PRC-03: Principles of Economics - Demand, Supply, and Market Equilibrium

Comprehensive vocabulary flashcards covering the economic foundations of demand, supply, market equilibrium, government price interventions, market classifications, and e-business based on the Chapter 2 lecture notes.

Needs

The basic requirements of a society — the essentials people cannot live well without, such as food, clothing, and shelter.

Wants

The desires of a society — things people would like to have beyond bare necessity, such as luxury units, heavy bikes, or chocolate.

Demand

The quantity of goods and services buyers are willing and able to buy, at different prices, in a given period of time.

Purchasing Power

The financial ability of a consumer to pay for a good or service.

The Demand Equation

The principle expressed as $\text{Demand} = \text{Want} + \text{Purchasing Power}$, stating that a want becomes economic demand only when backed by the ability and willingness to pay.

Law of Demand

The economic principle stating that, other things remaining the same (ceteris paribus), when the price of a product increases, its quantity demanded decreases; and when its price decreases, its quantity demanded increases ($Q_d = f(P)$).

Ceteris Paribus

A Latin expression meaning "other things remaining the same / constant."

Substitute Good (Competitive Good)

A good that satisfies the same need and is used in place of another good; an increase in the price of Good A leads to an increase in demand for Good B, giving a positive cross elasticity of demand.

Complementary Goods

Goods that are consumed together; an increase in the price of Good A causes a decrease in demand for Good B, giving a negative cross elasticity of demand.

Individual Demand

The demand for a good or service by a single consumer (household) in the market.

Market Demand

The collective demand of all consumers in the market for a particular good or service, determined by the horizontal sum of every individual buyer's demand.

Direct Demand

The demand for a final good meant for immediate consumer satisfaction (e.g., mobile phones, air conditioners, apples).

Derived Demand (Resource Demand)

The demand for capital goods or factors of production that arises because they are used to produce other goods and services.

Income Effect (of a Price Rise)

The economic phenomenon where a price increase lowers a consumer's purchasing power (real income), making them feel poorer and unable to buy as much of the good as before.

Substitution Effect (of a Price Rise)

The economic tendency where an increase in a product's price induces consumers to switch toward cheaper alternative (substitute) goods, reducing demand for the costlier good.

Diminishing Marginal Utility

The concept that each additional unit consumed provides less satisfaction than the previous unit, meaning consumers are only willing to buy more units at a lower price.

Giffen Goods

Rare inferior necessities with no close, affordable substitutes where a price increase leads to an increase in quantity demanded, creating a direct price–quantity relationship that breaks the Law of Demand.

Change in Quantity Demanded

A movement along a single demand curve (extension or contraction) caused solely by a change in the good's own price, ceteris paribus.

Extension in Demand Curve

A downward movement along the demand curve that occurs when a fall in price leads to an increase in quantity demanded.

Contraction in Demand Curve

An upward movement along the demand curve that occurs when a rise in price leads to a decrease in quantity demanded.

Change in Demand

A shift of the entire demand curve (rightward rise or leftward fall) caused by non-price (exogenous) factors such as income, tastes, weather, or population.

Supply

The quantity of goods and services that sellers are willing and able to sell at different prices, in a given period of time.

Stock

The total quantity of a good held by a seller (such as in warehouses and the market), representing all output whether currently offered for sale or not.

Law of Supply

The economic rule stating that if the price of a product increases, its quantity supplied increases; and if its price decreases, its quantity supplied decreases ($Q_s = f(P)$), ceteris paribus.

Extension in Supply

An upward movement along the supply curve that occurs when the product's own price rises, causing quantity supplied to increase.

Contraction in Supply

A downward movement along the supply curve that occurs when the product's own price falls, causing quantity supplied to decrease.

Change in Supply

A shift of the entire supply curve (rightward increase or leftward decrease) resulting from non-price factors such as resource costs, technology, taxes, subsidies, or number of sellers.

Reservation Price

The minimum price acceptable to a producer below which they refuse to sell their product, representing the floor price that makes production worthwhile.

Market

Any arrangement that brings buyers and sellers together to exchange goods, services, or resources and, in doing so, determine a price.

Local Market

A market serving a small, well-defined geographic area (such as a town, city, or neighborhood) where buyers and sellers typically meet face-to-face.

Regional Market

A market spanning a wider geographic area than a local market—often several districts or an entire province—usually centered around a specialized industry or produce.

National Market

A market operating across an entire country, typically characterized by standardized products, uniform pricing, and nationwide distribution networks.

International Market

A market involving the exchange of goods and services across national borders through exports and imports.

Online / Virtual Market

A market operating through digital platforms without a physical location, connecting buyers and sellers over the internet.

Goods Market

A market where tangible finished products and consumer goods—from groceries to manufactured goods—are bought and sold.

Factors / Resource Market

A market where the inputs of production—specifically land, labour, and capital—are bought and sold.

Financial Market

A market where money, currencies, and financial instruments such as stocks and bonds are traded between savers and borrowers.

Market Equilibrium

The market state where quantity demanded equals quantity supplied ($Q_D = Q_S$), establishing a market-clearing equilibrium price and quantity.

Market Disequilibrium

Any market situation where quantity demanded does not equal quantity supplied ($Q_D \neq Q_S$), resulting in either a surplus or a shortage.

Shortage

A disequilibrium condition where quantity demanded exceeds quantity supplied ($Q_D > Q_S$), creating upward pressure on market price.

Surplus

A disequilibrium condition where quantity supplied exceeds quantity demanded ($Q_S > Q_D$), creating downward pressure on market price.

Minimum Price (Price Floor)

A regulated price set by the government above the equilibrium price to protect producers by guaranteeing a minimum return, which typically creates a surplus.

Maximum Price (Price Ceiling)

A regulated price set by the government below the equilibrium price to protect consumers by keeping essential goods affordable, which typically creates a shortage.

Perishable Goods

Goods with a short lifespan that cannot be stored long and must be sold quickly, exhibiting a nearly vertical (perfectly inelastic) supply in the short run.

Durable Goods

Goods that have a long lifespan, can be stored, and typically carry higher prices, featuring an upward-sloping supply curve that becomes vertical once stock is exhausted.

E-Business

The process of buying and selling goods and services, or exchanging information regarding business activities, through digitalized systems including the internet.