Econ Unit 3 - Supply and Demand

Law of Demand

Consumers buy more of a good when its price decreases and less when its price increases

Demand curve

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

Inferior goods

A good that consumers demand less of when their incomes increase

Normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

Substitutes

Goods used in place of one another

Compliments

Goods that usually go together. Use of one increases use of another.

Law of supply

The principle that suppliers will normally offer more for sale at higher prices and less at lower prices

Subsidies

Money from the government to support your product.

Input costs

The price of the resources used to make products

Fixed cost

A cost that does not change, no matter how much of a good is produced

Variable cost

A cost that rises or falls depending on how much is produced

Marginal product of labor

The change in output from hiring one additional unit of labor

Increasing marginal returns

When adding another worker increases production.

Decreasing marginal returns

As you hire more workers, you start to get less and less benefit from each new worker hired.

Equilibrium

The point where quantity demanded equals quantity supplied. It is the point on the graph where the demand curve crosses the supply curve.

Equilibrium price

The price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy

Shortage (aka excess demand)

When quantity demanded is more than quantity supplied. Often a result of too low a price.

Surplus (aka excess supply)

When quantity supplied is more than quantity demanded. Often a result of too high a price.

Shortage

Excess demand

Surplus

Excess supply

Price floor

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

Price ceiling

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

Minimum wage

The lowest legal wage that can be paid to most workers

Rent control

A government set price ceiling on rent

Elasticity of demand

A measure of how consumers react to a change in price

Inelastic

Describes demand that is not very sensitive to a change in price

Elastic

Describes demand that is very sensitive to a change in price

Substitution Effect

When consumers react to an increase in a good's price by consuming less of that good and more of other goods

Income effect

Limited income causes consumers to buy less of a product as the price rises. This is one reason for the law of demand.

Supply curve

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

Demand schedule

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

Supply schedule

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

Supply shifter

Is a variable that can change the quantity of a good or service supplied at each price.

Demand shifter

Is a variable that can change the quantity of a good or service demanded at each price.

Marginal utility

The extra usefulness gained from using one more unit of a product.

Diminishing marginal utility

You get less satisfaction from a product as each additional unit of a product is acquired.

Utility

Ability or capacity of a good or service to be useful and give satisfaction to someone.

Change in demand

A change in the quantity demanded of a good or service at every price; a shift of the demand curve to the left or right

Change in quantity demanded

A movement along the demand curve that occurs in response to a change in price

Change in supply

A change in the quantity supplied of a good or service at every price; a shift of the supply curve to the left or right.

Change in quantity supplied

A movement along the supply curve that occurs in response to a change in price.