Units 2.1-2.3 Econ

Market

Where people willing and able to purchase a good, service or resource carry out an exchange with those who are willing and able to provide that same good, service or resource. It is not always a physical place; it can be local, national or international.
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product markets

Market where goods and services are sold.

factor markets

Market where resources are sold.

labour markets

Markets where people offer their services in exchange for a salary.

financial markets

Markets where foreign currencies, company shares or other financial contracts are traded.

competition

The effect of a large number of buyers and sellers acting independently; an individual seller has very little or no market power to influence the price of the product.

market power

The ability of a firm (or group of firms) to raise and maintain prices above the level that would occur under competition. Also called 'monopoly power'
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consumer

A person or an organisation that buys goods or services in a market.
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demand

The quantity of a good or service that consumers are willing and able to purchase at various prices during a specific time period, ceteris paribus.

effective demand

The quantity of goods or services that consumers are actually buying at various prices, supported by their ability to pay.

demand curve

A graph showing how the quantity demanded of a commodity or service varies with changes in its price.

demand schedule

A table that shows the quantity demanded of a good or service at different prices.
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law of demand

The principle that as the price of a product decreases, the quantity demanded of it will increase, ceteris paribus.

market demand

The sum of all individual demand for a good or service in a market at each price.
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assumptions about human nature and behavior

Human beings are assumed to have clear preferences that are stable over time, ceteris paribus.
Human beings are assumed to have highly developed analytical skills and perfect knowledge to make rational choices.
Rational behaviour for human beings means maximising personal satisfaction (utility) at all times.

income effect

When the price of a product falls, and if consumers' incomes have not changed (which means that they have the same amount of money to spend), we assume that consumers can buy more of that good.

real income

The income of individuals or countries after adjusting for inflation (price level changes).

substitution effect

When consumers substitute relatively lower-priced goods when the prices of those goods decline, thereby consuming more of them

law of diminishing marginal utility

The principle that as additional units of a good or services are consumed, the marginal utility will decline.

marginal utility

The benefit gained from consuming one additional unit of a product or service.

non-price determinants of demand

All factors affecting demand other than price; they cause the entire demand curve to shift.

What causes a movement along the demand curve?

change in price

Non-price determinants of demand

All factors affecting demand other than price; they cause the entire demand curve to shift.

normal goods

Goods whose demand increases as people's incomes increase.

how does income impact normal goods?

An increase in income leads to a rightward (outward) shift of the demand curve, while a fall in income leads to a leftward (inward)

Inferior goods

Goods whose demand decreases as people's incomes increase.

how does income impact inferior goods?

as people have more money to spend, the demand for inferior goods decreases. In this case, an increase in income leads to a leftward (inward) shift of the demand curve, while a fall in income leads to a rightward (outward) shift.

substitute goods

Goods that have similar characteristics and uses to consumers.

close substitutes

Goods that have very similar characteristics and uses to consumers so that they switch between them easily.

remote substitutes

Goods that have less similar characteristics and uses to consumers so that they switch between them less easily.

complementary goods

Goods that are consumed together.
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close complements

Goods that are usually consumed together, such that one good has little use without the other.

remote complements

Goods that are sometimes consumed together, but the consumption of one good does not depend on the other.
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change in price...impact on complements

A change in the price of one good will affect the demand of the complementary good. When the goods are close complements, the shift of the demand curve of the complementary good will be greater than when the two goods are remote complements.

unrelated goods

When goods are unrelated, the change in the price of one good will have no effect on the demand of the other.

tastes and preferences

When goods become more or less popular because of fashion, current events or promotion campaigns, demand is affected and the demand curve may shift to the right or to the left. Firms, interest groups, news media, social media, peer groups and governments can all affect the tastes and preferences of consumers.

expectations about future prices

if people expect prices of goods and services to increase in the near future, they may decide to purchase more of the good now, in the hope of avoiding higher prices later. They may also want to sell the good again later at a higher price, to make a profit from the expected price rise.

expectations about the future of the economy

If consumers expect the economy to do well, meaning consumers expect to keep their jobs and increase their incomes in the near future, they may increase their consumption of goods and services. Similarly, if businesses expect to sell more goods, they may increase consumption of resources for production.

