Econ Topic 3: Supply and Demand

Demand

the desire to own something and the ability to pay for it

Law of Demand

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

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

the change in consumption that results when a price increase causes real income to decline

Demand Schedule

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

Market Demand Schedule

a table that lists the quantity of a good all consumers in a market will buy at each different price

Demand Curve

downward-sloping line that graphically shows the quantities demanded at each possible price

When prices decrease, quantity demanded

increases.

When prices increase, quantity demanded

decreases.

Non-Price Determinants of Demand

factors that can lead to a shift in the demand curve

Normal Goods

goods for which demand increases when income is higher and for which demand decreases when income is lower

Complements

two goods that are bought and used together

Substitutes

goods that are used in place of one another

If the price of Good A rises, demand for its substitute will

rise.

If the price of Good A rises, demand for its complement will

fall.

Elasticity of Demand

a measure of how consumers react to a change in price

Inelastic Demand

a situation in which an increase or a decrease in price will not significantly affect demand for the product

Elastic Demand

a situation in which consumer demand is sensitive to changes in price

Total Revenue

the amount of money a company receives by selling its goods

Supply

the amount of a good or service that is available

Law of Supply

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

Quantity Supplied

how much of a good or service a producer is willing and able to offer at a specific price

Supply Schedule

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

Market Supply Schedule

a chart that lists how much of a good all suppliers will offer at various prices

Supply Curve

a graph of the quantity supplied of a good at different prices

Elasticity of Supply

measures how firms will respond to changes in the price of a good or service

The determinant for elasticity of supply is

time.

Marginal Product of Labor

the change in output from hiring one more worker

Increasing Marginal Returns

a level of production in which the marginal product of labor increases as the number of workers increases

Diminishing Marginal Returns

a level of production in which the marginal product of labor decreases as the number of workers increases

Negative Marginal Return

when additional labor decreases overall output

Fixed Cost

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

Variable Costs

costs that rise or fall depending on the quantity produced

Total Cost

the sum of fixed costs and variable costs

Marginal Cost

the additional cost of producing one more unit

Marginal Revenue

the additional income from selling one more unit of a good

Average Cost

total cost divided by the quantity produced

Subsidy

a government payment that supports a business or market

Excise Tax

a tax on the production or sale of a good

Regulation

a government intervention in a market that affects the price, quantity, or quality of a good

Equilibrium

the point at which quantity demanded equals quantity supplied

Disequilibrium

when the quantity demanded does not equal the quantity supplied in a market

Shortage

when the quantity demanded exceeds the quantity supplied

Surplus

when the quantity supplied exceeds the quantity demanded

Price Ceiling

a maximum price; causes a shortage

Rent Control

a price ceiling placed on housing

Price Floor

a minimum price; causes a surplus

Minimum Wage

a price floor placed on labor

Inventory

the quantity of goods a firm has on hand

Search Costs

the financial and opportunity costs that consumers pay in seeking a good or service