Topic 2: Price Mechanism and Its Applications (Part 1)

Vocabulary flashcards covering core concepts of demand, supply, market equilibrium, disequilibrium, surpluses, and functions of the price mechanism based on the lecture notes.

Price Mechanism

A system in a market economy where changes in equilibrium price resulting from changes in demand and supply cause resources to move in and out of industries.

Command Economy

An economic system in which decisions regarding economic allocation are made solely by the government.

Free Market Economy

An economic system in which economic decisions are made solely by individuals and firms without government intervention.

Mixed Economy

An economic system that combines elements of both market and command economies, featuring state ownership and intervention alongside operating market forces.

Market

An arrangement or venue that occurs wherever and whenever buyers and sellers interact.

Effective Demand

The quantity of a good or service which consumers are willing and able to buy at different price levels, over a specific time period, ceteris paribus.

Law of Demand

The rule stating that there is an inverse relationship between the price and the quantity demanded of a good or service, during a specific period of time, ceteris paribus.

Total Utility (TU)

The total satisfaction a person gains from consuming all units of a good.

Marginal Utility (MU)

The additional satisfaction gained from consuming one extra unit of a good.

Law of Diminishing Marginal Utility

The principle stating that as a person consumes more of a product, the additional utility gained from one more unit diminishes.

Substitutes

Goods in competitive demand that can satisfy the same wants and are considered by consumers to be alternatives to each other.

Complements

Goods in joint demand that are consumed together in order to derive satisfaction.

Normal Good

A good which consumers buy more of when their income rises and less of when their income falls.

Inferior Good

A good which consumers buy less of when their income rises and more of when their income falls.

Effective Supply

The quantity of a good or service which sellers are willing and able to offer for sale at different price levels, over a specific time period, ceteris paribus.

Law of Supply

The rule stating that there is a direct relationship between the price and the quantity supplied of a good or service, during a specific period of time, ceteris paribus.

Marginal Cost (MC)

The additional cost of producing one more unit of a good.

Marginal Revenue (MR)

The additional revenue received from selling one more unit of a good.

Goods in Joint Supply

Goods where the production of more of one good automatically leads to the production of more of another good.

Goods in Competitive Supply

Goods where the production of more of one good leads to a diversion of resources away from producing another good.

Market Equilibrium

A situation where quantity demanded equals quantity supplied ($Q_{dd} = Q_{ss}$), leading to no tendency for price or quantity to change.

Market Disequilibrium

A state of the market that exists when quantity demanded and quantity supplied do not balance out, creating a pressure for price to change.

Surplus

A condition of market disequilibrium in which quantity supplied exceeds quantity demanded ($Q_{ss} > Q_{dd}$).

Shortage

A condition of market disequilibrium in which quantity demanded exceeds quantity supplied ($Q_{dd} > Q_{ss}$).

Consumer Surplus

The difference between the maximum price a consumer is willing and able to pay for a good and the price that he or she actually pays.

Producer Surplus

The difference between the minimum price a producer is willing and able to sell a good at and the price that he or she actually receives.

Signalling Function of Price

The price function wherein price changes communicate information to producers and consumers regarding changes in market conditions.

Incentive Function of Price

The price function wherein price changes motivate producers to reallocate scarce resources or consumers to adjust consumption.

Rationing Function of Price

The price function wherein price changes distribute scarce goods and resources to buyers who demonstrate the greatest willingness and ability to pay.

Derived Demand

Demand for a factor of production (such as labour) that is derived from the demand for the final product it creates.