Lesson 3 - Supply & Demand

Marginal Revolution

The discovery of the theory of marginal utility in the early 1870s

Good

A useful thing that is subject to human control

Four requirements for something to be a good:

1. A human need must exist

2. The object must have properties that allow it to satisfy this need

3. Humans must know of this causal connection

4. Humans must have sufficient control over the object to make use of it

Consumer Good

A good that serves our desires directly

Producer Good

A good that is used in the production of another good

Structure of Production

The set of steps by which producer goods are used to produce a consumer good

Theory of Derived Demand

The [value] of goods of higher order is derived from that of the corresponding goods of lower order

What is this an example of?

Derived Demand Theory

Marginal

At the edge

Marginal Unit

The next unit gained or

given up

Marginal Utility

The additional utility a person gets from having one more unit of a good, or loses from having one less unit of a good

Theory of Marginal Utility

The theory the price of a good is determined by its marginal utility

Ordinal Ranking

A list in order of preference

Opportunity Cost

The best alternative given up when making a choice.

Diminishing Marginal Utility

A person acquires more units of a good, the satisfaction they derive from each new unit is lower than the previous unit (Less = More value )

Increasing Marginal Opportunity Cost

person gives up more units of a good, the satisfaction they give up with each new unit is higher than the previous unit

Range of Indeterminacy

The range of potential prices

Market Clearing Price

A price at which anyone who wants to buy or sell can find a willing trade partner; A price where the quantity demanded and quantity supplied are equal

Is this statement true “Goods will tend to end up in the hands of those buyers and sellers who want them the most”

Yes

Quantity Demanded

The amount of a good a person is willing and able to buy at a particular price

Demand Curve

The curve that shows the relationship between the price of a good and the quantity demanded.

Law of Demand

There is a negative relationship between the price of a good and the quantity demanded

Ceteris Paribus

Holding all other variables constant (all else equal)

Quantity Supplied

The amount of a good a person is willing and able to sell at a particular price

Supply Curve

The curve that shows the relationship between the price of a good and the quantity supplied

Law of Supply

There is a positive relationship between the price and the quantity supplied

Market Clearing Quantity

The number of exchanges that take place at a market clearing price