Principles of Economics: Demand, Supply, and Profit Maximization

Decision Framework

Systematic approach to evaluate choices and outcomes.

Incremental Decisions

Making choices step-by-step based on marginal analysis.

Incentives

Factors that motivate individuals to make decisions.

Marginal Benefits Calculation

Difference in total benefits from one additional unit.

Production Capacity

Maximum output that can be produced with resources.

Core Principles of Economics

Fundamental concepts guiding economic decision-making.

Quantifying Costs and Benefits

Converting values into monetary terms for evaluation.

Trade-offs

Compromises made when choosing between alternatives.

Economic Projection

Forecasting future economic conditions based on trends.

Market Dependencies

Interconnections between various economic markets.

Benefit Analysis

Evaluating the advantages gained from a decision.

Inflation

Rise in price levels reducing purchasing power.

Production Possibilities Frontier (PPF)

Graph showing maximum output combinations with resources.

Marginal Benefit

Additional benefit from consuming one more unit.

Marginal Cost

Extra cost incurred from producing one more unit.

Opportunity Cost

Next best alternative foregone when making a choice.

Economic Surplus

Total benefits minus total costs from a decision.

Cost-Benefit Principle

Evaluate costs and benefits before making decisions.

Rational Rule

Continue an action until marginal benefits equal costs.

Interdependence Principle

Choices depend on others' decisions and market conditions.

Framing Effect

Decision influenced by how information is presented.

Fixed Costs

Costs that do not change with production level.

Variable Costs

Costs that vary directly with production volume.

Total Revenue

Income from sales before any costs are deducted.

Marginal Revenue

Change in total revenue from selling one more unit.

Economic Actors

Individuals or entities making economic decisions.

Scarcity

Limited resources necessitating trade-offs in choices.

Sunk Cost

Irrecoverable cost that should not influence decisions.

Total Benefits

Overall gains from a decision or action.

Dependencies

Relationships affecting choices and resources over time.

Interdependency

How choices impact available resources for decisions.

Scarce Resources

Limited resources available for competing economic actors.

Market

A platform where buyers and sellers interact.

Demand Curve

Graph showing quantity demanded at various prices.

Law of Demand

Higher quantity demanded at lower prices.

Normal Goods

Demand increases as income rises.

Substitute Goods

Goods that can replace each other in consumption.

Complementary Goods

Goods that are consumed together.

Market Demand Curve

Total quantity demanded by the entire market.

Shift in Demand Curve

Change in demand due to factors other than price.

Factors Shifting Demand

Income, preferences, related goods, expectations, congestion and network effects, type and number of buyers (market).

Network Effects

Value of a service increases with more users.

Diminishing Marginal Benefit

Each additional unit yields less benefit.

Individual Demand Curve

Graph of quantity demanded by one buyer.

Aggregate Demand

Total demand from all individuals in a market.

Consumer Choice

Decisions made by individuals regarding purchases.

Price Elasticity

Sensitivity of quantity demanded to price changes.

Market Survey

Method to gather data on consumer preferences.

Buying Decisions

Choices made based on perceived value and cost.

Rational Rule for Buyers

Buy more if marginal benefit equals price.

Graphing Demand

Visual representation of demand relationships.

Price of Gas

Example used to illustrate demand concepts.

Quantity Demanded

Amount of a good consumers are willing to buy.

Individual Demand

Quantity demanded by a single consumer.

Market Demand

Total quantity demanded by all consumers.

Demand Survey

Collecting data on quantity demanded at prices.

Movement Along Demand Curve

Change in price causes movement along the curve.

Marginal Benefit Curve

Reflects additional benefit from consuming one more unit.

Income Effect

Change in demand due to consumer income changes.

Inferior Goods

Demand decreases as income increases.

Preferences

Changes in consumer desire affecting demand.

Related Goods

Demand influenced by prices of other goods.

Expectations in Demand

Future price expectations affect current demand.

Network Effect

Value increases as more people use a good.

Congestion Effect

Value decreases as more people use a good.

Number of Buyers

More buyers shift market demand curve right.

Individual Supply Curve

Graph showing quantity a business sells at prices.

Market Supply

Aggregate supply from all firms in the market.

Price Taking

above the market price, you couldn’t sell any units, and under the market price you would immediately sell all units

Diminishing Marginal Product

Output increases at a decreasing rate with inputs.

Shifts in Supply Curve

Supply curve moves due to changes in factors.

Input Prices

Higher input prices shift supply curve left.

Productivity & Technology

Improvements increase output with fewer inputs.

Expectations in Supply

Anticipating higher prices decreases current supply.

Type & Number of Sellers

More sellers increase market supply.

Supply Curve

Graph showing quantity supplied at various prices.

Movement Along Supply Curve

Change in quantity supplied due to price change.

Shift in Supply Curve

Movement of the entire supply curve due to factors.

Law of Supply

Higher prices lead to higher quantity supplied.

Perfect Competition

Market structure with many buyers and identical goods.

Rational Rule for Sellers

Sell more if price exceeds marginal cost.

Market Demand Shifters

Factors affecting demand not related to price.

Productivity Growth

Increased output with less input, lowering costs.

Complement-in-Production

Goods produced together; price increase raises supply.

Substitutes-in-Production

Alternative goods; price increase lowers supply of original.

Equilibrium

Point where quantity supplied equals quantity demanded.

Surplus

Excess supply leading to downward price pressure.

Shortage

Excess demand leading to upward price pressure.

Disequilibrium Symptoms

Indicators of market imbalance, like queuing.

Market Supply Curve Shift

Change in total quantity supplied at each price.

Type and Number of Sellers

Influences total market supply at given prices.

Total Cost

Sum of all costs incurred in production.

Profit Maximization

Determining optimal output level for maximum profit.