supply and demand

Demand

The willingness and ability of buyers to purchase different quantities of a good, at different prices, during a specific time period.

Quantity Demanded

The number of units of a good purchased at a specific price.

The Law of Demand

States that when the price goes up, the quantity demanded goes down, and when the price goes down, the quantity demanded goes up.

Substitution Effect

Occurs when consumers buy less of a product and more of another substitute product when the price of the first product increases.

Income Effect

Refers to the change in quantity demanded due to a change in consumers' purchasing power when the price of a product changes.

Law of Diminishing Marginal Utility

As you consume more of a good, the additional satisfaction from each new unit consumed decreases.

Demand Curve

A graphical representation of a demand schedule that is usually downward sloping, showing the inverse relationship between price and quantity demanded.

Ceteris Paribus

A Latin phrase meaning 'all other things held constant,' used in economics to analyze the effect of one variable while keeping others unchanged.

Change in Demand vs Change in Quantity Demanded

A shift in demand means more people are willing to buy a good at the same price, while a change in quantity demanded occurs with a price change along the demand curve.

Determinates of Demand

Factors that can cause a shift in the demand curve, including tastes and preferences, price of related goods, income, population, and expectations of future prices.

Substitutes

Goods used in place of one another; if the price of one increases, the demand for the other will increase.

Complements

Two goods that are bought and used together; if the price of one decreases, the demand for the other will increase.

Normal Goods

Goods for which demand increases when income increases and decreases when income falls.

Inferior Goods

Goods for which demand increases as income falls and decreases when income increases.

Price Elasticity of Demand

A measurement of consumers' responsiveness to a change in price.

Elastic Demand

Demand that is sensitive to changes in price, leading to a significant change in quantity demanded.

Inelastic Demand

Demand that is insensitive to a change in price, leading to a minor change in quantity demanded.

Unit Elastic Demand

Demand where the percentage change in quantity demanded is equal to the percentage change in price.

Elasticity Coefficient Greater than 1

Indicates elastic demand where quantity demanded is sensitive to price changes.

Elasticity Coefficient Less than 1

Indicates inelastic demand where quantity demanded is not sensitive to price changes.

Elasticity Coefficient Equal to 1

Indicates unit elastic demand where quantity demanded changes proportionately with price changes.

Factors Affecting Elasticity of Demand

Include the number of substitutes, whether goods are luxuries or necessities, percentage of income spent, and time available to respond to price changes.

Total Revenue (TR) and Elasticity

When demand is elastic, total revenue decreases as price increases; when demand is inelastic, total revenue increases as price increases.

Relationship Between Price Changes and Total Revenue

Elastic demand and a price increase lead to a decrease in total revenue; inelastic demand and a price increase lead to an increase in total revenue.

General Characteristics of Inelastic Goods

Few substitutes, necessities, small portion of income, required now rather than later.

General Characteristics of Elastic Goods

Many substitutes, luxuries, large portion of income, plenty of time to decide.

Demand Curve Shifts

Shifts occur when external factors change, affecting demand irrespective of price.

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded.

Marginal Utility

The additional satisfaction or utility gained from consuming one more unit of a good.

Responsive Consumers

Consumers who adjust their purchasing behaviors significantly in response to price changes.

Market Demand Curve

The sum of all individual demand curves for a good, representing the total demand in the market.