Principles of Microeconomics CH 3: Demand, Supply, and Market Equilibrium

- Firms: produce
- Households: consume

An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

EX: Orchestra - labor, land, building, musically talented people, and instruments combined to produce concerts.

A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

The consuming units in an economy.
Household decisions based on taste and preferences, buys what it can afford. Limited incomes.

- Product or output markets
- Input or factor markets

The markets in which goods and services are exchanged. Goods intended for household use. Firms supply and households demand.

The markets in which the resources used to produce goods and services are exchanged. Households supply resources (labor, loans, etc)

The input/factor market in which households supply work for wages to firms that demand labor.

The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

The input/factor market in which households supply land or other real property in exchange for rent.

The inputs into the production process. Land, labor, and capital are the three key factors of production.

- The price of the product in question.
- The income available to the household.
- The household's amount of accumulated wealth.
- The prices of other products available to the household.
- The household's tastes and preferences.
- The household's expectations about future income, wealth, and prices.

The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

Change in the price of a product affect the quantity demanded per period. Changes in any other factor, such as income or preference affect demand.

Shows how much of a given product a household would be willing to buy at different prices for a given time period. (Table)

A graph illustrating how much of a given product a household would be willing to buy at different prices.

The negative relationship between price and quantity demanded: Ceteris paribus, as price rises, quantity demanded decreases; as price falls, quantity demanded increases.

Other factors than product price exist:
- Income and wealth
- Prices of other goods and services
- Tastes and preferences
- Expectations

The sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

The total value of what a household owns minus what it owes. It is a stock measure.

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

Goods for which demand tends to fall when income rises.

Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.

Identical products.

Goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa.

The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by change in the original conditions.

The change in quantity demanded brought about by a change in price.

The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

The difference between revenues and costs.

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period. (Revenue must be more than cost to supply)

Shows how much of a product firms will sell at alternative prices.

The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

A graph illustrating how much of a product a firm will sell at different prices.

1) The price of the good or service
2) The cost of producing the product, which in turn depends on:
- Price of required inputs (labor, land, and capital)
- Technologies that can be used to produce the product
3) The prices of related products

The change in quantity supplied brought about by a change in price.

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of that good. The shift is brought about by change in the original conditions.

The sum of all that is supplied each period by all producers of a single product.

The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.

The condition that exists when quantity demanded exceeds quantity supplied at the current price.

The condition that exists when quantity supplied exceeds quantity demanded at the current price.

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