The market economy

Economic goods

A product or service that commands a price, derives utility and is transferable

Utility

The amount of benefit or satisfaction derived from the consumption of a good or service

A consumer

An individual who makes the decision whether to buy goods or services

Diminishing marginal utility

As more units of a good are consumed, a point will be reached where marginal utility eventually begins to decline

Equilibrium

The condition where there is no tendency to change

Principle of equi-marginal utility

Explains the behaviour of a consumer in distributing their limited income among various goods and services

Demand

The number of units of goods a consumer wants to buy at various prices

Law of demand

An increase in price leads to a decrease in quantity demanded or a decrease in price leads to an increase in quantity demanded

Consumer surplus

The benefit to consumers due to the difference between what consumers actually pay to consume a good and what they would have been willing to pay

Effective demand

Consumers must be willing to buy and be capable of paying the price set by the supplier

Derived demand

Occurs when one commodity is an essential part of another commodity

Complementary goods

Goods that are used jointly

Substitute goods

Goods that satisfy the same needs and thus can be considered as alternatives to each other

Normal good

A good that obeys the law of demand and has a positive income effect

Inferior good

Good with negative income effects

Giffen goods

Goods with a positive price effect

Supply

The quantity of a good that firms are willing to make available at various prices over a particular period of time

Demand curve

A graph illustrating the demand for a good at various prices at any given time

Supply curve

A graph illustrating the number of units of a good made available for sale at various market prices at any given time

Individual supply curve

A graph illustrating the different quantities of a good made available for sale by an individual firm at various market prices at any given time

Market/aggregate supply curve

A graph illustrating the total quantities of a good that all the firms in the market are willing to make available for sale at various prices at any given time

Fixed supply

Occurs when the supply of a product cannot be changed in the short run, whatever the price is

Movement along the supply chain

Caused by a change in price of the good or service

Shift in the supply curve

Caused by a change in any non-price determinant of supply

Price mechanism

The means by which decisions are taken by consumers and businesses to determine the allocation of scarce resources between competing uses