ap macro section 2

Competitive market

A market with many buyers and sellers, identical or very similar products, and no single participant able to control the market price.

Supply and demand model

An economic model that explains how prices and quantities are determined through the interaction of supply and demand.

Demand schedule

A table showing the relationship between the price of a good and the quantity demanded over a given period of time.

Quantity demanded

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

Demand curve

A graph showing the relationship between price and quantity demanded.

Law of demand

As price falls, quantity demanded rises; as price rises, quantity demanded falls, ceteris paribus.

Change in demand

A shift of the entire demand curve caused by factors other than the good’s own price (income, tastes, population, related goods, expectations).

Movement along the demand curve

A change in quantity demanded caused only by a change in the good’s own price.

Substitutes

Goods that can be used in place of one another; when the price of one rises, demand for the other increases.

Complements

Goods that are used together; when the price of one rises, demand for the other decreases.

Normal good

A good for which demand increases as consumer income increases.

Inferior good

A good for which demand decreases as consumer income increases.

Individual demand curve

A graph showing the relationship between price and quantity demanded by a single consumer.

Quantity supplied

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

Supply schedule

A table showing the relationship between the price of a good and the quantity supplied over a given period of time.

Supply curve

A graph showing the relationship between price and quantity supplied.

Law of supply

As price rises, quantity supplied rises; as price falls, quantity supplied falls, ceteris paribus.

Change in supply

A shift of the entire supply curve caused by factors other than the good’s own price (input costs, technology, taxes, subsidies, number of sellers, expectations).

Movement along the supply curve

A change in quantity supplied caused only by a change in the good’s own price.

Input

A resource used in the production of a good or service (labor, capital, land, or raw materials).

Equilibrium

The point where quantity demanded equals quantity supplied.

Equilibrium price / market-clearing price

The price at which quantity demanded equals quantity supplied and there is no surplus or shortage.

Equilibrium quantity

The quantity bought and sold at the equilibrium price.

Surplus

A situation where quantity supplied is greater than quantity demanded, usually caused by a price above equilibrium.

Shortage

A situation where quantity demanded is greater than quantity supplied, usually caused by a price below equilibrium.

Inefficient allocation to consumers

Occurs when goods do not go to the consumers who value them most, often due to price controls or shortages.

Wasted resources

Occurs when too many resources are used to produce a good that consumers do not highly value, often from surplus.

Inefficiently low quality

When producers lower quality to cut costs because price controls prevent charging higher prices.

Black market

An illegal market where goods are bought and sold at prices above or below the legal price set by the government.

Minimum wage

A government-set price floor on labor that makes it illegal to pay workers below a certain wage.

Inefficient allocation of sales among sellers

Occurs when higher-cost producers sell goods instead of lower-cost producers due to price controls.

Inefficiently high quality

When producers compete by raising quality instead of lowering price because price ceilings limit pricing.

Quantity control / quota

A government limit on the quantity of a good that can be produced, sold, or imported.

License

A legal right issued by the government that allows a firm or individual to sell a limited quantity under a quota system.

Demand price

The price consumers are willing to pay for a given quantity of a good.

Supply price

The minimum price producers are willing to accept to supply a given quantity of a good.

Wedge

The difference between the price consumers pay and the price producers receive due to taxes, quotas, or price controls.

Quota rent

The profit earned by holders of a quota or license because supply is artificially limited.

Deadweight loss

The reduction in total surplus that occurs when a policy (tax, quota, or price control) prevents mutually beneficial trades from happening.