DEMAND, SUPPLY, AND MARKET DEMAND IN PRODUCT/OUTPUT MARKETS
EQUILIBRIUM
Quantity Demanded - the amount (number of
Firms and Households: The Basic units) of a product that a household would buy
Decision-Making Units in a given period if it could buy all it wanted at
the current market price.
Firm - an organization that transforms
resources (inputs) into products (outputs). Changes in Quantity Demanded versus
Firms are the primary producing units in a Changes in Demand
market economy.
The most important relationship in individual
Entrepreneur - a person who organizes, markets is that between market price and
manages, and assumes the risks of a firm, quantity demanded.
taking a new idea or a new product and
turning it into a successful business. Changes in the price of a product affect the
quantity demanded per period.
Households - the consuming units in an
economy. Changes in any other factor, such as income or
preferences, affect demand.
Input Markets and Output Markets: The
Circular Flow Price increase, quantity demanded decreases
Price decrease, quantity demanded increases
Product or output markets - the markets in
which goods and services are exchanged. Increase in income is likely to cause an
increase in the demand for most goods.
Input or factor markets - the markets in
which the resources used to produce products Price and Quantity Demanded: The Law of
are exchanged. Demand
Labor Market - the input/factor market in Demand Schedule - a table showing how
which households supply work for wages to much of a given product a household would be
firms that demand labor. willing to buy at different places.
Capital Market - the input/factor market in Demand Curve - a graph illustrating how
which households supply their savings, for much of a given product a household would be
interest or for claims to future profits, to firms willing to buy at different places.
that demand funds to buy capital goods.
Properties of Demand Curves
Land Market - the input/factor market in 1. Have a negative slope.
which households supply land or other real 2. They intersect the quantity (X-) axis,
property exchange for rent. as a result of time limitations and
diminishing marginal utility.
Factors of Production - the inputs into the 3. THey intersect the price (Y-) axis, as a
production process. Land, labor, and capital result of limited incomes and wealth.
are the three key factors of production.
Law of Demand - the negative relationship
between price and quantity demanded: As
Firms determine the quantities and character price rises, quantity demanded decreases; as
of outputs produced and the types and price falls, quantity demanded increases.
quantities of inputs demanded.
Households determine the types of quantities
of products demanded and the quantities and
types of inputs supplied.
Other Determinants of Household Demand Change in price of a good or service leads to
Change in Quantity Demanded (movement
Income - the sum of all a household’s wages, along the demand curve).
salaries, profits, interest payments, rents, and
other forms of earnings in a given period of Change in income, preferences, or prices of
time. It is a flow measure. other goods or services leads to Change in
Demand (shift of the demand curve).
Wealth or Net Worth - the total value of what
a household owns minus what it owes. It is a From Household Demand to Market Demand
stock measure.
Market Demand - the sum of all the qualities
Normal Goods - goods for which demand goes of a good or service demanded per period by all
up when income is lower. the households buying in the market for that
good or service.
Inferior Goods - goods for which demand
tents to fall when income arises. SUPPLY IN PRODUCT/OUTPUT MARKETS
Substitutes - goods that can serve as Successful firms make profits because they are
replacement for one another, when the price able to sell their products for more than it
of one increases, demand for the other costs to produce them.
increases.
Profit - the difference between revenues and
Perfect Substitutes - identical products costs.
Complements, Complementary Goods - Prices and Quantity Supplied: The Law of
goods that “go together”; a decrease in the Supply
price of one results in an increase in demand
for the other and vice versa. Quantity Supplied - the amount of a particular
product that a firm would be willing and able
Income, wealth, and prices of goods available to offer for sale at a particular price during a
- are the three factors that determine the given time period.
combinations of goods and services that a
household is able to buy. Supply Schedule - a table showing how much
of a product firms will sell at different prices.
Changes in preferences can and do manifest
themselves in market behavior. Law of Supply - the positive relationship
between price and quantity of a good supplied:
Shift of Demand versus Movement Along a An increase in market price will lead to an
Demand Curve increase in quantity supplied, and a decrease
in market price will lead to a decrease in
Shift of a Demand Curve - the change that quantity supplied.
takes place in a demand curve corresponding
to a new relationship between quantity Supply Curve - a graph illustrating how much
demanded of a good and price of that good. of a product a firm will sell at different prices.
The shift is brought about by a change in the
original conditions.
Movement Along a Demand Curve - the
change in quantity demanded brought about
by a change in price
Other Determinants of Supply Market Supply - the sum of all that is supplied
each period by all producers of a single
The Cost of Production product.
In order for a firm to make a profit, its revenue MARKET EQUILIBRIUM
must exceed its costs.
Equilibrium - the condition that exists when
Cost of production depends on a number of quantity supplied and quantity demanded are
factors, including the available technologies equal. At equilibrium, there is no tendency for
and the prices and quantities of the inputs price to change.
needed by the firn (labor, land, capital, energy,
and so on). Excess Demand or Shortage - the condition
that exists when quantity demanded exceeds
The Prices of Related Products quantity supplied at the current price.
Assuming that its objective is to maximize Excess Supply or Surplus - the condition that
profits, a firm’s decision about what quantity exists when quantity supplied exceeds
of output, or product, to supply depends on: quantity demanded at the current price.
1. The price of the good or service
2. The cost of producing the product, POINTS TO REMEMBER:
which in turn depends on: 1. A demand curve shows how much of a
- The price of required inputs product a household would buy if it
(labor, capital, and land). could buy all it wanted at the given
- The technologies that can be price.
used to produce the product.
3. The prices of related products.
Shift of Supply versus Movement Along a
Supply Curve
Movement Along a Supply Curve - the change
in quantity supplied brought about by a
change in price.
Shift of a Supply Curve - the change that takes
place in a supply curve corresponding to a new
relationship between quantity supplied of a
good and the price of that good. The shift is
brought about by a change in the original
conditions.
As with demand, it is very important to
distinguish between movements along supply
curves (changes in quantity supplied) and
shifts in supply curves (change in supply):
Change in price of a good or service leads to
Change in quantity supplied (movement along
a supply curve).
Change in income, preferences, or prices of
other goods or services leads to Change in
Supply (shift of supply curve).
