Economics: Principles of Supply, Demand, Elasticity, and Market Efficiency

Vocabulary flashcards covering key microeconomic definitions including market structures, demand and supply, elasticities, price controls, and surplus.

Market

A group of buyers and sellers of a good or service.

Competitive Market

A market where there are so many buyers and sellers that each has a negligible impact on the market price.

Price Takers

Buyers and sellers in a perfectly competitive market who must accept the market-determined price because no single participant can influence it.

Monopoly

A market with one seller who sets the price of goods.

Quantity Demanded

The amount of a good that buyers are willing and able to purchase at a given price.

Law of Demand

The claim that, ceteris paribus, the quantity demanded of a good falls when the price of the good rises.

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded.

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded.

Normal Good

A good for which an increase in income leads to an increase in demand.

Inferior Good

A good for which an increase in income leads to a decrease in demand because a superior alternative becomes affordable.

Substitutes

Two goods for which an increase in the price of one leads to an increase in the demand for the other.

Complements

Two goods for which an increase in the price of one leads to a decrease in the demand for the other.

Quantity Supplied

The amount of a good that sellers are willing and able to sell at a given price.

Law of Supply

The claim that, ceteris paribus, the quantity supplied of a good rises when the price of the good rises.

Supply Schedule

A table that shows the relationship between the price of a good and the quantity supplied.

Supply Curve

A graph showing the relationship between the price of a good and the quantity supplied.

Equilibrium

A situation in which the market price reaches the level at which quantity supplied equals quantity demanded.

Equilibrium Price

The price that balances quantity supplied and quantity demanded.

Equilibrium Quantity

The quantity supplied and quantity demanded at the equilibrium price.

Surplus

A situation in which quantity supplied is greater than quantity demanded, also known as excess supply.

Shortage

A situation in which quantity demanded is greater than quantity supplied, also known as excess demand.

Law of Supply and Demand

The claim that the price of any good adjusts to bring the quantity supplied and quantity demanded of that good into balance.

Ceteris Paribus

A Latin phrase meaning 'all else equal', used to signal that all other independent variables are kept constant.

Comparative Statics

The analysis of tracing through the effect of a change in economic variables on market equilibrium.

Willingness to Pay

The maximum amount that a buyer will pay for a good.

Consumer Surplus

The amount a buyer is willing to pay minus the price paid, represented graphically as the area under the demand curve and above the market price.

Marginal Buyer

The buyer who would leave the market first if the price were to increase.

Cost

The value of everything a seller must give up to produce a good.

Producer Surplus

The amount a seller is paid for a good minus the cost of providing it, represented graphically as the area above the supply curve and below the price.

Total Surplus

The sum of consumer surplus and producer surplus ($\text{CS} + \text{PS}$), measuring the total net benefit created by all market trades.

Deadweight Loss

The reduction in total surplus that results when market quantity deviates from the competitive equilibrium quantity.

Efficiency

The property of resource allocation that maximizes total social surplus.

Equity

The property of distributing economic prosperity or surplus fairly among members of society.

Externalities

Costs or benefits that fall outside market supply and demand curves on third parties not directly involved in the transaction.

Elasticity

A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.

Price Elasticity of Demand

A measure of how much quantity demanded responds to a change in price, calculated as $\frac{\%\Delta Q_d}{\%\Delta P}$.

Midpoint Method

A method to calculate percentage changes using average initial and final values: $\frac{Q_2 - Q_1}{(Q_2 + Q_1)/2} \Big/ \frac{P_2 - P_1}{(P_2 + P_1)/2}$.

Total Revenue

The total amount paid by buyers and received by sellers of a good, calculated as $P \times Q_{\text{sold}}$.

Income Elasticity of Demand

A measure of how much quantity demanded responds to a change in consumer income, calculated as $\frac{\%\Delta Q_d}{\%\Delta \text{Income}}$.

Cross-Price Elasticity of Demand

A measure of how much quantity demanded of one good responds to a change in the price of another good, calculated as $\frac{\%\Delta Q_{d1}}{\%\Delta P_2}$.

Price Elasticity of Supply

A measure of how much quantity supplied responds to a change in price, calculated as $\frac{\%\Delta Q_s}{\%\Delta P}$.

Price Controls

Legal regulations preventing market prices from adjusting freely to equilibrium.

Price Ceiling

A legal maximum on the price at which a good can be sold.

Price Floor

A legal minimum on the price at which a good can be sold.

Rent Control

A specific price ceiling set on apartment rents to maintain affordability for tenants.

Quota

A legal restriction on the maximum quantity of a good that can be bought or sold.

Zoning

Laws that restrict how densely land can be developed, placing limits on housing supply.

Tax Incidence

The manner in which the burden of a tax is shared among market participants.