Chapter 3: Demand, Supply and Market Equilibrium
Important Terms: demand, demand schedule, substitute good, change in quantity supplied
complementary goods, equilibrium price, law of demand, change in demand, equilibrium
quantity, diminishing marginal utility, change in quantity demanded, surplus, shortage, income
effect, supply, substitution effect, supply schedule, law of supply, determinants of demand,
determinants of supply, rent control, inferior good, change in supply, price floor
What is the law of demand?
As the price of a good rises, the quantity demanded of the good falls and as the price of a good
falls, the quantity demanded of the good rises, ceteris paribus.
In simple terms: There is an inverse relationship between price and quantity demanded.
Assumption: Many buyers and sellers!!
What is the market demand for a given good?
______________________________________________________________________________
** What is a perfectively competitive market? **
1. ________________________________________________________________________
2. ________________________________________________________________________
3. ________________________________________________________________________
** Change in Quantity Demanded Versus Demand **
Change in quantity demanded is caused by a change in its ________.
Change in demand is caused by a change in _____________________________.
Shifters of Demand (Changes in Demand)
1. ________________________________________________________________________
2. ________________________________________________________________________
3. ________________________________________________________________________
a. ________________________________________________
b. ________________________________________________
4. ________________________________________________________________________
a. ________________________________________________
b. ________________________________________________
5. ________________________________________________________________________
Is price a shifter or determinant of demand?
____________
Supply
What is the Law of Supply?
As the price of a good rises the quantity supplied of a good rises; and as the price of a good falls,
the quantity supplied of the good falls.
This is a ___________relationship!
Supply Schedule
Price Tropicana (OJ) Healthy Juice (OJ) Total
$1 2 3 5
$2 4 6 10
$3 6 9 15
$4 8 12 20
Supply Curve
Change in Quantity Supplied Versus Supply
Change in quantity supplied is caused by a change in its own price.
Change in supply is caused by a change in ___________________________.
What are the shifters of supply?
1. ________________________________________________________________________
2. ________________________________________________________________________
3. ________________________________________________________________________
4. ________________________________________________________________________
5. ________________________________________________________________________
6. ________________________________________________________________________
Shortage and Surplus
Graph:
Cheat Sheet
____________
The share of the total surplus that is received by a consumer or consumers in a market
The difference between the maximum buying price a buyer is willing and able to pay for
a good or service and the price actually paid for the good or service.
____________
The difference between the actual price a producer receives (or producers receive) and
the minimum acceptable price, the triangular area above the supply curve and below the
market price.
________________
Total surplus is the total from both consumer and producer surplus.
_________________
The production of a good in the least costly way; occurs when production takes place at
the output level at which per-unit production costs are minimized.
__________________
The apportionment of resources among firms and industries to obtain the production of
the products most wanted by society (consumers); the output of each product at which its
marginal cost and marginal benefit are equal, and at which the sum of consumer surplus
and producer surplus is maximized.
Conditions for Allocative Efficiency
__________________________
__________________________
___________________________
Externalities
____________
A cost or benefit from production or consumption that accrues to someone other than the
immediate buyers and sellers of the product being produced or consumed (see negative
externality and positive externality).
_____________
A cost imposed without compensation on third parties by the production or consumption
of sellers or buyers. Example: A manufacturer dumps toxic chemicals into a river, killing
fish prized by sports fishers. Also known as an external cost or a spillover cost.
Example: Pollution from a factory, noise pollution from your neighbor
____________
A benefit obtained without compensation by third parties from the production or
consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring
farmer plants clover. Also known as an external benefit or a spillover benefit.
Example: Someone cleaning up the park, your neighbor paints their house
______________
A tax or charge levied on the production of a product that generates negative externalities.
If set correctly, the tax will precisely offset the overallocation (overproduction) generated
by the negative externality.
Underprovided
_______________
_______________
______________
____________________
A situation where one party to a market transaction has more information about a product
or service than the other. The result may be an under- or overallocation of resources.
__________________
The possibility that individuals or institutions will behave more recklessly after they
obtain insurance or similar contracts that shift the financial burden of bad outcomes onto
others. Example: A bank whose deposits are insured against losses may make riskier
loans and investments.
____________________
A problem arising when information known to one party to a contract or agreement is not
known to the other party, causing the latter to incur major costs. Example: Individuals
who have the poorest health are most likely to buy health insurance.