2.1 Equilibrium

Market

Where buyers and sellers come to negotiate the exchange of a good/service.

Demand

The amount of a good/service that consumers are willing and able to buy in a given market at a certain price.

Law of Demand

As the price of the product decreases, the quantity demanded increases ceteris paribus

Non-Price Determinants of Demand

The factors other than price of a product that affect the amount of a product that consumers are willing and able to buy.

Normal Good

A product for which demand increases when income increases.

Inferior Good

A product for which demand decreases when income increases.

Substitutes

Goods that are consumed in place of each other; so as the demand for one increases the others demand decreases.

Complements

Goods that a consumed with each other; so as the demand for one increases so does the demand for the other.

Real Income

What consumers can buy with their income.

Marginal Utility

The satisfaction gained by a consumer from buying 1 additional unit of a good.

Law of Diminishing Marginal Utility

The more of a product consumers buy, the less satisfaction they will get from consuming additional units.

Supply

The amount of a good/service that firms are willing and able to produce in a given market at a given price.

Law of Supply

As price of a product increases, the quantity supplied increases ceteris paribus.

Non-Price Determinants of Supply

Factors other than the price affecting the amount of a good that firms are willing and able to produce.

Competitive Supply

Goods that are produced in place of each other; so increasing the supply of one means decreasing the supply of the other.

Joint Supply

Goods that are produced with each other; so as the supply of one increase so does the other.

Equilibrium

Occurs when there is a state of rest in the market, no incentive to change product’s price, where D=S, quantity Q is bought and sold at price P.

Excess Supply

Occurs when quantity supplied is greater than quantity demanded.

Excess Demand

Occurs when quantity demanded is greater than quantity supplied.

Price Mechanism

Process where firms decide how to allocate resources based on changes in price.