Key Terms and Concepts

increase in the number of firms producing the good,for example,will result in a shift of the supply curve to the right.

Market equilibrium exists when the quantity supplied is equal to quantity demanded.The price that equates quantity supplied with quantity demanded is called the equilibrium price.If the price rises above the equilibrium price,the quantity supplied will exceed the quantity demanded, resulting in a surplus (excess supply).If the price falls below the equilibrium price,quantity demanded will exceed the quantity supplied,resulting in a shortage (excess demand).

An increase or a decrease in price to clear the market of a surplus or a shortage is referred to as the rationing function of prices.The rationing function is considered to be a short-run phenomenon.In the short run,one or more explanatory variables are assumed to be constant.A price ceiling is a government-imposed maximum price for a good or service produced by a given industry.Price ceilings create market shortages that require a non–price rationing mechanism to allocate available supplies of goods and services.There are a number of non-price rationing mechanisms,including ration coupons, queuing, favored customers,and black markets.

The allocating function of price,on the other hand,is assumed to be a long-run phenomenon.In the long run,all explanatory variables are assumed to be variable.In the long run,price changes signal consumers and producers to devote more or less of their resources to the consumption and production of goods and services.In other words,the allocating function of price allows for changes in all demand and supply determinants.

KEY TERMS AND CONCEPTS

Allocating function of price The process by which productive resources are reallocated between and among production processes in response to changes in the prices of goods and services. Change in demand Results from a change in one or more demand determinants (income,tastes,prices of complements,prices of substitutes, price expectations,income expectations,number of consumers,etc.) that causes an increase in purchases of a good or service at all prices.An increase in demand is illustrated diagrammatically as a right-shift in the entire demand curve.A decrease in demand is illustrated diagrammatically as a left-shift in the entire demand curve. Change in supply Results from a change in one or more supply determinants (prices of productive inputs,technology,price expectations,taxes and subsidies,number of firms in the industry,etc.) that causes an increase in the supply of a good or service at all prices.An increase in supply is illustrated diagrammatically as a right-shift in the entire supply curve.A decrease in supply curve is illustrated diagrammatically as a leftshift in the entire supply curve.

Change in quantity demanded Results from a change in the price of a good or service.As the price of a good or service rises (falls),the quantity demanded decreases (increases).An increase in the quantity demanded of a good or service is illustrated diagrammatically as a movement from the left to the right along a downward-sloping demand curve.

A decrease in the quantity demanded of a good or service is illustrated diagrammatically as a movement from the right to the left along a downward-sloping demand curve. Change in quantity supplied Results from a change in the price of a good or service.As the price of a good or service rises (falls),the quantity supplied increases (decreases).An increase in the quantity supplied of a good or service is illustrated diagrammatically as a movement from the left to the right to left along an upward-sloping demand curve.A decrease in the quantity supplied of a good or service is illustrated diagrammatically as a movement from the right to the left along an upwardsloping supply curve. Demand curve A diagrammatic illustration of the quantities of a good or service that consumers are willing and able to purchase at various prices, assuming that the influence of other demand determinants remaining unchanged. Demand determinants Nonprice factors that influence consumers’ decisions to purchase a good or service.Demand determinants include, income,tastes,prices of complements,prices of substitutes,price expectations,income expectations,and number of consumers. Equilibrium price The price at which the quantity demanded equals the quantity supplied of that good or service. Favored customer Describing a non–price rationing mechanism in which certain individuals receive special treatment.In the extreme,the favored customer as a form of non–price rationing may take the form of racial, religious,and other forms of group discrimination. Law of demand The change in the quantity demanded of a good or a service is inversely related to its selling price,all other influences affecting demand remaining unchanged (ceteris paribus). Law of supply The change in the quantity supplied of a good or a service is positively related to its selling price,all other influences affecting supply remaining unchanged (ceteris paribus). Market equilibrium Conditions under which the quantity supplied of a good or a service is equal to quantity demanded of that same good or service.Market equilibrium occurs at the equilibrium price. Market power Refers to the ability to influence the market price of a good by shifting the demand curve or the supply curve of a good or a service.

In perfectly competitive markets,individual consumers and individual suppliers do not have market power. Movement along the demand curve The result of a change in the quantity demanded of a good or a service.