Introduction to Microeconomics

Supply

The combined amount of a good that all producers in a market are willing to sell

Demand

The combined amount of a good that all consumers are willing to buy

Substitute

a good that can be used in place of another good

Complement

A good that is purchased and used in combination with another good

Demand curve

The relationship between the quantity of a good that consumers demand and the good’s price, holding all other factors constant

Change in quantity demanded

A movement along the de- mand curve that occurs as a result of a change in the good’s price.

Change in demand

A shift of the entire demand curve caused by a change in a determinant of demand other than the good’s own price

Supply curve

The relationship between the quantity supplied of a good and the good’s price, holding all other factors constant

Market Equilibrium

The point at which the quantity demanded by consumers exactly equals the quantity supplied by producers

Surplus

The amount by which quantity supplied exceeds quantity demanded when market price is higher than the equilibrium price

Shortage

The amount by which quantity demanded exceeds quantity supplied when market price is lower than the equilibrium price

Opportunity cost

The potential benefit that is sacrificed when one option is chosen over another

Inferior good

a good whose demand drops when people’s income rises

Consumer surplus

The difference between the amount consumers would be willing to pay for a good or service and the amount they actually have to pay

Producer Surplus

The difference between the price a producer is willing to accept for a good and the price that is actually received

Perfect substitute

A good that a consumer can trade for another good, in fixed units, and receive the same level of utility

Perfect complement

A good whose utility level depends on its being used in a fixed proportion with another good

Subsidy

a payment made to a firm or individual, made by the government for the purpose of increasing the purchase or supply of a specific good

Ceteris parabus

With other conditions remaining the same

Normal good

A good where demand goes up when income goes up

Marginal willingness to pay

The additional amount a consumer is willing to pay for one more unit of a good or service

Price elasticity of demand

The change in demand for a good or a service in relation to a change in its price

Tax incidence

Understanding the division of a tax burden among the affected parties

Excise tax

A legislated tax on specific goods or services at purchase such as fuel, tobacco, and alcohol

Substitution Effect

Consumers switching to cheaper products as price increase

Income effect

The change in demand for goods and services due to a change in a consumer’s income

Giffen good

A product that people by more of as its price increases

Marginal utility

The added satisfaction that a consumer gets from having one more unit of a good or service

Indifference curve

A graphic representation of the various combinations of two goods with which a consumer is equally satisfied

Perfect elasticity

When demand for a product is extremely sensitive to price changes

Perfectly inelastic

A situation where demand for a product or service does not change in response to price changes

Elasticity of supply

Measures how much the quantity supplied of a good or service changes when there is a price change

Marginal Rate of Substitution

The rate at which a consumer would be willing to forgo a specific quantity of one good for more units of another good at the same utility level

Utility

Total satisfaction or benefit from consuming a good