Economics: Market Structures, Demand & Supply Key Concepts

Market

Any arrangement that brings together buyers and sellers to exchange goods or services through business transactions.

Competitive Market

A market with many buyers and sellers so no single participant can influence the price.

Money Price

The amount of money required to purchase a good or service.

Relative Price (Opportunity Cost)

The ratio of the money price of a good to the money price of the next best alternative good.

Demand

Means that a consumer wants the good or service, can afford it, and has made a definite plan to purchase it.

Quantity Demanded

The amount consumers plan to buy during a specific time period at a particular price.

Law of Demand

Ceteris paribus: Higher price → smaller quantity demanded; Lower price → larger quantity demanded.

Substitution Effect

When the relative price of a good increases, consumers substitute away to cheaper alternatives, reducing quantity demanded.

Income Effect

When the price rises relative to income, consumers feel poorer and buy less.

Demand Curve

Graph showing the relationship between price and quantity demanded, holding other factors constant.

Willingness to Pay

Measures the marginal benefit of the good to the consumer.

Change in Quantity Demanded

Movement along the demand curve due to a change in price.

Change in Demand

Shift of the entire demand curve due to changes in factors other than price.

Substitutes

Goods used in place of each other; an increase in price of substitutes increases demand.

Complements

Goods used together; a fall in price of complements increases demand.

Normal Goods

Demand increases as income rises.

Inferior Goods

Demand decreases as income rises.

Supply

A firm supplies a good or service if it has resources and technology to produce it, can profit from producing it, and has made definite plans to produce and sell it.

Quantity Supplied

The amount producers plan to sell during a given time period at a given price.

Law of Supply

Ceteris paribus: Higher price → greater quantity supplied; Lower price → smaller quantity supplied.

Supply Curve

Graph showing the relationship between price and quantity supplied with other factors held constant.

Change in Quantity Supplied

Movement along the supply curve caused by a change in price.

Change in Supply

Shift of the entire supply curve caused by factors other than price.

Equilibrium

A state in which opposing forces balance.

Market Equilibrium

Occurs when the quantity demanded equals the quantity supplied.

Equilibrium Price

The price at which quantity demanded equals quantity supplied.

Surplus

Occurs if price is above equilibrium (quantity supplied > quantity demanded).

Shortage

Occurs if price is below equilibrium (quantity demanded > quantity supplied).