Macroeconomics Chapter 3: Supply and Demand Vocabulary

Vocabulary flashcards key concepts, terms, and definitions covered in Macroeconomics Chapter 3: Supply and Demand.

Central Planning

An economic system in which the government or a small group makes economic decisions.

Market Economy

An economic system in which buyers and sellers determine how resources and goods are allocated through supply and demand.

Mixed Economy

An economic system that uses both markets and central planning.

Demand

The quantity of a good that consumers are willing to buy at different prices.

Buyer's Reservation Price

The highest price a buyer is willing to pay for a good.

Substitution Effect

The consumer behavior where individuals switch to alternative goods when the price of a good increases.

Income Effect

The consumer behavior where higher prices reduce purchasing power, leading consumers to buy less.

Supply

The quantity of a good that sellers are willing to offer at different prices.

Seller's Reservation Price

The lowest price a seller is willing to accept, which equals marginal cost.

Low-Hanging Fruit Principle

The principle stating that sellers with lower production costs can supply goods at lower prices, and as production expands, sellers need higher prices to cover increasing opportunity costs.

Equilibrium Price

The price at which quantity supplied equals quantity demanded.

Equilibrium Quantity

The quantity of a good bought and sold at the equilibrium price.

Surplus (Excess Supply)

A market condition where quantity supplied is greater than quantity demanded ($\text{Quantity supplied} > \text{quantity demanded}$), resulting in downward pressure on price.

Shortage (Excess Demand)

A market condition where quantity demanded is greater than quantity supplied ($\text{Quantity demanded} > \text{quantity supplied}$), resulting in upward pressure on price.

Price Ceiling

The maximum legal price that can be charged for a good or service, such as rent control.

Movement Along a Curve

A change in quantity demanded or quantity supplied along an existing curve caused solely by a change in the good's own price.

Shift of a Curve

A change in the entire supply or demand curve caused by a factor other than the good's own price.

Normal Good

A good for which demand increases when consumer income increases.

Inferior Good

A good for which demand increases when consumer income decreases.

Substitutes

Goods that can replace each other in consumption, such as email and traditional mail.

Complements

Goods that are used together in consumption, such as tennis courts and tennis balls.

Buyer's Surplus

The economic gain to a buyer, calculated as buyer's reservation price minus market price ($\text{Buyer's Reservation Price} - \text{Market Price}$).

Seller's Surplus

The economic gain to a seller, calculated as market price minus seller's reservation price ($\text{Market Price} - \text{Seller's Reservation Price}$).

Total Surplus

The total economic well-being generated by a market, calculated as buyer's surplus plus seller's surplus ($\text{Buyer's Surplus} + \text{Seller's Surplus}$).

Efficiency Principle

The principle stating that the socially optimal quantity maximizes total economic surplus.

Negative Externality

A cost imposed on people outside a transaction, such as pollution created during production that producers do not pay for.

Positive Externality

A benefit received by people outside a transaction, such as a vaccination benefiting people other than the person receiving it.

Equilibrium Principle

Also called the No-Cash-on-the-Table Principle, stating that a market in equilibrium leaves no unexploited opportunities for individuals to make additional gains through trades.