2: The Interaction between Demand and Supply

demand

the quantity of a good that consumers are willing and able to purchase at every price level, cet par

the law of demand

there is an inverse relationship between price and quantity demanded, cet par

law of diminishing marginal utility

beyond a certain point of consumption, as more and more units of a good or service are consumed, the additional utility a consumer derives from successive units decreases

normal good

a good whose demand rises as people’s incomes rises, cet par

necessities

a good whose demand increases less than proportionately for a given increase in people’s incomes, cet par

luxury good

a good whose demand increases more than proportionately for a given increase in people’s income, cet par

inferior good

a good whose demand falls as people’s incomes rise, cet par

substitutes

goods which are considered to be alternatives to each other

complements

good that when consumed together, gives rise to a higher combined utility than if the goods were consumed individually

derived demand

the demand for goods which are not produced for its own sake but is used to facilitate the production of another

supply

the quantity of a good that producers are willing and able to supply at every price level, cet par

law of supply

there is a direct relationship between price and quantity supplied, cet par

joint supply

good are in joint supply when the production of one good leads to the production of the other good

competitive supply

goods in competitive supply compete for the use of the same inputs

price mechanism

describes the process by which consumers and producers interact through prices to determine the allocation of scarce resources between competing uses

shortage

a situation which exist at any price above the equilibrium price where quantity supplied exceeds quantity demanded

surplus

a situation which exist at any price above the equilibrium price where quantity supplied exceeds quantity demanded