Economics Chapter 3-4

Allocative Efficiency

when
resources produce the right mix of
goods/services most valued by
society (“right goods in the right
amounts”).

Capitalism

an economic system
where supply and demand in markets
determine prices, production, and
incomes.

Command Economy

the central
government decides what and how
much to produce, sets prices/wages,
and allocates output.

Mixed Economy

a blend of market
coordination (price system) and
government commands/intervention.

Market

the mechanism/institution that
brings buyers and sellers together to
exchange goods or services.

Law of Demand

ceteris paribus, as price
rises → quantity demanded falls (and vice
versa).

Law of Supply

ceteris paribus, as price
rises → quantity supplied rises (and vice
versa).

Ceteris Paribus

“other things
equal”; holding all other factors
constant.

Circular Flow Diagram

model of
money and real flows between
households and firms through two
markets.

Product Market (Market for Goods and
Services)

firms sell goods/services
to households; households spend
income.

Factor Market (Market for Resources)

households sell land, labor, and
capital to firms; receive wages, rent,
profit.

Price System

decentralized
process where prices convey
information and incentives,
coordinating economic activity.

Competitive Markets

many
buyers/sellers; no one controls
price; prices guide resource
allocation efficiently.

Demand

The quantity of a good or service
that consumers are willing and able to buy
at various prices.

Demand Curve

A graph showing the
relationship between the price of a product
and the quantity consumers are willing and
able to purchase.

Quantity Demanded

The specific amount
of a good or service consumers are willing
and able to buy at a particular price.

Change in Quantity Demanded

A
movement along an existing demand curve
caused only by a change in the good’s own
price.

Change in Demand

A shift of the entire
demand curve caused by a nonprice
determinant of demand.

Law of Demand

Ceteris paribus, when the
price of a good rises, the quantity
demanded falls, and vice versa.

Diminishing Marginal Utility

The principle
that each additional unit of a good usually
provides less additional satisfaction than
the previous unit.

Income Effect

The change in quantity
demanded caused by a change in consumers’
purchasing power when a price changes.

Substitution Effect

The change in quantity
demanded caused by consumers switching to
relatively cheaper alternatives after a price
change.

Supply

The quantity of a good or service
that producers are willing and able to offer
for sale at various prices.

Supply Curve

A graph showing the
relationship between the price of a product
and the quantity producers are willing and
able to sell.

Quantity Supplied

The specific amount of a
good or service producers are willing and
able to offer for sale at a particular price.

Change in Quantity Supplied

A movement
along an existing supply curve caused only
by a change in the good’s own price.

Change in Supply

A shift of the entire
supply curve caused by a nonprice
determinant of supply.

Law of Supply

Ceteris paribus, when the
price of a good rises, the quantity supplied
rises, and vice versa.

Equilibrium

The market condition in which
quantity demanded equals quantity supplied.

Equilibrium Price

The market-clearing price
at which quantity demanded equals quantity
supplied.

Equilibrium Quantity

The amount bought
and sold at the equilibrium price.

Surplus

A situation in which quantity
supplied is greater than quantity demanded
at a given price.

Shortage

A situation in which quantity
demanded is greater than quantity supplied
at a given price.

Competitive Market Forces

The price-
adjustment process through which surpluses
push prices down and shortages push prices
up.