Supply, Demand, and Elasticity

Comprehensive vocabulary flashcards covering key microeconomic concepts, price elasticity measures, tax incidence, market controls, and market equilibrium.

Microeconomics

The study of the behavior of individual firms, consumers, and markets.

Product Markets

Markets for final goods and services.

Factor Markets

Markets for the factors of production, including labor, land, and capital.

Price Elasticity of Demand

A measure of how much quantity demanded changes when price changes, calculated as the percentage change in quantity demanded divided by the percentage change in price ($E_D = \frac{\% \Delta Q}{\% \Delta P}$).

Price-Elastic Demand

A market condition where the percentage change in quantity demanded is greater than the percentage change in price ($\% \Delta Q > \% \Delta P$), causing price increases to reduce total revenue.

Price-Inelastic Demand

A market condition where the percentage change in quantity demanded is less than the percentage change in price ($\% \Delta Q < \% \Delta P$), causing price increases to raise total revenue.

Unit-Elastic Demand

A market condition where the percentage change in quantity demanded equals the percentage change in price ($\% \Delta Q = \% \Delta P$), resulting in no change in total revenue when price changes.

Perfectly Inelastic Demand

A state of zero elasticity represented by a vertical demand curve, where quantity demanded does not respond at all to changes in price.

Perfectly Elastic Demand

A state of infinite elasticity represented by a horizontal demand curve, where quantity demanded responds infinitely to the smallest change in price.

Total Revenue

The total money taken in by businesses through sales of goods, calculated as price multiplied by quantity ($R = P \times Q$).

Price Discrimination

The practice of charging different prices to different buyers for the same good or service based on differences in their price elasticity of demand.

Paradox of the Bumper Harvest

The economic situation in farming where an abundant harvest shifts supply rightward, driving down prices and lowering total farm income because the demand for food is relatively inelastic.

Price Elasticity of Supply

The responsiveness of quantity supplied by businesses to changes in market price, calculated as the percentage change in quantity supplied divided by the percentage change in price ($E_S = \frac{\% \Delta Q_S}{\% \Delta P}$).

Market Period

The time period immediately following a price change that is too short for a producer to adjust the quantity supplied, causing supply to be perfectly inelastic.

Short Run (Supply)

The time period long enough to alter variable inputs like labor and raw materials, but not fixed inputs like land and capital, resulting in intermediate supply elasticity.

Long Run (Supply)

The time period long enough for all inputs to be fully adjusted, making supply most elastic.

Income Elasticity of Demand

A measure of how much quantity demanded changes in response to a change in consumer income, calculated as percentage change in quantity demanded divided by percentage change in income ($E_I = \frac{\% \Delta Q_d}{\% \Delta I}$).

Normal Good

A good for which quantity demanded increases as consumer income rises, characterized by a positive income elasticity of demand.

Inferior Good

A good for which quantity demanded falls as consumer income rises, characterized by a negative income elasticity of demand.

Cross Elasticity of Demand

A measure of how much the quantity demanded of Good A changes when the price of Good B changes, calculated as $XED = \frac{\% \Delta Q_A}{\% \Delta P_B}$.

Substitute Good

A good used in place of another good, exhibiting a positive cross elasticity of demand.

Complement Good

A good used together with another good, exhibiting a negative cross elasticity of demand.

Excise Tax

A tax levied on the sale of a specific good or service, used to generate government revenue or alter consumer behavior.

Tax Incidence

The ultimate economic impact or burden of a tax on the real incomes of consumers versus producers.

Ramsey Tax Rule

The principle stating that a tax is shifted forward to consumers if demand is relatively inelastic compared to supply, and shifted backward to producers if supply is relatively inelastic compared to demand.

Subsidy

A government payment made to firms to cover part of production costs, acting as a reverse tax that shifts the supply curve downward.

Price Floor

A legal minimum price set above equilibrium for a good, service, or factor of production, which reduces quantity demanded and increases quantity supplied to create a surplus.

Deadweight Loss

The excess cost to consumers over what they are willing to pay, measuring total economic waste caused by inefficiency from government market interventions like price controls or subsidies.

Minimum Wage

A price floor in a factor market that establishes a legal lower limit on wages paid by employers to workers.

Price Ceiling

A legal maximum price set below equilibrium for a good, service, or factor of production, which increases quantity demanded and decreases quantity supplied to create a shortage.

Black Market

An illegal market where goods are bought and sold above legal price ceiling limits.

Demand Schedule

A table showing the relationship between various market prices of a good and the quantities consumers willingly buy at those prices.

Law of Downwardly-Sloping Demand

The principle stating that as the price of a good rises, the quantity that consumers willingly buy decreases, holding other things constant.

Substitution Effect

The reduction in quantity demanded that occurs when consumers switch to similar alternative goods because a product's price has increased.

Income Effect

The change in quantity demanded that occurs because a price increase lowers a consumer's real purchasing power.

Law of Decreasing Marginal Utility

The principle that satisfaction derived from consuming successive units of a good decreases, meaning consumers are willing to buy additional units only if price falls.

Change in Quantity Demanded

A movement along an existing demand curve caused exclusively by a change in the product's own price.

Change in Demand

A shift of the entire demand curve caused by a change in a non-price determinant of demand.

Law of Supply

The principle stating that as the price of a good rises, the quantity that businesses willingly produce and sell increases.

Law of Diminishing Returns

The principle that expanding production requires employing costlier marginal inputs, increasing marginal costs and requiring higher prices to justify increased output.

Change in Quantity Supplied

A movement along a fixed supply curve caused exclusively by a change in the price of the good.

Change in Supply

A shift of the entire supply curve caused by a change in a non-price determinant of supply.

Market Equilibrium

The point where supply and demand forces balance, such that quantity demanded equals quantity supplied at a specific market price.

Market Clearing Price

The price at which the quantity consumers want to buy exactly equals the quantity sellers want to sell.

Surplus

A state where quantity supplied exceeds quantity demanded because price is set above market equilibrium, exerting downward pressure on price.

Shortage

A state where quantity demanded exceeds quantity supplied because price is set below market equilibrium, exerting upward pressure on price.