Economics: Key Concepts in Demand, Supply, and Market Equilibrium

firm

an organization that transforms resources (inputs) into products (outputs)

entrepreneur

a person who organizes, manages and assumes the risk of a firm, taking a new idea or a new product and turning it into a successful business

household

the consuming units in an economy

product market

markets in which goods and services are exchanged; firms supply and households demand

factor market

markets in which the resources used to produce goods and services are exchanged

circular flow of economic activity

goods and services flow clockwise- labor services supplied by households flow to firms, and goods and services produced by firms flow to households; payment for goods and services flow counterclockwise from households to firms and payment for labor services from firms to households

quantity demanded

the amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price

Demand Schedule

shows how much of a given product a household would be willing to buy at different prices for a given time period

Demand Curve

a graph showing how much of a given product a household would be willing to buy at different prices

Law of Demand

the negative relationship between price and quantity demanded: ceteris paribus, as price rises, quantity demanded decreases; as price falls, quantity demanded increases during a given period of time, all other things remaining constant

determinants of demand

factors that affect the demand for a product, including income and prices of other goods and services

normal goods

demand goes up when income is higher and goes down when income is lower

inferior goods

demand tends to fall when income rises

substitutes

goods that can replace each other in consumption

perfect substitutes

goods that are identical in every aspect and can be used interchangeably

complements

goods that are consumed together, where the demand for one increases the demand for the other

complementary goods

another term for complements, goods that are consumed together

Shifts of a demand curve

The change that happens in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good.

Movement along a demand curve

The change in quantity demanded brought about by a change in price.

Profit

Difference between revenues and costs.

Quantity supplied

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

Supply Schedule

Shows how much of a product firms will sell at alternative prices.

Supply Curve

A graph illustrating how much of a product a firm will sell at different prices.

Law of Supply

The positive relationship between price and quantity of a good supplied.

Determinants of supply

The cost of production - for a firm to make a profit its revenue must exceed its costs.

Shift of supply curve

The change that happens in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good.

Movement along the supply curve

The change in quantity supplied brought about by a change in price.

Market equilibrium

The condition that exists when quantity supplied and quantity demanded are equal.

Excess demand/shortage

Happens when quantity demanded exceeds quantity supplied at the current price.

Excess supply/surplus

Happens when quantity supplied exceeds quantity demanded at the current price.

Changes in equilibrium

When supply & demand curves shift, the equilibrium price and quantity change.

Price rationing

The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

Price ceiling

A max price that sellers may charge for a good, usually set by government.

Price floor

A minimum price below which exchange is not permitted.

Consumer surplus

The difference between the maximum amount a person is willing to pay for a good and its current market price.

Producer surplus

The difference between the current price and the cost of production for the firm.

Deadweight loss

The total loss of producer and consumer surplus from underproduction or overproduction.