2.1-2.5 Markets, Supply, and Demand Vocab

market

A market is any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange.

competitive market

A market composed of many buyers and sellers acting independently, none of whom has any ability to influence the price of the product.

demand

The demand of an individual consumer indicates the various quantities of a good (or service) the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.

law of demand

There is a negative relationship between the price of a good and quantity demanded over a particular time period, ceteris paribus: as the price of the good increases, quantity demanded falls; as the price falls, quantity demanded increases.

individual demand

The demand by a single consumer for a good or service.

market demand

The sum of all individual consumer demands.

non-price determinants of demand

The variables other than price that can influence demand; any change in a determinant causes a shift of the demand curve.

normal good

A good the demand for which varies positively (directly) with income.

inferior good

A good the demand for which varies negatively (inversely) with income.

substitute goods

Two goods that satisfy a similar need so consumers can substitute one for the other.

complementary goods

Two goods that are used together.

change in quantity demanded

A movement along the demand curve caused by a change in the good's own price.

change in demand

A shift of the demand curve caused by a change in a non-price determinant of demand.

law of diminishing marginal utility

A law stating that there is a positive relationship between additional units consumed and marginal utility: as each additional unit is consumed, marginal utility falls.

income effect

The effect of a price change on quantity demanded arising from the change in consumers' real income.

substitution effect

The effect of a price change on quantity demanded arising because consumers substitute toward relatively cheaper goods and away from relatively more expensive goods.

supply

The supply of an individual firm indicates the various quantities of a good (or service) a firm is willing and able to produce and supply to the market for sale at different possible prices during a particular time period, ceteris paribus.

law of supply

There is a positive relationship between the price of a good and quantity supplied over a particular time period, ceteris paribus: as the price increases, quantity supplied increases; as the price falls, quantity supplied falls.

individual supply

The supply by a single firm of a good or service.

market supply

The sum of all individual firm supplies.

non-price determinants of supply

The variables other than price that can influence supply; any change in a determinant causes a shift of the supply curve.

change in quantity supplied

A movement along the supply curve caused by a change in the good's own price.

change in supply

A shift of the supply curve caused by a change in a non-price determinant of supply.

diminishing marginal returns

A law stating that there is a positive relationship between additional units of a variable input and marginal product: as additional units of the variable input are added to fixed inputs, marginal product first increases but eventually decreases.

market equilibrium

The situation where market demand is equal to market supply, and there is no tendency for price to change.

equilibrium price

The price at which quantity demanded equals quantity supplied.

equilibrium quantity

The quantity bought and sold at the equilibrium price.

excess demand (shortage)

Occurs when the quantity demanded is greater than the quantity supplied.

excess supply (surplus)

Occurs when the quantity supplied is greater than the quantity demanded.

price mechanism

The process by which prices coordinate the decisions of consumers and producers and allocate resources.

resource allocation

The way scarce resources are distributed among competing uses.

signalling function

The function of prices that provides information to consumers and producers.

incentive function

The function of prices that creates incentives for consumers and producers to change their behaviour.

rationing function

The function of prices that allocates scarce goods among consumers.

allocative efficiency

The condition where the economy produces the combination of goods and services most wanted by society.

marginal benefit

The extra or additional benefit received from consuming one more unit of a good.

consumer surplus

The difference between the highest price consumers are willing to pay and the market price they actually pay.

producer surplus

The difference between the market price producers receive and the minimum price they are willing to accept.

social surplus

The sum of consumer surplus and producer surplus.

maximum social welfare

The situation where social surplus is maximized; achieved where marginal benefit equals marginal cost (MB = MC).