Microeconomics: Interdependence, Circular Flow, and Supply and Demand

Vocabulary flashcards covering core microeconomic concepts including economic interdependence, circular flow diagram components, roles of government and markets, and the laws of supply and demand.

Interdependence

The relationship in an economy where businesses need households to supply resources and demand their goods, while households need businesses to supply goods and services and demand their resources.

Circular Flow Diagram

A model economists use to show the relationships and interactions between economic actors in the resource and product markets.

Product Market

The market in which firms are sellers and households are buyers (e.g., Target, Publix).

Factor Market

Also known as the resource market; the market where households are sellers and firms are buyers (e.g., labor market, banks loaning money, land owner selling land).

Revenue

The total amount of income generated from sales.

Income

Money received from work or investments.

Expense

Money spent on goods and services.

Role of Government in the Circular Flow Diagram

Collects tax payments from households and businesses, provides welfare payments and public goods to households, and provides subsidies and public goods to businesses.

Market Economy

An economic system where consumers decide what to produce, firms decide how to produce, and the price system decides who will get the items produced.

Demand

The quantity of a good or service a consumer is willing and able to purchase at each price.

Law of Demand

An economic law stating that as the price of a good rises, the quantity of the good consumers are willing and able to buy will decrease, creating an inverse relationship between price and quantity demanded.

Quantity Demanded

The amount of a good, service, or resource buyers are willing and able to buy at one specific price (e.g., $200$ units demanded at a price of $\$1$).

Difference Between Law of Demand and Quantity Demanded

You do not need a graph for the law of demand, but you do need a graph for quantity demanded.

Supply

The quantity of a good, service, or resource a seller is willing and able to sell at each price.

Law of Supply

An economic law stating that as price rises, the quantity a seller is willing and able to sell will increase, creating a direct relationship between price and quantity supplied.

Quantity Supplied

The amount of a good, service, or resource sellers are willing and able to sell at one specific price (e.g., $100$ units supplied at a price of $\$1$).

Equilibrium Price

Also known as the market-clearing price; the price where supply and demand are equal, and quantity demanded by consumers equals quantity supplied by producers.