CAIE AS Level Economics – Demand, Supply & Elasticities Vocabulary

Vocabulary flashcards summarising key economic terms from CAIE AS Level: demand, supply, elasticities, surpluses and the price mechanism.

Effective Demand

The quantity of a good or service a consumer is willing and able to buy at different prices over a period of time.

Individual Demand

The relationship between one consumer’s quantity demanded and the price of a product.

Market Demand

Total quantity demanded for a product at each price, found by summing all individual demands.

Law of Demand

For most goods, quantity demanded varies inversely with price, ceteris paribus.

Demand Curve

Graph showing the inverse relationship between price and quantity demanded over time.

Movement Along Demand Curve

A contraction or extension in demand caused solely by a change in the good’s own price.

Shift in Demand Curve

A whole-curve movement caused by changes in non-price determinants of demand.

Individual Supply

The relationship between one producer’s quantity supplied and the product’s price.

Market Supply

Total quantity supplied by all producers at each price, obtained by horizontal summation.

Law of Supply

For most goods, quantity supplied varies directly with price, ceteris paribus.

Supply Curve

Graph showing the direct relationship between price and quantity supplied over time.

Movement Along Supply Curve

An expansion or contraction in supply caused only by the product’s own price change.

Shift in Supply Curve

Entire curve moves due to changes in conditions of supply other than price.

Normal Good

Good whose demand rises when consumer income rises (positive YED).

Inferior Good

Good whose demand rises when consumer income falls (negative YED).

Substitute Goods

Alternative products; a price rise in one increases demand for the other (positive XED).

Complementary Goods

Products consumed together; a price rise in one lowers demand for the other (negative XED).

Determinants of Demand

Income, prices of other goods, tastes & preferences, speculation, population factors, income distribution.

Determinants of Supply

Costs of production, resource availability, climate, technology, government regulation, taxes & subsidies.

Costs of Production

Expenses (wages, raw materials, etc.) that influence how much producers are willing to supply.

Resource Availability

Extent to which inputs are accessible; greater availability shifts supply right.

Technology (as Supply Factor)

Improvements that lower production costs and shift supply rightward.

Government Regulation

Rules protecting workers/consumers; heavy regulation usually lowers supply.

Indirect Tax

A levy on production or sale that raises costs and shifts supply left.

Subsidy

Government payment to producers that lowers costs and shifts supply right.

Price Elasticity of Demand (PED)

Measure of responsiveness of quantity demanded to a price change; (%ΔQd)/(%ΔP).

Price Elastic Demand

PED > 1; quantity demanded changes by a larger percentage than price.

Price Inelastic Demand

PED < 1; quantity demanded responds proportionally less than price.

Unitary Elastic Demand

PED = 1; percentage change in quantity equals percentage change in price.

Perfectly Inelastic Demand

PED = 0; quantity demanded does not change when price changes.

Perfectly Elastic Demand

PED = ∞; any small price rise drives demand to zero.

PED Influencing Factors

Necessity, substitutes, addictiveness, income share, durability, peak/off-peak demand.

Income Elasticity of Demand (YED)

Responsiveness of demand to income change; (%ΔQd)/(%ΔIncome).

Luxury Good

Good with YED > 1; demand rises more than proportionally with income.

Cross Elasticity of Demand (XED)

Responsiveness of demand for good X to price change of good Y; (%ΔQx)/(%ΔPy).

XED Positive

Indicates substitutes; price rise of Y increases demand for X.

XED Negative

Indicates complements; price rise of Y decreases demand for X and X.

Price Elasticity of Supply (PES)

Responsiveness of quantity supplied to a price change; (%ΔQs)/(%ΔP).

Elastic Supply

PES > 1; firms can raise output quickly at low cost.

Inelastic Supply

PES < 1; output cannot change easily when price changes.

PES Influencing Factors

Time scale, spare capacity, stock levels, factor flexibility, barriers to entry.

Market Equilibrium

Price and quantity where quantity supplied equals quantity demanded (P* / Q*).

Surplus (Excess Supply)

Situation where supply exceeds demand at current price.

Shortage (Excess Demand)

Situation where demand exceeds supply at current price.

Consumer Surplus

Difference between the maximum price consumers are willing to pay and the market price paid.

Producer Surplus

Difference between the minimum price producers would accept and the market price received.

Economic Welfare

Total benefit to society; sum of consumer and producer surplus.

Price Mechanism

System where prices ration, signal and incentivise resource allocation (the ‘invisible hand’).

Rationing Function (of Price)

Price rises when goods are scarce, reducing quantity demanded.

Signalling Function (of Price)

Price changes communicate to producers and consumers where resources are needed.

Incentive Function (of Price)

Higher prices encourage producers to increase output and consumers to economise.

Joint Demand

Demand for complementary goods consumed together (e.g., cars and fuel).

Alternative Demand

Demand for substitute goods that satisfy the same need (e.g., tea vs coffee).

Derived Demand

Demand for a factor or related good resulting from demand for another product (e.g., microchips from PCs).

Joint Supply

Production of one good automatically produces another (e.g., lamb and wool).

Law of Diminishing Marginal Utility

Additional satisfaction gained from consuming extra units of a good declines as consumption increases.