Demand, Supply, Market Equilibrium, and Elasticity

Vocabulary flashcards covering core economics concepts from the lecture, including the Law of Demand, Law of Supply, Market Equilibrium and Disequilibrium, PED, YED, XED, and PES.

Law of Demand

An economic principle stating that if price increases, quantity demanded decreases (contraction of demand), and if price decreases, quantity demanded increases (extension of demand), ceteris paribus.

Contraction of Demand

A decrease in quantity demanded that occurs when price increases, represented by a movement upward along the demand curve.

Extension of Demand

An increase in quantity demanded that occurs when price decreases, represented by a movement downward along the demand curve.

Substitute Goods

Products that can be used in place of each other (such as Tea and Coffee); an increase in the price of one leads to an increase in demand for the other.

Complementary Goods

Products that are used together (such as Car and Petrol); an increase in the price of one leads to a decrease in demand for the other.

Normal Good

A good for which demand increases when consumer income increases, demonstrating a positive relationship.

Inferior Good

A good for which demand decreases when consumer income increases, demonstrating a negative relationship (examples include bajaj, hawker food, and used clothes).

Market Equilibrium

A state of balance that exists when quantity supplied equals quantity demanded at an equilibrium price $P_0$ and equilibrium quantity $Q_0$.

Market Disequilibrium

A market state where quantity supplied and quantity demanded are not equal at the current price.

Excess Supply (Surplus)

The market condition that exists when quantity supplied exceeds quantity demanded at the current price, causing price to fall until equilibrium is restored.

Excess Demand (Shortage)

The market condition that exists when quantity demanded exceeds quantity supplied at the current price, causing price to rise until equilibrium is restored.

Market Clearing

The outcome achieved when the market moves back to equilibrium position where quantity demanded equals quantity supplied.

Law of Supply

An economic principle stating a positive relationship where if price goes up, quantity supplied goes up (extension of supply), and if price goes down, quantity supplied goes down (contraction of supply), ceteris paribus.

Extension of Supply

An increase in quantity supplied caused by an increase in price, resulting in a movement along the supply curve.

Contraction of Supply

A decrease in quantity supplied caused by a decrease in price, resulting in a movement along the supply curve.

Price Elasticity of Demand (PED)

A numerical measure of the responsiveness of quantity demanded to a change in the price of a product, calculated as $\text{PED} = \frac{\text{\% change in Quantity demanded}}{\text{\% change in Price}}$.

Elastic PED

A state where the percentage change in quantity demanded is greater than the percentage change in price ($\text{PED} > 1$).

Inelastic PED

A state where the percentage change in quantity demanded is less than the percentage change in price ($\text{PED} < 1$).

Unitary Elastic Demand

A state where the percentage change in quantity demanded is equal to the percentage change in price ($\text{PED} = 1$).

Perfectly Elastic Demand

A state where all that is produced is sold at a given price, represented by a horizontal demand curve ($\text{PED} = \infty$).

Perfectly Inelastic Demand

A state where a change in price has no effect on the quantity demanded, represented by a vertical demand curve ($\text{PED} = 0$).

Income Elasticity of Demand (YED)

A numerical measure of the responsiveness of quantity demanded following a change in income, calculated as $\text{YED} = \frac{\text{\% change in QUANTITY demanded}}{\text{\% change in INCOME}}$.

Necessity Good

A type of normal good for which quantity demanded is unlikely to change significantly when income changes, having a positive YED close to $0$.

Luxury Good

A normal good with a positive YED greater than $1$ ($\text{YED} > 1$), where an increase in income leads to a larger proportional increase in quantity demanded.

Cross Elasticity of Demand (XED)

A numerical measure of the responsiveness of demand for one product following a change in the price of another related product, calculated as $\text{XED} = \frac{\text{\% change in QUANTITY of A}}{\text{\% change in PRICE of B}}$.

Price Elasticity of Supply (PES)

A numerical measure of the responsiveness of quantity supplied to a change in the price of a product, calculated as $\text{PES} = \frac{\text{\% change in quantity supplied}}{\text{\% change in price}}$.

Elastic PES

A state where the percentage change in quantity supplied is greater than the percentage change in price ($\text{PES} > 1$).

Inelastic PES

A state where the percentage change in quantity supplied is less than the percentage change in price ($\text{PES} < 1$).

Unitary Elastic Supply

A state where the percentage change in quantity supplied equals the percentage change in price ($\text{PES} = 1$), represented by a straight supply curve passing through the origin.

Perfectly Inelastic Supply

A state where quantity supplied remains unchanged regardless of price ($\text{PES} = 0$), represented by a vertical supply curve.

Perfectly Elastic Supply

A state where firms are unwilling to supply at any price below a specific level but will supply as much as possible at or above that price ($\text{PES} = \infty$), represented by a horizontal supply curve.

Spare Capacity

The ability of a business or industry to produce more of a product than it is currently producing.

Production Lag

The interval or lapse of time delay needed to produce a good, where longer delays make supply price inelastic and shorter delays make supply price elastic.

Substitutability of Factors of Production

The mobility and ease with which Factors of Production (FOP) can be switched between alternative uses to respond to changes in market conditions.