Supply and Demand: Key Terms
Aggregation: The process of adding up individual behaviors is referred to as aggregation.
Competitive equilibrium: The crossing point of the supply curve and the demand curve.
Competitive equilibrium price: Equates quantity supplied and quantity demanded.
Competitive equilibrium quantity: The quantity that corresponds to the competitive equilibrium price.
Complements: Two goods are complements when a fall in the price of one leads to a rightward shift in the demand curve for the other.
Demand curve: Plots the quantity demanded at different prices. A demand curve plots the demand schedule.
Demand curve shifts: The demand curve shifts only when the quantity demanded changes at a given price.
Demand schedule: A table that reports the quantity demanded at different prices, holding all else equal.
Diminishing marginal benefit: As you consume more of a good, your willingness to pay for an additional unit declines.
Excess demand: When the market price is below the competitive equilibrium price, quantity demanded exceeds quantity supplied, creating excess demand.
Excess supply: When the market price is above the competitive equilibrium price, quantity supplied exceed quantity demanded, creating excess supply.
Holding all else equal: Implies that everything else in the economy is held constant. The latin phrase ceteris paribus means “with other things the same” and is sometimes used in economic writing to mean the same thing as “holding all else equal“.
Inferior good: For an inferior good, an increase in income causes the demand curve to shift to the left, or in other words, causes buyers to buy less of the good.
Input: A good or service used to produce another good or service.
Law of Demand: In almost all cases, the quantity demanded rises when the price falls (holding all else equal).
Law of Supply: In almost all cases, the quantity supplied rises when the price rises (holding all else equal).
Market: A group of economic agents who are trading a good or service plus the rules and arrangements for trading.
Market demand curve: The sum of the individual demand curves of all potential buyers. It plots the relationship between the total quantity demanded and the market price, holding all else equal.
Market price: If all sellers and all buyers face the same price, it is referred to as the market price.
Market supply curve: The sum of the individual supply curves of all the potential sellers. It plots the relationship between the total quantity supplied and the market price, holding all else equal.
Movement along the demand curve: If a good’s own price changes and its demand curve hasn’t shifted, the own price changes produces a movement along the demand curve.
Movement along the supply curve: If a good’s own price changes and its supply curve hasn’t shifted, the own price change produces a movement along the supply curve.
Negatively related: Two variables are negatively related if the variables move in opposite directions.
Normal good: For a normal good, an increase in income causes the demand curve to shift to the right, or in other words, causes buyers to buy more of the good.
Perfectly competitive market: In a perfectly competitive market, (1) sellers all sell an identical good or service, and (2) any individual buyer or any individual seller isn’t powerful enough on his or her own to affect the market price of that good or service.
Positively related: Two variables are positively related if the variables move in the same direction.
Price-taker: A price-taker is a buyer or seller who accepts the market price—buyers can’t bargain for a lower price and sellers can’t bargain for a higher price.
Quantity demanded: The amount of a good or service that buyers are willing to purchase at a given price.
Quantity supplied: The amount of a good or service that sellers are willing to sell at a given price.
Substitutes: Two good are substitutes when a rise in the price of one leads to a rightward shift in the demand curve for the other.
Supply curve: Plots the quantity supplied at different prices. A supply curve plots the supply schedule.
Supply curve shifts: The supply curve shifts only when the quantity supplied changes at a given price.
Supply schedule: A table that reports the quantity supplied at different prices, holding all else equal.
Willingness to accept: The lowest price that a seller is willing to get paid to sell an extra unit of a good. At a particular quantity supplied. Willingness to accept is the height of the supply curve. Willingness to accept is the same as the marginal cost of production.
Willingness to pay: The highest price that a buyer is willing to pay for an extra unit of a good.