Economics: Supply, Demand, Costs, and Market Equilibrium

What is the law of demand

The law of demand says that when a good's price is lower, consumers will buy more of it.

What is the substitution effect

The substitution effect is when consumers react to an increase in a good's price by consuming less of that good and more of other goods. Ex: Great Value vs. Lays

What is a demand schedule

A demand schedule is a table that lists the quantity of a good a person will buy at each different price.

What is a demand curve

A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price.

What is a normal good

A good that consumers demand more of when their income increases

What is an inferior good

A good that consumers demand less of when their incomes increase

What is elastic demand

Describes demand that is very sensitive to a change in price

What is inelastic demand

Describes demand that is not very sensitive to a change in price

What is the law of supply

The higher the price the larger the quantity produced

What is a supply schedule

A chart that lists how much of a good all suppliers will offer at different prices

How do you graph supply

Mark the y-axis as price and the x-axis as output

What is the marginal product of labor

The change in output from hiring one additional unit of labor

What is increasing marginal returns

A level of production in which the marginal product of labor increases as the number of workers increases

What is decreasing marginal returns

A level of production in which the marginal product of labor decreases as the number of workers increases

What is a fixed cost

A cost that does not change, no matter how much of a good is produced

What is a variable cost

A cost that rises or falls depending on how much is produced

What is the total cost

Fixed costs + Variable costs

What is a marginal cost

The cost of producing one more unit of a good

What is marginal revenue

The additional income from selling one more unit of a good; sometimes equal to price

What changes supply

Production costs, taxes, regulation, subsidies, technology

What is a subsidy

A government payment that supports a business or market

What is an excise tax

A tax on the production or sale of a good

What is regulation

Government intervention in a market that affects the production of a good

What does a combined supply and demand curve look like

It looks like an X. Supply slope goes up and demand slope goes down the point where they meet is the equilibrium.

What happens at equilibrium

Quantity demanded and quantity supplied are equal

What is a price floor

A minimum price for a good or service

What is a price ceiling

A maximum price that can be legally charged for a good or service

What is a shortage

Situation in which quantity demanded is greater than quantity supplied; also known as excess demand

What is a surplus

Situation in which quantity supplied is greater than quantity demanded; also known as excess supply

Why do prices change

A change in supply (supply ^ price v supply v price ^) or demand (demand ^ price ^ demand v price v)

What do prices tell people

They communicate information and provide incentives to buyers and sellers who have high prices make buyers buy less and lower prices make buyers buy more

What is rationing

A system of allocating scarce goods and services using criteria other than price

What are spillover costs

Costs of production that affect people who have no control over how much of a good is produced

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