Key Terms

Key Terms

ceteris paribus other things being equal complements goods that are often used together so that consumption of one good tends to enhance consumption of the other consumer surplus the extra benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid deadweight loss the loss in social surplus that occurs when a market produces an inefficient quantity demand the relationship between price and the quantity demanded of a certain good or service demand curve a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis demand schedule a table that shows a range of prices for a certain good or service and the quantity demanded at each price economic surplus see social surplus equilibrium the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change equilibrium price the price where quantity demanded is equal to quantity supplied equilibrium quantity the quantity at which quantity demanded and quantity supplied are equal for a certain price level excess demand at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage excess supply at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus factors of production the resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs inferior good a good in which the quantity demanded falls as income rises, and in which quantity demanded rises and income falls inputs the resources such as labor, materials, and machinery that are used to produce goods and services; also called factors of production law of demand the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant law of supply the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant normal good a good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls price what a buyer pays for a unit of the specific good or service price ceiling a legal maximum price price control government laws to regulate prices instead of letting market forces determine prices price floor a legal minimum price producer surplus the extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept quantity demanded the total number of units of a good or service consumers are willing to purchase at a given price quantity supplied the total number of units of a good or service producers are willing to sell at a given price shift in demand when a change in some economic factor (other than price) causes a different quantity to be demanded at every price shift in supply when a change in some economic factor (other than price) causes a different quantity to be supplied at every price shortage at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand social surplus the sum of consumer surplus and producer surplus substitute a good that can replace another to some extent, so that greater consumption of one good can mean less of the other supply the relationship between price and the quantity supplied of a certain good or service supply curve a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis supply schedule a table that shows a range of prices for a good or service and the quantity supplied at each price surplus at the existing price, quantity supplied exceeds the quantity demanded; also called excess supply total surplus see social surplus

Key Concepts and Summary

3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services

A demand schedule is a table that shows the quantity demanded at different prices in the market. A demand curve shows the relationship between quantity demanded and price in a given market on a graph. The law of demand states that a higher price typically leads to a lower quantity demanded. A supply schedule is a table that shows the quantity supplied at different prices in the market. A supply curve shows the relationship between quantity supplied and price on a graph. The law of supply says that a higher price typically leads to a higher quantity supplied. The equilibrium price and equilibrium quantity occur where the supply and demand curves cross. The equilibrium occurs where the quantity demanded is equal to the quantity supplied. If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied. Excess demand or a shortage will exist. If the price is above the equilibrium level, then the quantity supplied will exceed the quantity demanded. Excess supply or a surplus will exist. In either case, economic pressures will push the price toward the equilibrium level.

3.2 Shifts in Demand and Supply for Goods and Services

Economists often use the ceteris paribus or “other things being equal” assumption: while examining the economic impact of one event, all other factors remain unchanged for analysis purposes. Factors that can shift the demand curve for goods and services, causing a different quantity to be demanded at any given price, include changes in tastes, population, income, prices of substitute or complement goods, and expectations about future conditions and prices. Factors that can shift the supply curve for goods and services, causing a different quantity to be supplied at any given price, include input prices, natural conditions, changes in technology, and government taxes, regulations, or subsidies.

3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process

When using the supply and demand framework to think about how an event will affect the equilibrium price and quantity, proceed through four steps: (1) sketch a supply and demand diagram to think about what the market looked like before the event; (2) decide whether the event will affect supply or demand; (3) decide whether the effect on supply or demand is negative or positive, and draw the appropriate shifted supply or demand curve; (4) compare the new equilibrium price and quantity to the original ones.

3.4 Price Ceilings and Price Floors

Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result. Price floors prevent a price from falling below a certain level. When a price floor is set above the equilibrium price, quantity supplied will exceed quantity demanded, and excess supply or surpluses will result. Price floors and price ceilings often lead to unintended consequences.