above legal limits
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| Price Floor | Minimum price for a good or service
Creates surpluses
Often used when the market system hasn't provided a sufficient income for certain groups of resource suppliers or producers
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