Demand, Supply, and Market Equilibrium
Summary
1. What are the basic decision-making units in the economy?
The basic decision-making units in the economy are households and firms. Firms transform inputs into goods or services that are sold in markets. Households are the ultimate consumers of these outputs.
2. What are the relationships between these basic units? How does a circular flow diagram illustrate these relationships?
Although firms are the producers of output and households are consumers of these outputs, each of the decision-making units act as both producer and consumer. Firms receive labor, land, and capital inputs from households. In turn, households supply these inputs to firms. The relationships between households and firms are shown in the circular flow diagram.
3. What do we mean by "quantity demanded?" What influences quantity demanded on the part of households?
The amount of a good that consumers are willing to buy of a product is called the quantity demanded at that price. This amount depends not only on the price, but also on other factors, such as income, tastes and preferences, wealth, expectations, and the prices of related goods.
4. What is the demand schedule for a product? What are the main features of a demand curve? What is the law of demand and how is it illustrated by demand curves?
A demand schedule is just a listing of different price-quantity combinations. A demand curve is a graphical representation of the demand for a product. Demand curves have a negative slope, which illustrates the law of demand. This law says that, holding other factors constant, an increase in price will cause a decrease in quantity demanded, and vice versa.
5. What can change the demand for a product? How does the demand curve react to changes in demand? What do we mean by normal goods? Inferior goods? Complementary goods? Substitute goods?
A change in the other factors affecting demand will cause a change in demand and a resulting...