Economics Key Concepts: Demand, Supply, and Market Mechanics

Change in demand

Means there has been a shift in the demand curve.

Change in quantity demanded

Means that price has changed and there is movement along the demand curve.

Real GDP growth

Is determined not by the quantity of factors of production but by the quality of factors of production such as human capital.

Capital-intensive production process

Means that the process uses a high ratio of machinery and other capital to labor.

Expectations (in economics)

Cause both demand and supply to shift.

Market mechanism

Refers to the use of market prices and sales to determine resource allocation.

Determinant of market supply

Includes technology, factor costs, taxes and subsidies, producer expectations, prices of related goods, and number of sellers.

Law of demand

States that during a given period of time, the quantity of a good demanded increases as its price falls, ceteris paribus.

Equilibrium price

Is found where the market supply curve intersects the market demand curve.

Economics

Can be defined as the study of how scarce resources are allocated.

Shift in supply

Is defined as a change in the supply curve because of a change in a determinant of supply.

Fundamental problem of economics

Is the scarcity of resources relative to human wants.

Opportunity costs

Are experienced whenever choices are made due to the scarcity of resources.

Movement along the demand curve

Represents a change in the quantity demanded in response to price changes.

Human capital

Is a key factor explaining differences in size of real GDP across countries.

Diminishing returns

Occurs when the productivity of workers increases with more physical capital up to a certain point.

Invisible hand of the market

Is a force that directs economic activity, with prices being the guiding force.

Market prices

Signal desired outputs or resource allocations in the market mechanism.

Nonprice determinant

A factor that causes a shift in the supply curve.

Scarcity

Refers to the limited nature of resources in relation to human wants.

Resource allocation

Is the process of distributing resources among various uses.

Quantity demanded

Is inversely related to the price of the same item.

Intersection of demand and supply curves

Establishes the equilibrium price and output.

Factor of Production

$100,000 cash is not a factor of production; it does not directly produce anything.

Opportunity Cost

The activity that is the best alternative use of your time.

Production Possibilities Curve (PPC)

The supply of resources is fixed.

Trade-off

A movement along the economy's production possibilities curve.

U.S. Arable Land

12 percent of the world's arable land.

U.S. Economy Production

The United States produces more than one-fifth of the world's production.

Declining Sectors in U.S. GDP

Farming and manufacturing.

Increasing Component of U.S. GDP

Only services.

Legal framework

Protects the ownership of private property to encourage the private sector.

Demand curve shift

If corn products are found to cause cancer, then the demand curve for corn will shift left.

Minimum wage effect

If the market wage for fast-food restaurants is $11 and the government enforces a minimum wage of $7, the unemployment rate will not be affected by the minimum wage.

Minimum wage surplus

If the market wage for fast-food restaurants is $4 per hour and the government enforces a minimum wage of $7 per hour, the unemployment rate will increase as quantity of labor supplied increases and quantity of labor demanded decreases.

Gasoline price effect

An increase in the price of gasoline will shift the demand curve for gas-guzzling automobiles to the left.

Supply curve variable

Price is not held constant along a given supply curve for a good.

Invisible hand

The allocation of resources by market forces.

Scarcity in economics

Society's desires exceed resources available.

Shortage indication

If there is a shortage at a given price, then that price is less than the equilibrium price.

Demand curve movement

An increase in the price of new automobiles will cause a movement along the demand curve, not a shift of the entire demand curve.

Shortage

A shortage will cause the price to rise and the quantity supplied to increase. A price below equilibrium causes a shortage, which puts upward pressure on both price and quantity supplied as the market moves toward equilibrium.

Maximize Total Profits

The goal of most business firms in a market economy is to maximize total profits. Most businesses are motivated by profits.

Capital-Intensive Production

A capital-intensive production process is one that has a high ratio of capital to labor. This means it uses a large amount of machinery and other capital relative to the amount of labor.

Increase in Quantity Supplied

Ceteris paribus, an increase in the price of perfume is most likely to cause an increase in the quantity supplied of perfume. If the price of a product is the only variable changing, then we can track changes in quantity supplied along a supply curve.

Higher Equilibrium Quantity

A rightward shift in a demand curve and a rightward shift in a supply curve both result in a higher equilibrium quantity. An increase in demand causes both equilibrium price and quantity to increase. An increase in supply causes equilibrium price to fall but equilibrium quantity to increase.

Per Capita GDP

Per capita GDP will rise if GDP increases more rapidly than the population increases. As long as the growth in GDP outpaces population growth, living standards (as measured by per capita GDP) will rise.

Goods and Services in the U.S.

When compared to the average household in most low-income countries, poor people in the United States, on average, receive far more goods and services.

Surplus

If there is a surplus at a given price, then that price is greater than the equilibrium price. At prices above equilibrium, quantity supplied will be greater than quantity demanded, so a market surplus will exist.

Market Participation Benefits

People benefit by participating in the market because market participation allows individuals to specialize and ultimately consume more after trade.

Lower Quantity Demanded

Ceteris paribus, lower quantity demanded of a good occurs if there is a higher price of the good. Quantity demanded and price of an item are inversely related.

Market Participants

Who participates in markets? Business firms, consumers, and government agencies.