Econ Unit 2 Vocab

Market

Any kind of arrangement where buyers and sellers of a particular good, service or resource are linked together to carry out an exchange

Competition

Occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market

Competitive Markets

A market composed of many buyers and sellers acting independently, none of whom have the ability to influence the price of a product (i.e. no market power)

Demand

Indicates the various quantities of a good that consumers (or a consumer) are willing and able to buy at different prices during a particular time period, ceteris paribus (all other things being equal)

Demand Curve

A curve showing the relationship between the price of a good and the quantity of the good demanded, ceteris paribus (all other things being equal)

Law of Demand

A law stating that there is a negative relationship between the price of a good and quantity of the good demanded, over a particular time period, ceteris paribus: as the price of a good increases, the quantity of the good demanded falls (and vice versa)

Market Demand

Refers to the sum of all individual consumer demands for a good or service

Non-Price Determinants of Demand

The variables (other than price) that can influence demand, and that determine the position of a demand curve; a change in any determinant of demand causes a shift of the demand curve

Normal Good

A good the demand for which varies positively (or directly) with income; this means that as income increases, demand for the good increases

Inferior Good

A good for which the demand for which varies negatively (or indirectly) with income; this means that as income increases, the demand for the good decreases

Substitutes (Substitute Goods)

Two or more goods that satisfy a similar need, so that one good can be used in place of another. If two goods are substitutes, an increase in the price of one leads to and increase in the demand for the other

Complements (Complementary Goods)

Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other

Utility

A subjective concept, it is the satisfaction that consumers gain from consuming something

Law of Diminishing Marginal Utility

A law stating that as consumption of a good increases, marginal utility, or the extra utility the consumer receives, decreases with each additional unit consumed, therefore consumers will buy more only if price falls; this underlies the law of demand

Substitution Effect

Part of an explanation of the law of demand; there is an inverse relationship between price and quantity demanded because as prices fall consumers substitute the now less expensive good for other products

Income Effect

Part of an explanation of the law of demand; as price falls real income increases causing the consumer to buy more of the good

Supply

Indicates the various quantities of a good that firms (or a firm) are willing and able to produce and sell at different possible prices during a particular time period, ceteris paribus (all other things being equal)

Supply Curve

A curve showing the relationship between the price of a good and the quantity of the good supplied, ceteris paribus (all other things being equal)

Law of Supply

A law stating that there is a positive relationship between the price of a good and quantity of the good supplied, over a particular time period, ceteris paribus: as the price of the good increases, the quantity of the good supplied also increases (and vice versa)

Market Supply

Refers to the sum of all individual firm supplies of a good or service

Non-Price Determinants of Supply

The variables (other than price) that can influence supply, and that determine the position of a supply curve; a change in any determinant of supply causes a shift of the supply curve

Competitive Supply

In the case of two goods, refers to production of one or the other by a firm; in other words the two goods compete with each other for the same resources (for examples, if a farmer can produce wheat or corn, producing more of one means producing less of the other)

Joint Supply

Refers to production of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other (for example, butter and skimmed milk are both produced from whole milk, and producing more of one means producing more of the other as well)

Subsidy

An amount of money paid by the government to firms for a variety of reasons: to prevent an industry from failing, to support producers’ incomes, or as a form of protection against imports (due to the lower costs and lower prices that arise from the subsidy). A subsidy given to a firm results in a higher level of output and lower price for consumers. May also be paid to consumers as financial assistance or for income redistribution

Short Run

In microeconomics, it is a time period during which at least one input is fixed and cannot be changed by the firm

Long Run

In microeconomics, it is a time period in which all inputs can be changed; there are no fixed inputs

Total Product

The total quantity of output produced by a firm

Marginal Product

The extra or additional output that results from one additional unit of a variable input (such as labor)

Law of Diminishing Marginal Returns

A law stating that as more and more units of a variable input (such as labor) are added to one or more fixed inputs (such as land), the marginal product of the variable input at first increases, but there come a point when the marginal product of the variable input begins to decrease; underlies the firms’ supply curve

Total Cost

The total costs incurred by a firm that undertakes production of something

Marginal Cost

The extra or additional cost of producing one more unit of output

Excess Supply

In the context of demand and supply, occurs when the quantity of a good demanded is smaller than the quantity supplied, leading to a surplus

Surplus

In general, this is the excess of something over something else to which it is being compared. (i) In the context of demand and supply, it is the extra supply that results when quantity supplied is greater than quantity demanded. (ii) In the case of consumer and producer surplus, it is the extra benefit consumers get by paying less for a good than the amount they are willing to pay, or the extra benefit producers get by receiving a higher price for the good they are selling than the price they are willing to receive.

Excess Demand

In the context of demand and supply, occurs when the quantity of a good demanded is greater than the quantity supplied, leading to a shortage of the good

Shortage

In the context of demand and supply, is the amount by which quantity demanded is greater than quantity supplied

Equilibrium

A state of balance such that there is no tendency to change

Market Equilibrium

Occurs where quantity demanded is equal to quantity supplied, and there is no tendency for the price or quantity to change

Equilibrium Price

The price determined in a market when quantity demanded is equal to quantity supplied, and there is no tendency for the price to change; is it the price that prevails when the is market equilibrium

Equilibrium Quantity

The quantity that is bought and sold when a market is in equilibrium, i.e. when quantity demanded is equal to quantity supplied

Price Mechanism

The system where prices are determined by demand and supply in competitive markets, resulting from the free interactions of buyers (demanders) and seller (suppliers); these interactions determine the allocation of resources

Signal

The ability of prices, and changes in prices, to communicate information to consumers and producers about the existence of excess demand or excess supply, on the basis of which they make economic decisions, which together with prices as incentives lead to an efficient allocation of resources (assuming no market failures)

Incentive

The ability of prices, and changes in prices, to communicate information to consumers and producers that motivates them to respond by offering them incentives to behave in their best-self-interest; firms according to the law of supply and consumers according to the law of demand; compare with prices as signals, which together with prices as incentives lead to an efficient allocation of resources (assuming no market failures)

Allocative Efficiency

An allocation of resources that results in producing the combination and quality of goods and services mostly preferred by consumers. the condition for allocative is given by MSB = MSC (marginal social benefit = marginal social cost) or P = MC (price = marginal cost); alternatively it is when social surplus is maximum

Marginal Benefit

The extra or additional benefit received from consuming one more unit of a good

Consumer Surplus

Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid. In a diagram, it is shown by the area under the demand curve and above the price paid by consumers up to quantity purchased

Producer Surplus

refers to the difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good. In a diagram, it is shown as the area under the price received by producers and above the supply curve up to the quantity sold

Social Surplus

The sum of consumer and producer surplus; it is maximum in a competitive market with no market failures

Community Surplus

The sum of consumer and producer surplus; it is maximum in a competitive market with no market failures

Welfare Loss

Refers to loss of a portion of social surplus that arises when marginal social benefits are not equal to marginal social costs (MSB ≠ MSC), due to market failure