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Macroeconomics: Demand, Supply, and Market Equilibrium

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  • What is a perfectly competitive market?
    A market with many buyers and sellers, identical products, and no barriers to new firms entering.
  • Define market demand.
    The total demand by all consumers for a given good or service.
  • What does a demand schedule show?
    A table showing the relationship between the price of a product and the quantity demanded.
  • State the law of demand.
    Holding everything else constant, when price falls, quantity demanded increases; when price rises, quantity demanded decreases.
  • What are the substitution and income effects?
    Substitution effect: change in quantity demanded due to relative price change. Income effect: change in quantity demanded due to change in purchasing power.
  • What does ceteris paribus mean in demand analysis?
    All other variables are held constant when analyzing the relationship between price and quantity demanded.
  • What causes a shift in the demand curve?
    A change in any factor other than price that affects demand, such as income, tastes, or prices of related goods.
  • How does an increase in income affect demand for normal and inferior goods?
    Increases demand for normal goods and decreases demand for inferior goods.
  • Define substitutes and complements in related goods.
    Substitutes: goods used for the same purpose. Complements: goods used together.
  • How do changes in the price of related goods affect demand?
    An increase in the price of a substitute increases demand; an increase in the price of a complement decreases demand.
  • How do changes in tastes affect demand?
    If consumer preferences change, demand for the product can increase or decrease.
  • What role do population and demographics play in demand?
    An increase in the number of buyers or changes in demographics can increase or decrease demand.
  • How do expectations about future prices affect current demand?
    If prices are expected to rise, current demand increases; if expected to fall, current demand decreases.
  • What is the law of supply?
    Holding everything else constant, an increase in price causes an increase in quantity supplied, and a decrease in price causes a decrease in quantity supplied.
  • What causes a shift in the supply curve?
    Changes in input prices, technology, number of firms, prices of related goods in production, expected future prices, or natural disasters.
  • How do input prices affect supply?
    An increase in input prices decreases supply; a decrease in input prices increases supply.
  • What is technological change in supply?
    A change in a firm's ability to produce output with given inputs, which can increase or decrease supply.
  • How do the number of firms and expected future prices affect supply?
    More firms increase supply; fewer firms decrease supply. Expecting higher future prices may reduce current supply.
  • Define market equilibrium.
    A situation where quantity demanded equals quantity supplied at a certain price.
  • What happens when there is a surplus in the market?
    Quantity supplied exceeds quantity demanded, causing sellers to lower prices.
  • What happens when there is a shortage in the market?
    Quantity demanded exceeds quantity supplied, causing sellers to raise prices.
  • How do shifts in demand and supply affect equilibrium price and quantity?
    An increase in demand raises price and quantity; an increase in supply lowers price and raises quantity; simultaneous shifts have combined effects.
  • What is the difference between a movement along a curve and a shift of the curve?
    Movement along a curve is caused by a change in price (quantity changes); a shift is caused by changes in other factors affecting demand or supply.