Economics: Demand, Supply, and Market Equilibrium Concepts

Market

a group of buyers and sellers of a particular good or service

demand

the desire to own something and the ability to pay for it

demand schedule

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

elasticity formula

% change in quantity demanded / % change in price

Inelastic Demand

A situation in which an increase or a decrease in price will not significantly affect demand for the product

Demand Curve

a graph of the relationship between the price of a good and the quantity demanded

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

Diminishing Marginal Utility

Decreasing satisfaction or usefulness as additional units of a product are acquired

Income and Substitution Effect

as your income goes up the want for substitute goes down and vice versa

normal good

a good that consumers demand more of when their incomes increase

Inferior Good

a good that consumers demand less of when their incomes increase

Factors that Determine Demand

• Price of a related good (complement or substitute)

• Income of consumers

• Tastes of consumers

• Number of consumers

• Expectations of consumers

change in demand

a shift of the demand curve, which changes the quantity demanded at any given price

Change in Quantity Demanded

movement along the demand curve showing that a different quantity is purchased in response to a change in price

supply

The quantity of something that producers have available for sale

Supply Schedule

a table that shows the relationship between the price of a good and the quantity supplied

Supply Curve

a graph of the relationship between the price of a good and the quantity supplied

Law of Supply

Tendency of suppliers to offer more of a good at a higher price

Equilibrium Price and Quantity

The point at which the supply and demand curves meet

Surplus

A situation in which quantity supplied is greater than quantity demanded

Shortage

A situation in which quantity demanded is greater than quantity supplied

Factors that Determine Supply

• Price of inputs

• Production technology

• Number of producers

• Expectations of producers

change in supply

a shift of the supply curve, which changes the quantity supplied at any given price

Change in Quantity Supplied

the change in amount offered for sale in response to a change in price

Total Revenue Test

a method of measuring elasticity by comparing total revenues

Elastic Supply

Exists when a small change in price causes a major change in quantity supplied.

Inelastic Supply

exists when a change in a good's price has little impact on the quantity supplied

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer Surplus

the amount a seller is paid for a good minus the seller's cost of providing it

Deadweight Loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

Price Ceiling (binding and non-binding)

a legally established maximum price for a good or service

Price Floor/ Support (binding & non-binding)

is a government-imposed legal minimum limit on how low a price can be charged for a good, service, or resource.

Tax Incidence

the manner in which the burden of a tax is shared among participants in a market

Subsidies

a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.

Quotas

In reference to migration, laws that place maximum limits on the number of people who can immigrate to a country each year.

Tariffs

Taxes on imported goods

Per-unit tax

a tax of a specific amount on each unit of a product sold