Economics: Demand, Supply, Costs, and Surplus Key Concepts

Question

Answer

What is a market?

An arrangement where buyers and sellers meet (or communicate) to exchange goods and services at mutually agreeable prices.

What is Quantity Demanded (Qd)?

The amount buyers are willing and able to purchase at a certain price, holding other factors constant.

What is Demand?

The relationship between the price of an item and the quantity demanded.

What does the Law of Demand state?

When price falls, Qd increases; when price rises, Qd decreases (inverse relationship).

List 5 demand shifters.

Income, population/number of buyers, taste & preferences, expectations, price of related goods (substitutes & complements).

What is Quantity Supplied (Qs)?

The amount a seller is willing and able to sell at a given price, holding other factors constant.

What is Supply?

The relationship between the price of an item and the quantity supplied.

What does the Law of Supply state?

When price increases, Qs increases; when price decreases, Qs decreases (direct relationship).

List 5 supply shifters.

Technology, input prices, number of sellers, expectations, substitutes in production.

What causes movement along a demand or supply curve?

A change in the price of the good itself.

What causes a shift of the entire demand or supply curve?

A change in factors other than price (like income, input costs, technology, etc.).

What is production in economics?

The process where an economy transforms inputs (factors of production) into outputs (goods and services).

What does the Production Possibilities Frontier (PPF) show?

The maximum attainable combinations of two products an economy can produce using available resources and current technology.

What are the key assumptions of the PPF model?

Fixed resources, constant technology, some specialized inputs, only two outputs considered.

What does the shape of the PPF depend on?

Whether resources are equally adaptable; it can be linear, bowed-in, or bowed-out.

What is the Law of Opportunity Cost?

As more of one good is produced, the opportunity cost of additional units increases because resources are specialized.

What are three key implications of the PPF?

Scarcity (can't have unlimited amounts), efficiency (must operate on the PPF), trade-offs (more of one good means less of another).

What are the sources of economic growth that shift the PPF outward?

More resources (labor, land), improved resource quality (education, training), technological advances.

What does an outward shift of the PPF represent?

Overall economic growth.

What does a biased shift of the PPF represent?

Growth concentrated in one sector or industry.

What is the difference between accounting cost and economic cost?

Accounting cost includes only explicit costs, while economic cost includes both explicit (accounting cost) and implicit (opportunity) costs.

What is a fixed cost (FC)?

A cost that does not change with the quantity of output produced. Exists only in the short run.

What is average fixed cost (AFC) and its formula?

Fixed cost per unit of output. AFC = FC / Q.

What is a variable cost (VC)?

A cost that changes with the quantity of output produced. The more you produce, the higher the VC.

What is average variable cost (AVC) and its formula?

VC per unit of output. AVC = VC / Q.

What is total cost (TC) and its formula in the short run?

The market value of all inputs a firm uses in production. In the short run: TC = FC + VC.

What is average cost (AC) and its formula?

Total cost per unit of output, also called average total cost (ATC). In the short run: AC = TC/Q = FC/Q + VC/Q.

What is marginal cost (MC)?

The increase in total cost that arises from producing one more unit of output.

What is average product (AP) and its formula?

The output per unit of input. AP = Output / Input.

How can average cost (AC) also be expressed in relation to inputs?

AC = Input cost per unit × (Input / Output).

What happens when MC < AC?

AC falls.

What happens when MC > AC?

AC rises.

Where does MC intersect AC?

At the minimum point of AC.

What happens when MC < AVC?

AVC falls.

What happens when MC > AVC?

AVC rises.

Where does MC intersect AVC?

At the minimum point of AVC.

What is consumer surplus (CS)?

The difference between the maximum price a consumer is willing to pay and the price they actually pay.

What is producer surplus (PS)?

The difference between the price producers receive and the minimum price they are willing to accept.

What is total surplus (TS)?

The sum of consumer surplus (CS) and producer surplus (PS).