Micro Economics Section 2

Demand

The relationship between the price of a product and the quantity buyers are willing and able to purchase during a specific period of time.

Ability

Having the necessary money to purchase a product.

Willingness

Having the desire and preferences necessary to want to purchase a product.

Time

The specific period during which buyers are purchasing a product.

All Other Things Equal (Ceteris Paribus)

Everything besides price that could affect quantity demanded is held constant.

Income Effect

When a price falls, purchasing power increases, allowing consumers to buy more.

Substitution Effect

Buyers have an incentive to replace a more expensive good with a cheaper substitute.

Diminishing Marginal Utility

The additional satisfaction from each additional unit of a good tends to decrease.

Taste and Preferences

Consumers' likes, dislikes, and preferences that influence what they want to buy.

Number of Buyers

More buyers in a market generally increase market demand.

Changes in Income

Changes in consumers' income that affect how much they are able and willing to purchase.

Normal Goods

Goods where income and demand move in the same direction.

Inferior Goods

Goods where income and demand move in opposite directions.

Prices of Related Goods

The prices of substitute and complementary goods that can affect demand.

Substitute Goods

Goods that can be used in place of each other, such as Coke and Pepsi.

Complementary Goods

Goods that are generally used together, such as ham and cheese.

Future Expectations (Demand)

Expectations about the future that can cause consumers to buy more or less today.

Supply

The relationship between the price of a good or service and the quantity producers are willing and able to produce.

Law of Supply

There is a direct relationship between price and quantity supplied.

Number of Sellers

More producers in a market generally increase the total supply.

Price of Resources

Cheaper resources generally increase supply, while more expensive resources decrease supply.

Technology

Improved technology can lower production costs and increase supply.

Taxes

Government charges that can increase production costs and decrease supply.

Subsidies

Government payments to producers that can lower costs and increase supply.

Future Expectations (Supply)

Producers' expectations about the future that can affect how much they produce today.

Prices of Other Goods

Prices of other goods producers could make instead, which can affect what they choose to produce.

Price Elasticity of Demand

A measure of how sensitive quantity demanded is to a change in price.

Elastic Demand

Quantity demanded changes significantly when price changes.

Inelastic Demand

Quantity demanded changes only slightly when price changes.

Elasticity of Demand (Ed)

|Percent change in quantity demanded ÷ Percent change in price|

Independent Variable

The variable that is changed or controlled; in demand elasticity, price is the independent variable.

Dependent Variable

The variable that responds to a change; in demand elasticity, quantity demanded is the dependent variable.