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Purchasing power
The ability of consumers to buy goods and services with their income, reflecting the value of money.
Complements
Goods that are consumed together, where the demand for one increases the demand for the other.
Substitutes
Goods that can replace each other; an increase in the price of one leads to an increase in the demand for the other.
Law of Demand
As the price of a good decreases, the quantity demanded increases, and vice versa.
Law of Supply
As the price of a good increases, the quantity supplied increases, and vice versa.
Elasticity of Demand
A measure of how much the quantity demanded of a good responds to a change in price.
Elasticity of Supply
A measure of how much the quantity supplied of a good responds to a change in price.
Cross Price Elasticity of Demand
The responsiveness of the quantity demanded for one good to a change in the price of another good.
Perfect Competition
A market structure characterized by a large number of small firms, identical products, and free entry and exit.
Monopolistic Competition
A market structure with many firms selling similar but not identical products, allowing for some price control.
Monopoly
A market structure characterized by a single seller who controls the entire market supply of a good or service.
Oligopoly
A market structure dominated by a few large firms, each of which has some control over the market price.
Accounting Profit
Total revenue minus explicit costs; measures the company's profitability.
Economic Profit
Total revenue minus total costs (explicit and implicit), indicating the true economic gain.
Normal Profit
The minimum profit necessary for a company to remain competitive in the market.
Economies of Scale
Cost advantages that firms experience as they increase their output.
Diseconomies of Scale
Increased per unit costs that companies face when they grow too large.
Short-run Equilibrium
A situation where the quantity supplied and quantity demanded are equal, but product or resource prices are fixed.
Long-run Equilibrium
A situation where all factors of production can be adjusted and firms earn normal profit.
Social Optimal Price/Quantity
The level of output where marginal social cost equals marginal social benefit, ensuring allocative efficiency.
Fair Return Price
The price that allows a firm to cover all its costs, including normal profit.
Least Cost Rule
The principle that firms minimize costs by choosing a combination of factors of production that produces a given output most efficiently.
Diminishing Marginal Returns
A decrease in the incremental output or benefit derived from an additional unit of input.
Derived Demand
The demand for a factor of production that derives from the demand for the goods and services that it helps produce.
Factor Market
The market where factors of production (labor, capital, land) are bought and sold.
Labor Demand
The quantity of labor that employers are willing and able to hire at different wage rates.
Labor Supply
The quantity of labor that workers are willing and able to offer at different wage rates.
Positive Consumption Externalities
Benefits to third parties not directly involved in a transaction that increase the overall welfare.
Negative Consumption Externalities
Costs imposed on third parties not directly involved in a transaction, reducing overall welfare.
Absolute Advantage
The ability of an individual or group to carry out a particular economic activity more efficiently than another.
Comparative Advantage
The ability of an individual or group to carry out a particular economic activity at a lower opportunity cost than another.
Per Unit Tax/Subsidy
A tax or subsidy applied to each unit sold or produced.
Lump Sum Tax/Subsidy
A fixed amount of tax or subsidy that does not change with the level of production or sales.
Production Possibilities Curve
A graph that shows the maximum feasible amounts of two goods that a business can produce, given available resources.
