Microeconomics for Business: Demand and Supply

Comprehensive practice vocabulary flashcards covering the fundamental concepts of demand and supply, market structures, and equilibrium analysis from the microeconomics lecture.

Market

The total supply and demand for a particular product.

Monopoly

A market structure characterized by having only one supplier.

Duopoly

A market structure characterized by having two suppliers.

Oligopoly

A market structure characterized by having a few suppliers.

Competition

A market structure characterized by a lot of suppliers, which can be perfect or monopolistic.

Homogeneous Products

Products from different providers that are perceived by consumers as virtually identical, such as gasoline, wheat, or gold.

Heterogeneous Products

Products of different providers that are perceived by consumers as clearly different, such as clothing, restaurants, or soft drinks.

Ideal Market Conditions

A theoretical market where buyers and sellers have no market power, goods are private with no externalities, and there is no asymmetric information.

Market Atomism

A condition in a perfectly competitive market where many buyers and suppliers exist, and each supplier is so small compared to the market that they have negligible influence on the price.

Price Takers

Suppliers in a perfectly competitive market who have no control over the price and must accept the market price as given.

Price Makers

Suppliers in non-competitive markets who are large enough to influence the market price.

Demand Function

Describes how the total quantity of a product demanded relates to its price.

Reservation Price (Demand)

The maximum price that people are willing to pay for a product; if the price is higher, an individual will not buy the product.

Law of Demand

The inverse or negative relationship between price ($p$) and quantity demanded ($q$).

Ordinary Goods

Goods that obey the Law of Demand.

Consumer Surplus (CS)

The difference between the maximum willingness to pay (WTP) and the paid market price.

Total Willingness to Pay (WTP)

The maximum willingness to pay of all demanders, represented by the area under the demand curve until the last sold unit.

General Linear Demand Function

A mathematical representation of demand written as $q_D = a - bp$, where $a$ and $b$ are unknowns.

Ceteris Paribus Hypothesis

The assumption that all other explanatory variables (like income and taste) remain constant when determining the influence of one variable (like price).

Inverse Demand Function

A function that indicates the maximum price a consumer is willing to pay for one additional unit given a quantity, written as $p = D^{-1}(q)$; also known as the marginal willingness to pay curve.

Market Demand

The sum of the individual demand functions of all consumers, found graphically by horizontal summation.

Demand Shocks

Shifts of the demand curve caused by changes in explanatory variables other than the product's own price.

Substitutes

Two goods for which an increase in the price of one leads to an increase in the demand for the other.

Complements

Two goods for which an increase in the price of one leads to a decrease in the demand for the other.

Normal Good

A good for which demand increases when consumer income increases.

Inferior Good

A good for which demand falls when consumer income increases, such as second-hand furniture.

Reservation Price (Supply)

The minimum price at which a supplier is willing to offer a product.

Law of Supply

The positive relationship between price ($p$) and quantity supplied ($q$).

Total Production Costs

The sum of the marginal production costs of all supplied units, represented by the surface below the supply function.

Producer Surplus (PS)

The difference between the marginal cost and the received market price.

Law of Diminishing Marginal Returns

The principle that as more resources are deployed to produce output, the increase in output eventually slows down, causing marginal production costs to rise.

Supply Shocks

Shifts of the supply curve caused by changes in explanatory variables such as technology, input prices, or expectations.

Equilibrium Price

The price ($p^*$) at which the quantity demanded and the quantity supplied are equal.

Supply Surplus

An excess supply that occurs when the current price is higher than the equilibrium price ($p > p^*$), leading to downward pressure on prices.

Excess Demand

A situation where quantity demanded exceeds quantity supplied because the price is below the equilibrium price ($p < p^*$), leading to upward pressure on prices.

Signal Function of Prices

The role of prices in a competitive market to provide information to producers about profitability and to consumers about what they must give up to purchase a product.

Comparative Statics

The comparison of market equilibrium before and after a shock without considering the trajectory between the two states.