Economics Microeconomics Glossary: Demand, Supply and Elasticities

Positive Statement

A statement of fact that can be scientifically tested to see if it is true or false.

Normative Statement

A statement that includes a value judgement and therefore cannot be refuted just by looking at evidence.

The Fundamental Economic Problem

The problem of scarcity, which arises because resources are limited while people's wants are unlimited.

Command or Planned Economy

An economic system where resources are allocated by the government through planning.

Free Market Economy

An economic system where resources are allocated through free markets by the price mechanism.

Mixed Economy

An economic system that combines elements of both free markets and government intervention, for example the UK economy.

Factors of Production

Inputs used in the production of goods and services, such as land, labour, capital and entrepreneurship.

Land

Natural resources used in the production of goods and services, e.g. wood.

Labour

The human effort, both physical and mental, used in the production process, including the skills, abilities and time contributed by workers.

Capital

Man-made goods used to produce other goods and services, e.g. machinery, tools, and buildings.

Entrepreneurship

The ability and willingness to take a financial risk and combine the other factors of production to produce goods or services.

Opportunity Cost

The benefit of the next best alternative foregone when a choice is made.

Productive Efficiency

Achieving the maximum output from available resources.

Allocative Efficiency

A situation where resources are allocated in the way that maximises social welfare.

Market Demand

The total quantity of a good/service that consumers are willing and able to buy at a given price.

The Law of Demand

As the price of a good decreases, the quantity demanded increases, and vice versa.

Utility

The satisfaction or economic welfare derived from consuming a good/service.

Marginal Utility

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

The Law of Diminishing Marginal Utility

As consumption increases, the additional satisfaction gained from each additional unit decreases.

Demand Conditions

Factors other than price that affect consumer demand for a good/service, leading to shifts of the demand curve.

Increase in Demand

A rightward shift of the demand curve, indicating consumers are willing and able to buy more at any given price.

Decrease in Demand

A leftward shift of the demand curve, indicating consumers want less at each price.

Substitutes or substitute goods

Goods which can be used for the same purpose as each other, and therefore can replace the other.

Complements or complementary goods

Goods which tend to be bought or used together, so that they experience joint demand.

Normal good

A good for which demand increases as consumer incomes rise, and vice versa.

Inferior good

A good for which demand decreases as consumer incomes rise, and vice versa.

Market supply

The total quantity of a good/service that producers are willing and able to sell at a given price.

Profit

The financial gain made after total costs are subtracted from total sales revenue.

Total Revenue

The total income generated from selling goods or services.

Increase in Supply

A rightward shift of the supply curve, indicating producers are willing to sell more at any given price.

Decrease in Supply

A leftward shift of the supply curve, indicating producers are willing to sell less at any given price.

Excess Supply

A disequilibrium in which quantity supplied is greater than the quantity demanded.

Excess Demand

A disequilibrium in which quantity demanded is greater than quantity supplied.

Equilibrium

The point at which quantity demanded equals quantity supplied.