Economics Lecture: Markets, Auctions, and the Law of Demand

Vocabulary flashcards covering introductory economics lecture topics including auction types, pricing mechanisms, demand fundamentals, effects, and determinants.

Price Rationing Mechanism

The market process through which prices adjust to allocate goods to buyers who are willing and able to pay, and determine supply from sellers willing and able to receive that price.

Invisible Hand

Adam Smith's economic concept describing how self-interested buyers and self-interested sellers voluntarily interact in a market to determine trade quantities and prices.

Open English Auction

The most common auction format where sequential, public bids are submitted, often leading buyers to use bidding strategies like last-second sniping or proxy bidding rather than revealing their true valuation.

Single Price Sealed Bid Auction

An auction format where each bidder submits a single hidden bid simultaneously, eliminating sniping and multiple bidding rounds, though buyers still lack an incentive to bid their true value.

Second Price Sealed Bid Auction

Also known as a Vickrey auction, an auction type where the highest bidder wins but pays the second-highest bid price, providing an economic incentive for buyers to reveal their true value.

Truth Telling

An economic outcome or bidding strategy in auctions where a buyer submits a bid equal to their exact valuation or preference for a good.

Dutch Auction

Also referred to as a reverse auction, an auction format that starts at a high price and progressively lowers the price until a buyer accepts.

Demand

The complete economic relationship between the price of a good and the quantity demanded that buyers are willing and able to purchase.

Law of Demand

The economic principle asserting an inverse or indirect relationship between the price of a good and the quantity demanded.

Substitution Effect

An explanation for the law of demand stating that as a good's price increases, buyers purchase less of it and switch to relatively cheaper substitute goods.

Income Effect

An explanation for the law of demand stating that an increase in a good's price reduces a buyer's real purchasing power (real income), causing them to reduce consumption of that good.

Demand Schedule

A tabular representation displaying the inverse relationship between various prices and their corresponding quantities demanded.

Willingness to Pay

The maximum price a consumer is willing to pay for a specific unit or quantity of a good, represented by points on the demand curve.

Normal Good

A good for which demand increases (shifting the demand curve to the right) when consumer nominal income increases.

Inferior Good

A good for which demand decreases (shifting the demand curve to the left) when consumer nominal income increases, such as boxed Kraft macaroni and cheese.

Complementary Goods

Goods consumed together where an increase in the price of one good leads to a decrease in demand for the other, moving in opposite directions (e.g., hot dogs and hot dog buns).

Substitute Goods

Goods used in place of one another where an increase in the price of one good leads to an increase in demand for the other, moving in the same direction (e.g., coffee and tea).

Change in Quantity Demanded

A movement along a stationary demand curve caused strictly by a change in the good's own price.

Change in Demand

A shift of the entire demand curve to the right or left caused by changes in non-price determinants such as income, preferences, expectations, or prices of related goods.