Unit 3: Supply, Demand, and Perfect Competition

Vocabulary flashcards covering key microeconomics concepts from Unit 3, including supply and demand determinants, double shifts, related markets, shutdown criteria, and perfect competition characteristics.

Law of Demand

An economic principle stating that, all else being equal, as the price ($P$) of a good increases, the quantity demanded ($Q_D$) decreases, and as price decreases, quantity demanded increases.

Law of Supply

An economic principle stating that, all else being equal, as the price ($P$) of a good increases, the quantity supplied ($Q_S$) increases, and as price decreases, quantity supplied decreases.

GNITE (Supply Determinants)

A mnemonic for the non-price determinants that shift the supply curve: Government action, Number of firms, Input price change, Technology to produce, and Excise tax/subsidy.

IPACS (Demand Determinants)

A mnemonic for the non-price determinants that shift the demand curve: Income change, Population change, Attitudes & trends, Complement price change, and Substitute price change.

Change in Quantity Demanded ($Q_D$)

A movement along a stationary demand curve caused strictly by a change in the price of the good itself, rather than a shift of the demand curve.

Complements in Consumption

Goods typically consumed together, such that a decrease in the price of one good leads to an increase in the demand (and thus an increase in the equilibrium price and quantity) for the other good.

Substitutes in Consumption

Goods that can be used in place of each other, such that a decrease in the supply of one good (raising its price) causes an increase in the demand for the other good.

Double Shift (Demand Increase & Supply Decrease)

A simultaneous market shift where demand increases ($D \uparrow$) and supply decreases ($S \downarrow$), resulting in a definitive increase in equilibrium price ($P \uparrow$) while the change in equilibrium quantity ($Q$) is indeterminate.

Short-Run Shutdown Rule

The operating decision rule stating that a firm should cease production in the short run if the market price ($P$) is strictly less than average variable cost ($P < AVC$), or if its total loss exceeds its fixed cost ($\text{Total Loss} > FC$).

Loss Minimization Condition

The decision of a firm to continue producing in the short run despite incurring losses, which occurs when the market price exceeds average variable cost ($P > AVC$), meaning total loss is less than fixed cost ($\text{Total Loss} < FC$).

Price Taker

A firm in a perfectly competitive market that has no individual control over the market price and must sell all of its output at the equilibrium market price.

No Barriers to Entry or Exit

The key characteristic of a perfectly competitive industry that allows firms to enter freely when profits exist and exit freely when losses occur, ultimately causing firms to earn zero economic profits in the long run.

MR DARP

An acronym representing the horizontal demand curve faced by an individual perfectly competitive firm, signifying that Marginal Revenue ($MR$) equals Demand ($D$), Average Revenue ($AR$), and Price ($P$): $MR = D = AR = P$.

Profit-Maximizing Output ($Q_{\text{max}}$) Determination

$Q_3$, found at the output level where marginal revenue (Demand at price $P_3$) intersects the rising marginal cost curve ($MR = MC$).

Short-Run Supply Curve of a Perfectly Competitive Firm

The segment of the marginal cost ($MC$) curve that lies at and above the minimum average variable cost ($AVC$), represented by points $S$, $T$, and $V$ ($STV$).