Economics Chapters 4–7: Demand, Supply, Prices & Market Structures

Demand

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

Ceteris paribus

"All other things being equal." Economists use this assumption to focus on how one factor—such as price—affects demand.

Law of demand

When a good's price rises, quantity demanded usually falls; when its price falls, quantity demanded usually rises.

Substitution effect

When a good becomes more expensive compared with alternatives, consumers switch to substitutes.

Income effect

When a price changes, consumers' purchasing power changes. A lower price lets them buy more with the same income.

Demand schedule

A table showing how much consumers will buy at different prices. A demand curve graphs this relationship.

Elasticity of demand

How strongly quantity demanded responds to a change in price.

Elastic

Quantity changes by a relatively large amount. Examples: restaurant meals, brand-name clothing, or other goods with many substitutes.

Inelastic

Quantity changes by a relatively small amount. Examples: essential medicines, basic utilities, or goods with few substitutes.

Consumer expectations

If people expect prices to rise, they may buy more now. If they expect prices to fall, they may wait.

Advertising

Can increase demand by informing consumers or making a product seem more desirable.

Substitutes

Goods that can be used in place of one another, such as tea and coffee. If the price of one rises, demand for the other may rise.

Complements

Goods commonly used together, such as printers and ink. If the price of one rises, demand for the other may fall.

Inferior good

A good people tend to buy less of as their income rises, often switching to preferred alternatives.

Law of supply

As a good's price rises, producers generally offer more for sale; as its price falls, they offer less.

Supply market schedule

A table showing how much producers will sell at different prices. The supply curve graphs this relationship.

Supply elasticity

How strongly quantity supplied responds to a change in price. Supply is usually more elastic when producers can quickly increase production.

Increasing returns

Workers allow better specialization, so total output rises at an increasing rate.

Diminishing returns

With some resources fixed, each additional worker adds less output than the previous one, though total output may still rise.

Negative returns

Too many workers crowd the workspace or interfere with one another, causing total output to fall.

Advantages of prices

Prices communicate information, help guide buyers and sellers, encourage efficient use of resources, and help determine what gets produced and consumed.

Equilibrium

The price and quantity where quantity supplied equals quantity demanded.

Disequilibrium

A situation where quantity supplied and quantity demanded are unequal.

Shortage

Quantity demanded is greater than quantity supplied, often putting upward pressure on price.

Surplus

Quantity supplied is greater than quantity demanded, often putting downward pressure on price.

Price floor

A legal minimum price. If set above equilibrium, it can create a surplus. Example: a minimum wage.

Price ceiling

A legal maximum price. If set below equilibrium, it can create a shortage. Example: rent control.

Black market

Illegal or unofficial buying and selling, sometimes encouraged by shortages or restrictions.

Spillover costs

Costs of an economic activity imposed on people not directly involved, such as pollution affecting nearby residents.

Monopoly

A market with one main seller and no close substitutes. The firm has significant control over price, though demand and regulation still constrain it.

Natural monopoly

A monopoly that can serve a market at lower cost than multiple competing firms, often because of high infrastructure costs.

Government monopoly

A monopoly owned or authorized by the government, sometimes to provide a public service or control a specific activity.

Perfect competition

Characteristics include many buyers and sellers, nearly identical products, easy entry and exit, good information, and little control over market price.

Monopolistic competition

A market with many firms selling similar but differentiated products.

Start-up costs/barriers to entry

Costs or obstacles that make it difficult for a new firm to enter a market. High barriers can reduce competition.

Differentiation

Making a product seem distinct from competitors' products—for example through design, quality, location, service, or branding.

Oligopoly

A market dominated by a small number of large firms. Each firm's decisions can affect the others.

Cartel

A group of firms that coordinate to limit competition, often by controlling output or prices.

Collusion

Secret or explicit cooperation among firms to reduce competition.

Price war

When competing firms repeatedly cut prices to attract customers. This can reduce profits for all involved.

Price fixing

An agreement among competitors to set prices rather than compete. It is generally illegal.

Regulation

Government rules that shape how businesses operate, often to protect consumers, workers, competition, or the environment.

Antitrust laws

Laws designed to prevent monopolies, cartels, price fixing, and other practices that unfairly restrict competition.

Sherman Antitrust Act

A U.S. law passed in 1890 that prohibits certain agreements restraining trade and attempts to monopolize markets.