Supply, Demand, and Elasticity Review

Vocabulary terms and core concepts covering supply and demand equilibrium, price elasticity of demand, market states, economic statements, and marginal analysis.

Equilibrium price

The price level where the supply and demand lines intersect, found by setting the supply and demand equations equal to each other.

Price Elasticity of Demand (PED)

A measure of how much the quantity demanded of a good responds to a change in the price of that good, calculated as $\% \text{ change in quantity} / \% \text{ change in price}$.

Percentage Change in Quantity (Midpoint Method)

The formula used to calculate quantity changes in elasticity: $\frac{Q_2-Q_1}{\frac{Q_2+Q_1}{2}}$.

Percentage Change in Price (Midpoint Method)

The formula used to calculate price changes in elasticity: $\frac{P_2-P_1}{\frac{P_2+P_1}{2}}$.

Shortage

A market condition that occurs when the quantity demanded exceeds the quantity supplied ($Q_d > Q_s$).

Surplus

A market condition that occurs when the quantity supplied exceeds the quantity demanded ($Q_s > Q_d$).

Elastic

A situation where consumer demand or supplier output changes significantly when prices shift.

Inelastic

A situation where demand or supply remains relatively constant regardless of price changes.

Normative statement

A statement that expresses an opinion or value judgment about what should happen; it cannot be proven true or false with facts alone.

Positive statement

A statement that is factual and can be tested or verified with evidence.

Complementary goods

Products that are often used together; when the price of one falls, the demand for the other increases.

Inferior good

A good for which demand increases when income decreases and demand decreases when income increases.

Marginal cost (MC)

The additional cost a producer incurs to create one more unit of a good or service.

Marginal utility (MU)

The additional satisfaction a consumer gains from consuming one more unit of a product.

Utility Maximization Principle

The economic rule stating that a consumer should buy a good if its marginal utility is greater than or equal to its marginal cost ($MU \ge MC$).

Supply Curve Shift

A movement of the entire supply curve; for example, an increase in supply shifts the supply curve to the right.