Supply, Demand, & Price

demand

the desire to own something and the ability to pay for it

Law of Demand

consumers will buy more of a good when its price is lower and less when its price is higher

substitution effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

income effect

the change in consumption resulting from a change in real income

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

market demand schedule

a table that lists the quantity of a good all consumers in a market will buy at each different price

Ceteris Paribus

all other things held constant

normal good

a good that consumers demand more of when their incomes increase

inferior good

a good that consumers demand less of when their incomes increase

Demographics

the characteristics of a population with respect to age, race, and gender.

complements, complementary goods

Goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa.

substitute goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

non-price determinants

factors that can cause demand for a good to change

elasticity of demand

a measure of how consumers respond to price changes

Inelastic

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

elastic

describes demand that is very sensitive to a change in price

total revenue

the total amount of money a firm receives by selling goods or services

supply

The quantity of something that producers have available for sale

Law of Supply

producers offer more of a good as its price increases and less as its price falls

quantity supplied

the amount a supplier is willing and able to supply at a certain price

supply schedule

a chart that lists how much of a good a supplier will offer at different prices

market supply schedule

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

elasticity of supply

a measure of the way quantity supplied reacts to a change in price

marginal product of labor

the change in output from hiring one additional unit of labor

increasing marginal returns

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

diminishing marginal returns

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

fixed costs

costs that remain constant as output changes

variable costs

costs that change as output changes

total cost

fixed costs plus variable costs

marginal cost

the cost of producing one more unit of a good

marginal revenue

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

operating costs

the cost of operating a facility, such as a store or factory

negative marginal returns

when the addition of a unit of labor actually reduces total output

subsidy

A government payment that supports a business or market

excise tax

Consumer tax on a specific kind of merchandise, such as tobacco.

regulation

the use of governmental authority to control or change some practice in the private sector

Equilibrium

balance

disequilbrium

a mismatch between quantity demanded and quantity supplied as the market seeks equilibrium; usually temporary, except when government intervenes to set the price

shortage

A situation in which quantity demanded is greater than quantity supplied

surplus

A situation in which quantity supplied is greater than quantity demanded

price ceiling

A legal maximum on the price at which a good can be sold

price floor

A legal minimum on the price at which a good can be sold

rent control

a price ceiling placed on rent

minimum wage

lowest legal wage that can be paid to most workers

inventory

the quantity of goods that a firm has on hand

search costs

the financial and opportunity costs consumers pay when searching for a good or service

supply shock

An unexpected event that causes the short-run aggregate supply curve to shift

Rationing

Restricting the amount of food and other goods people may buy during wartime to assure adequate supplies for the military

barter

Exchange goods without involving money.