Market Forces: Demand and Supply

Chapter 2: Market Forces: Demand and Supply

Ad valoren tax: a percentage tax; the sales tax is a well-known example.

Change in demand: Changes in variables other than the price of a good, such as income or the price of another good, lead to a change in demand. This corresponds to a shift of the entire demand curve.

Change in quantity demanded: Changes in the price of a good lead to a change in the quantity demanded of that good. This corresponds to a movement along a given demand curve.

Change in quantity supplied: Changes in the price of a good lead to a change in the quantity supplied of that good. This corresponds to a movement along a given supply curve.

Change in supply: Changes in variables other than the price of good, such as input prices or technological advances, lead to a change in supply. This corresponds to a shift of the entire supply curve.

Complements: Goods for which an increase (decrease) in the price of one good leads to a decrease (increase) in the demand for the other good.

Consumer surplus: The value consumers get from a good but do not have to pay for.

Demand function: A function that describes how much of a good will be purchased at alternative prices of that good and related goods, alternative income levels, and alternative values of other variables affecting demand.

Demand shifter: Variables other than the price of a good that influence demand.

The interaction of supply and demand ultimately determines a competitive price, such that there is neither a shortage nor a surplus of the good. This price is called Equilibrium price and the corresponding quantity, is called the Equilibrium quantity for the competitive market.

Excise tax: a tax on each unit of output sold, where the tax revenue is collected from the supplier.

Full economic price: The dollar amount paid to a firm under a price ceiling, plus the nonpecuniary price.

Inferior good: A good for which an increase (decrease) in income leads to a decrease (increase) in the demand for that good.

Informative advertising: Advertising often provides consumers with information about the existence or quality of a product, which in turn induces more consumers to buy the product.

Law of demand: price and quantity demanded are inversely related.

Lay of supply: as the price of a good rises (falls) and other things remain constant, the quantity supplied of the good rises (falls).

Linear demand function: A representation of the demand function in which the demand for a given good is a linear function of prices, income levels, and other variables influencing demand.

Linear supply function: A representation of the supply function in which the supply of a given good is a linear function of prices and other variables affecting supply.

Nonpecuniary price: The latter price is paid not in dollars but through opportunity cost.

Normal good: A good for which an increase (decrease) in income leads to an increase (decrease) in the demand for that good.

Persuasive advertising: advertising can also influence demand by altering the underlying tastes of consumers.

Price ceiling: The maximum legal price that can be charged in a market.

Price floor: The minimum legal price that can be charged in a market.

Producer surplus: The amount producers receive in excess of the amount necessary to induce them to produce the good.

Shortage: there is not enough of the good to satisfy all consumers willing to purchase it at that price.

Substitutes: Goods for which and increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good.

Supply function: A function that describes how much of a good will be produced at alternative prices of that good, alternative input prices, and alternative values of other variables affecting supply.

Supply shifters: Variables that affect the position of the supply curve include the prices of inputs, the level of technology, the number of firms in the market, taxes, and produces expectations.

Surplus: firms are producing more than they can sell at a price of higher level.