Supply and Demand

inverse relationship

the quantities that consumers will demand at each and every price, relationship between price and quantity

substitution effect

if the price goes up for a product, consumers buy less of that product and more of a substitute product

demand

the desire, ability, and willingness to buy a product in market

law of demand

consumers will buy more of a good when its price is lower, and less of a good when its price is higher

law of diminishing marginal utility

as you consume anything, the additional satisfaction that you will receive will start to decrease (the more you buy of any good the less satisfaction you get from each new unit consumed)

elastic

if consumers react heavily to a small price change

inelastic

if consumers only react slightly to a large price change

equilibrium

the point at which supply and demand intersect on a graph, shows the most desirable price points for both firms and consumers.

surplus

prices decrease, excess supply

shortage

prices rise, excess demand

price ceiling

a maximum legal price is set by the government

price floor

minimum legal price is set by government

supply

the amount of goods available

law of supply

states that the quantity supplied, or the amount offered for sale, caries directly with its price

subsidies

government payments used to protect an industry, they have the opposite effect of taxes (increasing supplies)

invisible hand

metaphor for the unseen forces that move the free market economy