Price System and the Microeconomy Vocabulary

Flashcards for reviewing key vocabulary related to price systems and microeconomics.

Price Mechanism

The mechanism through which resources are allocated based on price signals from consumers to producers.

Market

A place or system where buyers and sellers come together to exchange goods or services.

Demand

The quantity of a product that buyers are willing and able to purchase at different prices per period of time, all other things being equal.

Effective Demand

Demand backed by purchasing power.

Demand Schedule

A table showing the quantity demanded of a product at various prices.

Demand Curve

A graph representing the relationship between the price of a product and the quantity demanded.

Normal Goods

Goods for which demand increases as income increases.

Inferior Goods

Goods for which demand decreases as income increases.

Substitutes

Alternative goods that satisfy the same want or need.

Complements

Goods that are jointly demanded as they add to the satisfaction that consumers get from another product.

Supply

The quantity of a product that suppliers are willing and able to sell at different prices over a period of time, all other things being equal.

Supply Schedule

A table showing the quantity supplied of a product at various prices.

Supply Curve

A graph representing the relationship between the price of a product and the quantity supplied.

Subsidy

A payment (typically from the government) to reduce the cost to the buyer of a product or service

Indirect Tax

A tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).

Increase in Demand

A shift to the right of the demand curve, indicating an increase in demand.

Decrease in Demand

A shift to the left of the demand curve, indicating a decrease in demand.

Increase in Supply

A shift to the right of the supply curve, indicating an increase in supply.

Decrease in Supply

A shift to the left of the supply curve, indicating a decrease in supply.

Movement along a demand or supply curve

How the quantity demanded or the quantity supplied responds to a change in the price of the product.

Extension of demand or supply

An increase in the quantity demanded or quantity supplied.

Contraction of demand or supply

A decrease in the quantity demanded or quantity supplied.

Shift of a demand or supply curve

A shift of a demand or supply curve in response to a change in any of the non-price determinants of demand or supply.

Elasticity

Measures the responsiveness of one variable after a change in another variable, ceteris paribus.

Price elasticity of demand (PED)

Measures the responsiveness of the quantity demanded for a product following a change in the price of the product.

Price Inelastic

The demand for product is unresponsive to price changes.

Price Elastic

The demand for product is responsive to price changes.

Perfectly Inelastic Demand

Regardless of the price charged, consumers are willing and able to buy the same amount

Perfectly Elastic Demand

At a particular price, consumers are not prepared to buy any of the product, but if the price falls by a certain amount, they will buy all that is available.

Unit Elasticity

An increase in price is exactly matched by the fall in quantity demanded

Income elasticity of demand (YED)

Measures the responsiveness of the quantity demanded for a product following a change in consumer income.

Normal Good

A good is one where the quantity demanded increases as income increases.

Inferior Good

A good is one where the quantity demanded decreases as income increases.

Necessity Good

A normal good for which the quantity demanded is unlikely to change when income changes

Luxury Good

A normal good where the quantity demanded is responsive to changes in income

Cross elasticity of demand (XED)

Measures the responsiveness of the quantity demanded for one product following a change in the price of another product.

Market equilibrium

Market situation in which the quantity supplied equals the quantity demanded.

Market disequilibrium

Market situation in which market supply and demand are not equal.

Derived demand

When something is required because it is needed for the production of other goods and services.

Joint supply

When two goods are produced together but for different purposes.

Adam Smith

The invisible hand of the market works automatically to achieve the best outcomes for society.

Consumer surplus

The difference between the price a consumer is willing to pay for a product and the market price

Producer surplus

The difference between the price a supplier receives for a product and the minimum price they would be willing to accept