demographic changes

Any change in the population such as age structure, gender ratio, life expectancy, etc.

positive feedback loop

A change in a system that leads to more and greater change away from an equilibrium, destabilising the system.

market bubble

A situation in which asset prices appear to be based on implausible or inconsistent views about the future.

market crash

A sudden dramatic decline of prices in a market.

producers

One of the people, companies, or countries that make, grow, or supply goods, services or resources in a market.

examples of producers

Firms who sell final goods and services or intermediate goods in the product market
Firms who sell raw materials in the resource market
Households who offer their services in the labour market
Governments and other countries that produce and offer goods, services and materials, and supply workers

effective supply

The quantity of goods or services that producers are actually selling at various prices, supported by their ability to produce.

supply curve

A graph showing how the quantity supplied for a commodity or service varies with changes in its price.

individual supply

The supply of one product by one firm at every price.

supply schedule

A table that shows the quantity supplied of a good or service at different prices.

law of supply

As the price of a product increases, the quantity supplied will usually increase, ceteris paribus.
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market supply

The sum of all the individual supplies of a product at every price.

assumptions of law of supply

law of diminishing marginal returns and increasing marginal costs of production,

marginal returns

The additional returns (output/product) gained from adding an additional factor of production (input).

law of diminishing marginal returns

The principle that adding more of one factor of production (input), while holding at least one other factor of production constant, will at some point yield lower marginal returns (output/product).
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fixed capital

A real, physical asset that is used in the production of a product, but is not used up in the production.

marginal costs

The cost of producing one more unit of a good.

short run

a period of time in which at least one factor of production is fixed.

non-price determinants of supply

All factors affecting supply other than price; they cause the entire supply curve to shift.

Non-price determinants of supply

The variables that can influence supply: Costs of factor of production, Price of related goods (Joint Supply and Competitive Supply), Technology, Producer expectations, Taxes, The number of firms, Supply shocks and Subsidies.

productivity

The quantity of output per unit of input.

expectations about future prices: supply

If firms expect prices of the products they sell to increase in the near future, they might withhold part of their current production from the market

hoarding

Accumulating or storing a good or resource in order to prevent its release into a market for self-use or profit-making purposes.

Expectations about the future of the economy (supply)

If producers expect the economy to do well, they will expect that people will have more money to spend and that the consumption of goods and services will increase. They may increase supply to meet this possible future increase in demand.

number of firms in the market

As the market supply is the sum of all the individual supplies of a product, when the number of firms that offer the same good increases, the market supply also increases, shifting the supply curve of that good outwards (to the right).

two types of relationships between goods in terms of supply

joint supply and competitive supply.

joint supply

When two or more goods are derived from the same product so that it is not possible to produce more of one without producing more of the other.

This means that an increase in the price of one leads to an increase in its quantity supplied, according to the law of supply.

by product

A secondary product made during the production of something else.

Competitive supply

When the production of two goods use similar resources and processes; if a supplier produces more of one good, it means producing less of the other.

indirect tax

A tax imposed on a good or service; it is typically paid to the government by the producer or supplier and is considered a cost of production.

cost of production vs indirect tax

When indirect taxes are imposed or increased, the costs of production for firms increase, causing supply to decline. elimination of a tax, or reduction of an existing tax, results in a decline in production costs and causes an increase in supply.

subsidy

An amount of money granted by the government to a firm or industry; it reduces the firm's costs of production, increasing the supply of the good or service. Usually a per-unit payment by the government to firms in order to lower production costs and increase production.

regulations

Regulation is when governments monitor firms and industries to confirm that they are abiding by relevant legislation.

market equilibruim

The point where the supply curve of a good or service crosses the demand curve, at the price where the quantity demanded equals the quantity supplied.

equilibrium price

The price that is set by the interaction between consumers and producers in markets where there are no surpluses or shortages and the market has cleared.

disequilibrium

A state where quantity demanded does not exactly equal quantity supplied, due to changes in the external environment (non-price determinants of demand and supply).

excess supply (surplus)

When the quantity demanded of a good is less than the quantity supplied; occurs when the price in the market is above the equilibrium price. Also known as surplus.

excess demand (shortage)

When the quantity demanded of a good is more than the quantity supplied; occurs when the price in the market is below the equilibrium price. Also known as shortage.