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market
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consists of all buyers or sellers of that good
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demand curve
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a schedule or graph showing the quantity of a good that buyers wish to buy at each price
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substitution effect
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the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes
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income effect
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the change in the quantity demanded of a good that results because the change in the price of a good changes the buyers purchasing power.
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buyer's reservation price
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the largest $ amount that a buyer would be willing to pay for a good.
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supply curve
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a graph or schedule showing the quantity of a good that sellers wish to sell at each price.
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seller's reservation price
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the smallest $ amount for which a seller would be willing to sell an additional until, generally equal to marginal cost
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equilibrium
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there is no tendency for change
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equilibrium price and quantity
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the values of price and quantity for which quantity supplied and quantity demanded are equal
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market equilibrium
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occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price
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excess supply
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the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price.
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excess demand
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the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price.
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price ceiling
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a max. allowable price, specified by law.
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change in the quantity demanded
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a movement along the demand curve that occurs in response to a change in price
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change in demand
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a shift in the entire demand curve
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change in supply
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a shift in the entire supply curve
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change in the quantity supplied
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a movement along the supply curve which occurs in response to a change in price.
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complements
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an increase in the price of one causes a leftward shift in the demand curve for the other (or a decrease causes a rightward shift)
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substitutes
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an increase in the price of one causes a rightward shift in the demand for the other (of if a decrease causes a leftward shift)
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normal good
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demand curve shifts rightward when the incomes of buyers increase and a leftward shift when the incomes of buyers decrease.
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inferior good
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demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease
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buyer's surplus
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the difference between the buyer's reservation price and the price he or she actually pays
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seller's surplus
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the difference between the price received by the seller and his or her reservation price
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total surplus
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the difference between the buyer's reservation price and the seller's reservation price
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cash on the table
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economic metaphor for unexploited gains from exchange
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socially optimal quantity
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the quantity of a good that results in the max. possible economic surplus from producing and consuming the good
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efficiency
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occurs when all goods and services are produced and consumed at their respective socially optimal levels.
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Efficiency Principle
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When the economic pie grows larger, everyone can have a larger slice
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Equilibrium Principle
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a market that leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action
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market supply
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the sum of all of the Q supplied of all individual firms in the market for each price level.
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