ECON - Demand, Supply, and Market Dynamics, and Market Failure

This set of vocabulary flashcards covers the fundamental concepts of demand, supply, equilibrium, price elasticity, market systems, and market failure based on the Unit 2 lecture notes.

Markets

Where buyers and sellers interact.

Demand

The willingness and ability of consumers to buy a good or service at different prices over a period of time, consisting of both desire and ability to pay.

The Law of Demand

The inverse relationship where, when price increases, quantity demanded decreases, and when price decreases, quantity demanded increases.

Demand Curve

A graph that slopes downward from left to right showing the relationship between price on the vertical axis and quantity demanded on the horizontal axis.

Extension in demand

A movement along the demand curve that occurs when price falls, causing quantity demanded to increase.

Contraction in demand

A movement along the demand curve that occurs when price rises, causing quantity demanded to decrease.

Substitutes

Goods that can replace each other; if the price of one increases, the demand for the other increases.

Complements

Goods used together; if the price of one increases, the demand for both decreases.

Supply

The willingness and ability of producers to sell a good or service at different prices over time.

Law of Supply

The direct relationship where, when price increases, supply increases, and when price decreases, supply decreases.

Supply Curve

A graph that slopes upward from left to right.

Extension in supply

A movement along the supply curve that occurs when price rises, causing quantity supplied to increase.

Contraction in supply

A movement along the supply curve that occurs when price falls, causing quantity supplied to decrease.

Equilibrium

The point where quantity demanded equals quantity supplied, also known as the market clearing price.

Surplus

A market condition that happens when quantity supplied is greater than quantity demanded, often resulting in unsold goods and lower prices.

Shortage

A market condition that happens when quantity demanded is greater than quantity supplied, often resulting in goods running out and rising prices.

Price Mechanism

The method by which resources are allocated in a market economy through price signals, incentives, and rationing.

Rationing function

A function of the price mechanism where high prices reduce demand.

Signalling function

A function of the price mechanism where rising prices show scarcity.

Incentive function

A function of the price mechanism where high prices encourage firms to produce more.

Price Elasticity of Demand (PED)

A measure of how responsive quantity demanded is to a change in price.

PED Formula

$$PED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$

Elastic demand

A situation where $PED > 1$, meaning demand is very responsive to price changes; a small price change leads to a large change in demand.

Inelastic demand

A situation where $PED < 1$, meaning demand is not very responsive and price changes do not affect demand much.

Unit elastic

A situation where $PED = 1$, meaning the percentage change in price is equal to the percentage change in demand.

Total Revenue (TR)

$$\text{Total Revenue} = \text{Price} \times \text{Quantity}$$

Market economy

An economy where resources are allocated by price and private individuals rather than the government.

Market failure

An occurrence where resources are not allocated efficiently by the free market.

Externalities

Costs or benefits that affect third parties as a result of economic activities.

Positive externalities

Benefits to third parties, such as vaccinations or education, leading to under-consumption in a free market.

Negative externalities

Costs to third parties, such as pollution or smoking, leading to over-production in a free market.

Private cost

The cost of production to the producer.

Social cost

$$\text{Social cost} = \text{private cost} + \text{external cost}$$

Private benefit

The benefit of consumption to the consumer.

Social benefit

$$\text{Social benefit} = \text{private benefit} + \text{external benefit}$$

Subsidies

Government payments used to increase the consumption of beneficial goods like education.

Public goods

Goods provided by the government, such as roads, street lighting, and defence, because they are not efficiently provided by the market.

Microeconomics

The branch of economics that focuses on individual markets, firms, and consumers.

Macroeconomics

The branch of economics that focuses on the whole economy, including inflation, unemployment, and GDP.

Resource allocation

The process of distributing scarce resources to produce goods and services based on what to produce, how to produce, and for whom to produce.