Economics: Demand, Supply, and Market Equilibrium Concepts

What is consumer demand?

The quantity of a good or service consumers are willing and able to buy at different prices.

What is the Law of Demand?

As price increases, quantity demanded decreases, assuming other factors stay the same.

What is ceteris paribus?

A Latin term meaning all other factors remain unchanged.

What happens to quantity demanded when price increases?

Quantity demanded decreases.

What happens to quantity demanded when price decreases?

Quantity demanded increases.

What is a movement along the demand curve?

A change in quantity demanded caused by a change in the good's own price.

What is a substitute good?

A good that can be used instead of another good.

Give an example of substitute goods.

Butter and margarine.

What is a complementary good?

A good that is used together with another good.

Give an example of complementary goods.

Cars and petrol.

What is a flow-on effect?

A change that occurs because of an earlier change in the price of a good or service.

How can the price of one good cause a flow-on effect on another good?

A price change can change demand for related goods, such as substitutes or complements.

What factors can cause demand to shift?

Income, tastes and preferences, prices of related goods, population, expectations and government policies.

What happens to demand for a normal good when income increases?

Demand usually increases.

What is a necessity?

A good or service considered essential, such as basic food.

What is a luxury good?

A good or service that is not essential and is usually bought more when income increases.

What is a normal good?

A good for which demand increases as income increases.

What is an inferior good?

A good for which demand decreases as income increases because consumers switch to better-quality alternatives.

What is disposable income?

Income left over after income tax has been paid.

What are savings?

Money that is not spent and is kept for future use or investment.

What is producer supply?

The quantity of a good or service that producers are willing and able to sell at different prices.

What is the Law of Supply?

As price increases, quantity supplied increases, assuming other factors stay the same.

What happens to quantity supplied when price increases?

Quantity supplied increases.

What happens to quantity supplied when price decreases?

Quantity supplied decreases.

What is a movement along the supply curve?

A change in quantity supplied caused by a change in the good's own price.

What are related goods for a producer?

Goods or services that use similar resources to produce.

What are costs of production?

The expenses a producer must pay to produce a good or service.

What are examples of costs of production?

Raw materials, wages, rent, utilities and other operating costs.

What is productivity?

How efficiently resources are used to produce goods or services, often measured as output per unit of input.

What factors can cause supply to change?

Costs of production, productivity, technology, taxes, subsidies, weather and the number of producers.

What happens to supply when costs of production increase?

Supply decreases.

What happens to supply when productivity increases?

Supply increases.

What happens to supply when a subsidy is given to producers?

Supply usually increases because production costs are reduced.

What happens to supply when a tax on producers increases?

Supply usually decreases because production costs increase.

What is a market?

A place or system where buyers and sellers exchange goods and services.

What is market demand?

The total quantity demanded by all consumers at each price.

What is market supply?

The total quantity supplied by all producers at each price.

What is market equilibrium?

The point where quantity demanded equals quantity supplied.

What is the equilibrium price?

The price where quantity demanded equals quantity supplied.

What is a shortage?

A situation where quantity demanded is greater than quantity supplied.

What is a surplus?

A situation where quantity supplied is greater than quantity demanded.

What happens to price when there is a shortage?

Price tends to rise.

How is equilibrium restored after a shortage?

Higher prices reduce quantity demanded and increase quantity supplied until they become equal.

What happens to price when there is a surplus?

Price tends to fall.

How is equilibrium restored after a surplus?

Lower prices increase quantity demanded and reduce quantity supplied until they become equal.

What is a market period?

A very short period where producers have little or no time to change the quantity supplied.

What is the short run?

A period where some factors of production can be changed but others are fixed.

What is the long run?

A period long enough for all factors of production to be changed.

What is Price Elasticity of Demand (PED)?

A measure of how much quantity demanded responds to a change in price.

What is the formula for PED?

PED = percentage change in quantity demanded ÷ percentage change in price.

What does elastic demand mean?

Quantity demanded changes by a greater percentage than the change in price.

What is the PED value for elastic demand?

PED is greater than 1.

What does inelastic demand mean?

Quantity demanded changes by a smaller percentage than the change in price.

What is the PED value for inelastic demand?

PED is less than 1.

What does relatively elastic demand mean?

Quantity demanded responds strongly to a change in price.

What does relatively inelastic demand mean?

Quantity demanded responds weakly to a change in price.

What is revenue?

The total money a business earns from selling goods or services before costs are taken out.

What is the formula for revenue?

Revenue = price × quantity sold.

What are expenses?

The costs a business incurs to operate and produce goods or services.

What is profit?

The money a business has left after paying its expenses.

What is the formula for profit?

Profit = revenue − expenses.

What is profitability?

A business's ability to generate profit from its activities.

What are direct taxes?

Taxes paid directly to the government by an individual or organisation.

Give an example of a direct tax.

Income tax.

What are indirect taxes?

Taxes added to the price of goods or services and paid by consumers.

Give an example of an indirect tax.

GST.

What is income tax?

Money paid to the government from income earned.

What is a subsidy?

A payment from the government to producers to help reduce production costs.

What is the purpose of taxes?

Taxes raise government revenue to help pay for public goods and services and can influence behaviour.

What is a tax burden?

The economic cost of a tax that is ultimately paid by consumers and/or producers.

How does an indirect tax affect consumers?

It increases the price consumers pay for the good or service.

How does an indirect tax affect producers?

Producers may receive less money from each sale after the tax is paid.

How does elasticity of demand affect the tax burden?

The more inelastic demand is, the greater the share of the tax burden usually falls on consumers.

Who carries more of an indirect tax when demand is inelastic?

Consumers generally carry more of the tax burden.

Who carries more of an indirect tax when demand is elastic?

Producers generally carry more of the tax burden.

What happens to quantity demanded when demand is inelastic and price increases?

Quantity demanded changes by a relatively small amount.

What happens to quantity demanded when demand is elastic and price increases?

Quantity demanded changes by a relatively large amount.

Why are necessities often inelastic in demand?

Consumers still need them even when their prices increase.

Why are luxuries often more elastic in demand?

Consumers can more easily reduce or delay buying them when prices rise.

What happens to demand for substitutes when the price of another good increases?

Demand for the substitute usually increases.

What happens to demand for complements when the price of one good increases?

Demand for the complementary good usually decreases.

What happens to demand when consumer income increases for a normal good?

Demand increases.

What happens to demand when consumer income increases for an inferior good?

Demand decreases.

What happens to savings when disposable income increases?

Savings tend to increase.

What is quantity demanded?

The amount consumers are willing and able to buy at a particular price.

What is quantity supplied?

The amount producers are willing and able to sell at a particular price.