1.2 how markets work - keywords

utility

the satisfaction gained from consuming a product

demand

the quantity of goods or services that will be bought over a period of time at any given price

demand or effective demand

when quantity demanded for a good increases because its price falls; it is shown by a movement down the demand curve

the law of diminishing marginal utility

the value or utility that individual consumers gain from the last product consumed falls the greater the number consumed; so the marginal utility of consuming the sixth product is lower than the second product consumed

price elasticity of demand

the proportionate response of changes in quantity demanded to a proportionate change in price; equation = change in quantity demanded (%) / change in price (%)

income elasticity of demand

a measure of the responsiveness of quantity demanded of a change in income; equation = percentage change in quantity demanded / percentage change in income

cross elasticity of demand

a measure of the responsiveness of quantity demanded of one good to a change in price of another good; equation = percentage change in quantity demanded of good x / percentage change in price of good y

supply

the quantity of goods that suppliers are willing to sell at any given price over a period of time

conditions of supply

factors other than price, such as income or the price of other goods, which lead to change in supply and are associated with shifts in the supply curve

joint supply

this is when increasing the supply of one good causes an increase or decrease in the supply of another good, e.g. producing more lamb will increase the supply of wool

price elasticity of supply

a measure of the responsiveness of quantity supplied to a change in price; equation = % change in quantity supplied / % change in price

short run

factors the period of time when at least one factor inputs to the production process can be varied

long run

factors the period of time when all factor inputs can be varied but the state of technology remains constant

equilibrium

a state of equality or balance between market demand and supply

equilibrium price

the price at which there is no tendency to change because planned (or desired or exante) purchases (i.e. demand) are equal to planned sales (i.e. supply)

rationing function

when changes in price lead to more or less being produced, so increasing or limiting the quantity demanded by buyers

incentive function

when changes in price encourage buyers and sellers to change the quantity they buy and sell

signalling function

when changes in price gives information to buyers and sellers which influence their decisions to buy and sell

consumer surplus

the difference between what the customer is willing to pay and what they actually pay, set by the price mechanism

producer surplus

factors the difference between the market price which firms receive and the price at which they are prepared to supply, set by the price mechanism

economic welfare

the total benefit society receives from an economic transaction; equation = area of producer surplus + area of consumer surplus

community surplus

producer surplus + consumer surplus

indirect taxes

charges placed on goods and services by the government and they increase production costs for producers; they are used by the government to raise revenue and also to reduce consumption of some products

ad valorem tax

tax levied as a percentage of the value of the good

specific or unit tax

tax levied on volume

incidence of tax

the tax burden on the taxpayer

subsidy

a grant given which lowers the price of a good, it is usually designed to encourage the production or consumption of a particular good or service