Supply, market, demand

Supply

The quantity of a good or service that producers are willing and able to offer at various prices during a specific time period

Individual supply

The supply of one product from one firm at every price

Market supply

The sum of all individual supplies of a product at every price

Law of supply

A rule stating there is a direct (positive) relationship between the price of a good and the quantity supplied

Marginal returns

The additional output gained from adding one more unit of input to a production process

Law of diminishing marginal returns

A more units (like labor) are added to a fixed input (like land), the additional input per unit will decrease

Marginal cost

The cost of producing one additional unit of a good or service

Non-price determinant of supply

A factor other than price that affects supply and causes the entire curve to shift

Indirect tax

Imposed (force) on a good or service that increases production costs for firms

Subsidy

An amount of money granted by the government to a firm or industry to recuse costs and increase supply

Regulation

A rule that requires certain behavior of individuals or firms, usually increasing production costs

Joint supply

When two or more goods are derived (obtained) from the same product

Competitive supply

When the production of two goods use similar resources

Equilibrium

A state of balance where two opposing forces (supply and demand) are equally matched

Market equilibrium

The point where the supply curve crosses the demand curve

Equilibrium price (market-clearing price)

Where quantity demanded equals quantity supplied

Excess demand (shortage)

Where quantity demanded is greater than quantity supplied, usually because the price is below equilibrium

Excess supply (surplus)

Where quantity supplied is greater than quantity demanded, because the price is above equilibrium

Price mechanism

The system in a free market where changes in price determine how scarce resources are allocated

Signaling function

When shortages or surpluses send information to consumers and firms about the market’s state

Incentive function

When price changes motivate producers to change production levels to maximize profit or consumers to maximize utility

Rationing

The controlled distribution of scarce resources when demand exceeds supply

Elasticity

The responsiveness of one variable to a change in another variable

Price elasticity of demand (PED)

How much the quantity demanded changes in response to a change in the product’s own price (PED<1)

Price inelastic demand

Where the percentage change in quantity is less than the percentage change in price (PED>1)

Unitary elastic demand

When a change in price leads to a proportionally equal change in quantity (PED=1)

Consumer surplus

Difference between the highest price producers are willing to pay and the actual price they pay

Producer surplus

Difference between the lowest price producers are willing to accept and the actual price they receive

Social/Community surplus

The sum of consumer and producer surplus, representing the total benefit to society at equilibrium

Primary commodity

Raw materials or natural resources extracted or harvested without significant processing (oil, wheat, etc.)

Manufactured goods

Finished products created through processing raw materials using labor and machinery

Income elasticity of demand (YED)

A measure of responsiveness of quantity demanded to changed in consumers’ incomes

Normal good

A good where demand increases as income rises (positive)

Inferior good

A good where demand decreases as income rises (negative)

Engel curve

A diagram showing the relationship between income and quantity demanded

Sectoral change

The dynamic process where the relative size or an economy’s sectors changes as a percentage of total output during growth