Key Concepts in Demand and Market Economy

Price-allocation system

A system based on money, for determining production and consumption of goods based on services

Market Economy

Economic system that leaves production, consumption, and price decisions largely to consumers and business people

Consumer sovereignty

The belief that consumers are the main drivers for deciding what goods and services will be produced in that market

Law of Demand

An inverse relationship between the quantity demanded and the price of a product

Demand

Amount of a good or service consumers are willing to buy at different prices at a particular time

Substitution effect

As price increases, consumers will replace pricier items with less pricier alternatives

Income effect

Buying less or substituting a preferred item due to lower income

Quantity demanded

Quantity of goods or services a consumer demands at a specific price

Market demand

The total of all individual demands in a given market at a particular time

Demand schedule

Table showing quantities that would be demanded at a number of different prices

Demand curve

Visual aid of quantities of a good or service consumers are willing to buy at different prices

Market demand curve

Visual aid of the total of all individual demands in a given market at one time

Elasticity of demand

A measure of the impact of the price effect

Demand shifters

Factors other than price that change the demand for a product or service

Complementary goods

Products that are often used together

Greenwashing

Making a company look different from what is actually is

Diminishing marginal utility

When an additional unit of a product consumed is less satisfying than the one before it.

Elastic demand

Quantity is sensitive to a change in price (ex. when price goes up consumers will find alternatives)

Inelastic demand

Quantity is insensitive to a change in price (ex. when price goes up, consumers buying habits stay the same)

Perfectly inelastic

A straight line vertically

Perfectly elastic

A straight line horizontally