Econ Chapter 3

Demand

The desire to purchase a particular item at a specified price and time. Accompanied by the ability and willingness to pay

Law of Demand

Tells us that the buyers will purchase more of an item at a lower price and less at a higher price.

Substitution Effect

When a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good

income effect

refers to how a change in a consumer’s real income or purchasing power influences their demand for a good or service.

demand schedule

a table that lists the quantity of a good that a person will purchase at various prices in a market.

Market demand schedule

shows the quantities demanded at various prices by all consumers in the market.

Demand curve

Line graph that shows the amount of a product demand at each price.

Elasticity of Demand

This is the percentage change in demand that follows a price change. The more demand expands or contracts after a price change, the greater the elasticity of demand.

Supply

used to refer to the amount of goods or services offered for sale at a particular price.

Law of Supply

the quantity of a good or service supplied varies directly with its price. This means the number of units of something offered increases as the price increases and decreases as the price decreases

Equilibrium price

Price at which supply and demand are equal and is the price at which goods are sold

Market

group of buyers and sellers of a good

Price Directed Market Economy

prices play such an important role in economic life that the US is often called a

Competitive market

so many buyers and sellers that each has a negligible difference in the price

Normal Good

a good for which an increase in income leads to a decrease in demand

Inferior Good

a good for which an increase in income leads to a decrease in demand

Substitute

two goods for which an increase in the price of one leads to the increase of another

Compliment

Two goods for which an increase in the price of one leads to the decrease in the demand of another

Equilibrium Quantity

quantity supplied and the quantity demanded when the price is adjusted to balance supply and demand

Law of Supply and Demand

claim that the price of any good adjusts to bring the supply and demand for that good into balance

Price Floor

Guarantees sellers a minimum price that they may charge for their goods

Price Ceiling

Sets the maximum price for that sellers may charge for their product

For perfect competition, 4 things must happen

1. Many buyers and sellers acting independently

2. Competing products are practically identical

3. all buyers and sellers must have full knowledge of the prices

4. Buyers and sellers can enter and leave the market at free will.

Elasticity of supply

if the change in the price causes a larger percentage change in supply, then the supply is said to be elastic

Marginal Utility

the degree of satisfaction or usefulness that a consumer gets from each additional purchase of a product or utility

Principle of Diminishing Marginal Utility

each additional purchase of a product or service by a given consumer will be less satisfying.