Economics: Demand, Supply, and Price Dynamics

Law of demand

The economic principle stating that as the price of a good decreases, quantity demanded increases, and as price increases, quantity demanded decreases.

Substitution effect

The consumer reaction to a price increase by purchasing less of that good and more of a substitute good.

Income effect

The change in consumption resulting from a change in real income or purchasing power caused by a price change.

Demand schedule

A table listing the quantities of a good that a person will purchase at various prices.

Demand curve

A graph showing the relationship between the price of a good and the quantity demanded.

Market demand

The total quantity of a good or service that all consumers in a market are willing and able to purchase at various prices.

True demand

The condition where consumers possess both the desire to own a good and the financial ability to pay for it.

Market equilibrium

The state in a market where quantity supplied equals quantity demanded, resulting in stable prices.

Elasticity of demand

A measure of how drastically buyers change their quantity demanded in response to a change in price, calculated as $\text{Elasticity} = \frac{\text{Percent Change in Quantity Demanded}}{\text{Percent Change in Price}}$.

Inelastic demand

A state where quantity demanded is relatively unresponsive to price changes, resulting in an elasticity value of less than $1$.

Elastic demand

A state where quantity demanded is highly responsive to price changes, resulting in an elasticity value greater than $1$.

Unitary elastic demand

A condition where the percentage change in quantity demanded equals the percentage change in price, resulting in an elasticity of exactly $1$.

Ceteris paribus

A Latin phrase meaning 'all other things held constant,' used in economic analysis to isolate the effect of one variable.

Normal good

A good for which demand increases when consumer income increases.

Inferior good

A good for which demand decreases when consumer income increases.

Complements

Two goods that are bought and used together, such that a price rise in one causes a demand decrease for the other.

Substitutes

Goods used in place of one another, such that a price rise in one causes a demand increase for the other.

Law of supply

The economic rule stating that producers offer more of a good as its price increases and less as its price falls.

Quantity supplied

The specific amount of a good or service that a producer is willing and able to sell at a given price.

Supply schedule

A chart showing the relationship between price and quantity supplied for a specific good.

Market supply curve

A graph illustrating the total quantity supplied by all producers in a market at various price levels.

Elasticity of supply

A measure of how responsive the quantity supplied is to changes in price.

Marginal product of labor

The change in total output resulting from hiring one additional unit of labor.

Increasing marginal returns

A stage of production where the marginal product of labor increases as the number of workers increases.

Diminishing marginal returns

A stage of production where additional workers increase total output, but at a decreasing rate.

Fixed cost

A cost that does not change regardless of how much of a good or service is produced.

Variable cost

A cost that rises or falls depending on the quantity produced.

Total cost

The sum of fixed costs and variable costs, calculated as $\text{Total Cost} = \text{Fixed Cost} + \text{Variable Cost}$.

Marginal cost

The additional cost incurred by producing one more unit of a good.

Marginal revenue

The additional income generated from selling one additional unit of a good.

Profit-maximizing output level

The level of production where marginal revenue equals marginal cost ($\text{Marginal Revenue} = \text{Marginal Cost}$).

Average cost

The total cost divided by the quantity produced, calculated as $\text{Average Cost} = \frac{\text{Total Cost}}{\text{Quantity}}$.

Total revenue

The total amount of money a business receives from selling goods, calculated as $\text{Total Revenue} = \text{Price} \times \text{Quantity}$.

Subsidy

A government payment that supports a business or market to encourage production or keep prices low.

Excise tax

A tax levied on the production or sale of a specific good, increasing production costs for suppliers.

Formula for percent change in price

$$\text{Percent Change in Price} = \frac{\text{Original Price} - \text{New Price}}{\text{Original Price}} \times 100$$

Formula for percent change in quantity demanded

$$\text{Percent Change in Quantity Demanded} = \frac{\text{Original Quantity} - \text{New Quantity}}{\text{Original Quantity}} \times 100$$

Non-price determinants of demand

Factors other than price—such as consumer preferences, income, demographics, and expectations—that shift the demand curve.

Non-price determinants of supply

Factors other than price—such as input costs, technology, government regulations, and expectations—that shift the supply curve.

Short-run shutdown rule

An operational guideline stating a firm should continue producing in the short run if total revenue exceeds total variable costs.