Exam Two Study Guide: Supply, Demand, and Elasticity

Vocabulary practice flashcards covering Market Forces of Supply and Demand and Elasticity and Its Applications for Exam Two review.

Perfectly Competitive Market

A market structure where there are many buyers and many sellers producing and selling identical goods, causing each participant to act as a price-taker.

Price-Taker

A buyer or seller in a competitive market who takes the market price as given, having no individual say over the market price.

Quantity Demanded

The amount of a good or service that buyers are willing and able to purchase given its price and the buyer's available income.

Law of Demand

The principle stating that the relationship between price and quantity demanded is negative; as price increases (ceteris paribus), quantity demanded decreases, and vice versa.

Demand Schedule

A table showing the relationship between price and quantity demanded.

Demand Curve

A graph showing the relationship between price and quantity demanded.

Market Demand

The total demand for all buyers of a good or service, calculated by summing the quantity demanded for each individual buyer at every potential price.

Normal Goods

Goods for which demand increases when income increases, and demand decreases when income decreases.

Inferior Goods

Goods for which demand decreases when income increases (ceteris paribus), and demand increases when income decreases (ceteris paribus).

Substitutes

Two goods for which an increase in the price of one good (ceteris paribus) leads to an increase in the demand for the other good.

Complements

Two goods for which an increase in the price of one good (ceteris paribus) leads to a decrease in the demand for the other good.

Equilibrium

The point of intersection between the supply curve and the demand curve in a market.

Equilibrium Price

The price at which quantity supplied equals quantity demanded, also known as the market clearing price.

Equilibrium Quantity

The quantity supplied and demanded at the equilibrium price.

Surplus

A situation where quantity supplied is greater than quantity demanded, occurring when the market price is above the equilibrium price.

Shortage

A situation where quantity demanded is greater than quantity supplied, occurring when the market price is below the equilibrium price.

Quantity Supplied

The amount of a good or service that sellers are willing and able to supply.

Law of Supply

The principle stating that the relationship between price and quantity supplied is positive; as price increases (ceteris paribus), quantity supplied increases.

Supply Schedule

A table showing the relationship between price and quantity supplied.

Supply Curve

A graph showing the relationship between price and quantity supplied.

Law of Supply and Demand

The principle stating that market prices will adjust until quantity supplied equals quantity demanded, rendering shortages and surpluses temporary when prices can fluctuate freely.

Elasticity

A measure of the responsiveness of demand or supply to a change in one of its determinants.

Price Elasticity of Demand

A measure of how much quantity demanded changes when the price of a good or service changes, calculated as percentage change in quantity demanded divided by percentage change in price.

Midpoint Method Formula

A method for calculating price elasticity of demand using average baseline values: $\text{Price Elasticity of Demand} = \frac{(Q_2 - Q_1) / [\frac{Q_2 + Q_1}{2}]}{(P_2 - P_1) / [\frac{P_2 + P_1}{2}]}$

Elastic Demand

Demand is elastic if quantity demanded responds substantially to a change in price, where the price elasticity of demand is greater than $1$ in absolute value.

Inelastic Demand

Demand is inelastic if quantity demanded responds only slightly to a change in price, where the price elasticity of demand is less than $1$ in absolute value.

Unit Elastic Demand

Demand is unit elastic if quantity demanded responds proportionally to the change in price, where the price elasticity of demand equals $1$ in absolute value.

Perfectly Inelastic Demand

Demand where quantity demanded stays constant regardless of price changes (price elasticity of demand equals $0$), represented by a vertical demand curve.

Perfectly Elastic Demand

Demand where any price increase causes quantity demanded to fall to zero (price elasticity of demand equals infinity), represented by a horizontal demand curve.

Price Elasticity of Supply

A measure of how much the quantity supplied of a good changes when its price changes, calculated as $\frac{\%\Delta Q_s}{\%\Delta P}$; it is always positive and is more elastic in the long run.

Total Revenue

The total amount received by sellers of a good, calculated as $TR = P \times Q$.

Income Elasticity of Demand

A measure of how much quantity demanded changes when consumer income changes, calculated as $\frac{\%\Delta Q_D}{\%\Delta I}$.

Cross-Price Elasticity of Demand

A measure of how much the quantity demanded of one good changes when the price of a different related good changes, calculated as $\frac{\%\Delta Q_{D2}}{\%\Delta P_1}$.