Economics Key Concepts: Supply, Demand, and Market Structures

CHAPTERS 1, 2, AND 3

CHAPTERS 1, 2, AND 3

Scarcity

The limited nature of society's resources

Trade-offs

To get one thing you want, you have to give up another thing you want

Opportunity cost

Whatever must be given to obtain something else

Thinking on the margin

The decision-making process compares the additional benefit of one more unit of an activity against its additional cost

Incentives

Something that induces a person to act - a key to analyzing how markets work

Trade

Exchange of goods and services between parties, often motivated by the idea that both parties will gain from trade

Free markets

An economic system where the prices of goods and services are determined by competition between privately owned businesses and consumers, rather than the government

Adam Smith and the invisible hand

A metaphor for how self-interested individuals in a free market benefit society as a whole by allocating resources efficiently through the forces of supply and demand

Externality

The impact of one person's actions on the well-being of a bystander

Market power

The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

Standard of living

The level of wealth, comfort, and goods and services available to a population reflects their material well-being

Inflation

An increase in the overall level of prices in the economy

Role of economists

When economists are trying to explain the world, they are scientists; when they are giving guidance on how to improve it, they are policymakers

Economic models

Simplified representations of complex economic systems, using tools like mathematics and graphs to illustrate relationships and make predictions about economic behavior

Productive resources

Factors of production: human, natural, land, and capital

Human resources

People: mental and physical abilities that allow them to contribute to the workforce

Capital resources

Goods, specifically produced to produce another good

Natural resources

An actual or potential form of wealth extracted from the natural environment

Circular flow model

A visual model of the economy that shows how dollars flow through markets among households and firms

Profit

Businesses want revenue

Cost

Businesses must get productive resources by paying

Expenditure

The money a household spends to purchase goods and services

Income

The money households get for selling resources

Input

Productive resources viewed by businesses

Production possibilities frontier

A graph that shows the combinations of output that the economy can possibly produce with the available factors of production and production technology

Constant opportunity cost

Straight line on the production possibilities frontier

Increasing opportunity cost

Bowed out curve on the production possibilities frontier

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer

Absolute advantage

The ability to produce a good using fewer inputs than another producer

CHAPTER 4

CHAPTER 4

Competitive markets

A market in which there are many buyers and sellers, so each has a negligible impact on the market price

Law of demand

The claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

Demand schedule

A table that shows the relationship between the price of a good and the quantity demanded of a good

Demand curve

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

Individual demand

The quantity of a good or service a single consumer is willing and able to buy at various prices in a given time

Market demand

The total quantity of a product/service that all consumers in a market are willing and able to buy at various prices during a specific time

Movement along the demand curve

Caused only by a change in the product's price, showing how much more or less consumers buy at different prices on the same curve

Shift in the demand curve

Caused by non-price factors (income, tastes, population, etc.), moving the entire curve left (decrease) or right (increase) DEMAND

INEPT

Shifters of demand: number of buyers, income, price of related goods, tastes, expectations

Normal good

An increase in income leads to an increase in demand; a decrease in income leads to a decrease in demand.

Inferior goods

An increase in income leads to a decrease in demand; a decrease in income leads to an increase in demand.

Number of buyers

An increase in the number of buyers increases the quantity demanded at each price, shifting the demand curve to the right.

Expectations of the future

A change in what consumers expect to happen in the future can cause an increase or decrease in demand.

Price of related goods

Substitutes: an increase in the price of one leads to an increase in the demand for another; complements: an increase in the price of one leads to a decrease in the demand for the other.

Taste

If consumers like a product, demand increases; if they dislike it, demand decreases.

Law of supply

The claim that, other things being equal, the quantity supplied of a good rises when the price of a good rises.

Supply schedule

A table that shows the relationship between the price of a good and the quantity supplied.

Supply curve

A graph that shows the relationship between the price of a good and the quantity supplied, slopes upward.

Individual supply

The quantity of a good or service a single producer is willing and able to sell at various prices over time.

Market supply

The total quantity of a product or service that all producers in a market are willing and able to sell at various prices.

Movement along the supply curve

Caused only by a change in the good's own price, moving up or down the same curve.

Shift in the supply curve

Caused by non-price factors, shifting the entire curve left or right.

NITE

Shifters of supply: input prices, technology, number of sellers, expectations about the future.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded.

Shortage

A situation in which the quantity demanded is greater than the quantity supplied.

CHAPTER 5

CHAPTER 5

Elastic

If the quantity demanded/supplied responds to a change in price.

Inelastic

If the quantity demanded/supplied responds only slightly to a price change.

Price elasticity of demand

A measure of how much the quantity demanded of a good responds to a change in price.

Factors determining consumer sensitivity to price changes

Availability of close substitutes, necessities vs. luxuries, market definition, and time horizon.

Total revenue test

The amount paid by buyers and received by sellers of a good, calculated as the price of the good times the quantity sold.

Price elasticity of supply

A measure of how much the quantity supplied of a good responds to a change in its price.

Factors determining producer sensitivity to price changes

Depends on product uniqueness, availability of substitutes, necessity vs. luxury, brand loyalty, and market factors.

CHAPTER 6

CHAPTER 6

Price controls

Government-mandated prices for goods or services, implemented through price ceilings or price floors.

Price ceiling

A legal maximum on the price at which a good can be sold.

Binding price ceiling

When the maximum price is below the equilibrium price.

Nonbinding price ceiling

When the maximum price is above the equilibrium price.

Unintended consequences of price ceilings

A binding price ceiling on a competitive market leads to a shortage.

Rent control

Debate over price ceilings for rentals, providing stability but reducing housing supply and quality.

Price floor

A legal minimum on the price at which a good can be sold.

Binding price floor

If the price floor is set above the equilibrium market price, it causes a surplus.

Nonbinding price floor

If the price floor is set below the equilibrium market price.

Unintended consequences of price floors

A binding price floor causes a surplus.

Minimum wage

The government sets the lowest price for labor that any employer may pay.

Tax incidence

The manner in which the burden of a tax is shared among participants in a market.

CHAPTER 24, 25, AND 29

CHAPTER 24, 25, AND 29

GDP

Gross Domestic Product: The total market value of all final goods and services produced in a country over a specific period.

Final goods and services

Goods and services sold to end consumers/users, purchased for final use.

Intermediate goods

Man-made goods used to produce other goods and services, not counted in GDP.

Nominal GDP

The production of goods and services valued at current prices.

Real GDP

A measure that evaluates current production using prices fixed at past levels.

Per capita GDP

A country's economic output per person, calculated by dividing real GDP by the population.

Limitations of GDP

Measures production, not well-being, ignoring unpaid work, environmental costs, and income inequality.

Purchasing power

Directly reduces purchasing power as each unit of currency buys less than before.

CPI

Consumer Price Index: used to monitor changes in the cost of living.

Effects of inflation

Reduced purchasing power, higher costs for essentials, and potential economic instability.

Regional price parities

Measure differences in price levels and the cost of living across U.S. states and metro areas.

Unemployment rate

The percentage of the labor force that is unemployed.

Labor force

The total number of workers, both employed and unemployed.

Discouraged workers

People who want to work but have stopped looking for jobs due to perceived lack of opportunities.

Limitations of the unemployment rate

Excludes discouraged workers and underemployed individuals, not reflecting job quality.

U-6 rate

A broader unemployment measure including discouraged workers and part-time workers.

Frictional unemployment

Unemployment that results because it takes time for workers to search for jobs that best suit them.

Structural unemployment

Unemployment that results because the available labor in some labor markets is insufficient.