Definition and characteristics of a competitive market
A competitive market is one with many buyers and sellers of the same good or service, where no single participant can influence the price.
What a demand schedule shows and how it’s used
A demand schedule is a table showing the quantities of a good or service that consumers are willing and able to purchase at various prices.
Meaning and shape of the demand curve
A demand curve is a downward-sloping graph that shows how much of a good consumers are willing to buy at different prices.
It slopes downward because as price decreases, quantity demanded increases—reflecting the law of demand. It visually represents the data in the demand schedule.
What the law of demand states
The law of demand says that, all else equal, a higher price leads to a smaller quantity demanded, and a lower price leads to a larger quantity demanded.
It reflects consumers’ typical reaction to price changes and forms the foundation of the downward-sloping demand curve.
Definition and role of the income effect
When the price of a good falls, consumers experience an increase in real purchasing power (their income can buy more). This leads them to buy more of the good, contributing to the downward slope of the demand curve.
Definition and explanation of the substitution effect
When the price of a good decreases, it becomes relatively cheaper than substitutes, so consumers switch to buying more of it and less of other goods. When price rises, they switch away. This behavior contributes to the inverse price-demand relationship.
Meaning and connection to the demand curve
Each additional unit of a good provides less additional satisfaction (utility) to the consumer. Because of this, consumers will only buy additional units if the price decreases, reinforcing the downward slope of the demand curve.
Difference between a change in demand and a change in quantity demanded
Change in quantity demanded: Movement along the demand curve caused by a price change.
Change in demand: A shift of the entire demand curve caused by non-price factors (income, tastes, population, etc.). A rightward shift means demand increases at every price; a leftward shift means demand decreases.
List and explanation of the five main demand shifters
- Prices of related goods: Substitutes (coffee vs. tea): If the price of tea rises, demand for coffee increases. Complements (coffee and sugar): If the price of sugar rises, demand for coffee decreases.
- Income: Rising income increases demand for normal goods but decreases demand for inferior goods.
- Tastes/Preferences: If a good becomes more popular or fashionable, demand rises.
- Expectations: If consumers expect future prices to rise, current demand increases.
- Number of Consumers: An increase in population or market size raises demand overall.
What a supply schedule represents
A supply schedule is a table showing how much of a good producers are willing to sell at various prices. It provides the numerical data to construct the upward-sloping supply curve.
What the supply curve shows and why it slopes upward
A supply curve is an upward-sloping graph showing the relationship between price and quantity supplied. It slopes upward because higher prices provide an incentive for producers to supply more, as they can earn greater revenue and cover higher production costs.
Explanation of the law of supply
The law of supply states that, all else equal, an increase in price causes an increase in quantity supplied, and a decrease in price causes a decrease in quantity supplied.
Producers respond positively to price changes because higher prices mean greater potential profit.
Why production costs rise and how that shapes supply
As production expands, each additional unit typically costs more to produce due to resource limitations or inefficiencies.
To cover these increasing marginal costs, suppliers require higher prices to justify producing more. This explains the upward slope of the supply curve.
Relationship between profit motive and supply behavior
Producers aim to maximize profit, so they supply more only when higher prices make additional production worthwhile.
This tendency to produce more when profitable contributes to the upward-sloping supply curve.
How a change in supply differs from a change in quantity supplied
- Change in quantity supplied: Movement along the supply curve caused by a change in price.
- Change in supply: Shift of the entire supply curve due to non-price factors (input costs, technology, etc.). Rightward shift = supply increases; leftward = decreases.
List and describe major supply shifters
- Input Prices: Higher input costs reduce supply; lower costs increase it.
- Prices of Related Goods in Production: Producers may switch to more profitable goods. For example, if pet veterinary services become more profitable, fewer vets supply farm services.
- Technology: Improvements lower production costs, shifting supply right.
- Expectations: If producers expect higher future prices, they may withhold supply now.
- Number of Producers: More sellers increase total market supply.
Definition of equilibrium in a market
Equilibrium occurs when quantity demanded equals quantity supplied. At this point, the market is stable—there is no pressure for price to rise or fall. Buyers and sellers are both satisfied with the current price and quantity.
What the market-clearing or equilibrium price means
The equilibrium price is the price where the quantity of a good demanded equals the quantity supplied. It’s called the market-clearing price because all goods produced are sold, and no buyer or seller is left unsatisfied.
Definition of equilibrium quantity
The equilibrium quantity is the amount of a good or service bought and sold at the equilibrium price—the intersection point of the supply and demand curves.
Meaning and outcome of a surplus
A surplus occurs when price is set above equilibrium, causing quantity supplied to exceed quantity demanded. Sellers compete for buyers by lowering prices until the market returns to equilibrium.
Meaning and outcome of a shortage
A shortage happens when price is set below equilibrium, causing quantity demanded to exceed quantity supplied. Buyers compete for the limited goods, driving prices up until equilibrium is reached.
How demand or supply shifts affect equilibrium price and quantity
- Increase in Demand: Both equilibrium price and quantity rise.
- Decrease in Demand: Both equilibrium price and quantity fall.
- Increase in Supply: Equilibrium price falls, quantity rises.
- Decrease in Supply: Equilibrium price rises, quantity falls.
When both curves shift, one of the outcomes (price or quantity) can become indeterminate.
What happens when there are simultaneous shifts in the Supply and Demand curves?
- S and D move in opposite direction = impact on quantity will be indeterminate
- S and D move in same direction = impact on price will be indeterminate
What price controls are and their purpose
Price controls are government-imposed limits on how high or low a market price can go. They are used to keep goods affordable for consumers or ensure producers earn enough revenue, but they often create imbalances like shortages or surpluses.
