Definitions

Economics: the study of how scarce resources are allocated to fulfill the infinite wants of consumers

Micro-economics: the observation of small economic units like the effects of government regulations on individual markets and consumer decision making.

Macro-economics: “big picture” version of economics and focuses on aggregate
production and consumption in an economy.

Scarcity: when there are insufficient resources available (limited resources) to produce all that people desire (infinite wants).

Relative scarcity: resources are scarce relative to the demand of goods and services.

Opportunity cost: it is the real cost of the next best alternative (in the scale of preference) that is forgone to obtain more of something else

Ceteris paribus: all other things remaining constant

Theory of Demand/Effective demand: Demand is defined as the amount of goods and/or services consumers are willing and able to buy in a given period of time at a given price, ceteris paribus (other things remaining constant).

Law of Demand: The Law of Demand states that in a given time period, the quantity demanded of a product is inversely related to its price, ceteris paribus.

Individual Demand: Refers to the demand for a good or service by an individual consumer.

Market demand: Refers to the SUM of the individual demand for a good or service by all the consumers in the market.

Change in price of good (DEMAND): a change in price of a good will affect the quantity demanded and cause a movement along the demand curve.

Change in non-price factor (DEMAND): a change in a non-price factor will affect the demand and cause a shift in the demand curve.

Non-price demand factors: factors that affect the consumer’s ability and willingness to buy. For example:

-      Income, i.e. effect on normal and inferior goods

-      Population

-      Tastes and preferences

-      Prices of substitutes and complements

-      Expected future prices

Substitute/Competitive demand: A substitute is an alternative product that can replace another because it satisfies the same want.

-      For substitutes, if the price of one good changes, the demand for the substitute good will change in the same direction.

Complements/Joint demand: A complementary product is one that must be used at the same time with another to satisfy the same human wants.

-      For complements, if the price of one good changes, then the demand for the complementary good will change in the opposite direction.

Derived Demand: when a good is in derived demand, it is demanded for its contribution to the manufacture of another product

-      For two goods in derived demand, a change in demand for the final good causes a similar change in the demand for the resource used to produce it.

Normal Goods: A good is a normal good when demand for it increases in response to an increase in consumer income (demand for the good varies directly with income).

-      Increase in income leads to a rightward shift of the demand curve

-      Decrease in income leads to leftward shift of the demand curve

-      When income changes, demand will change in the same direction

Inferior Goods: A good is an inferior good when demand for it decreases in response to an increase in consumer income (demand for the good varies inversely with income).

-      Increase in income leads to a leftward shift of the demand curve

-      Decrease in income leads to a rightward shift of the demand curve

-      When income changes, demand will change in the opposite direction

Changes in consumer preferences happen due to: Awareness campaigns, advertising etc. This is because the more desirable a good looks, the higher the demand and vice versa.

Exceptional Demand Curve: Such a good has ‘snob appeal’ known as ostentatious goods. It is not wanted for itself but to display one’s wealth.

-      Upward sloping demand curve

Supply: the amount of a good a producer is willing and able to sell in a given period of time, at a given price, ceteris paribus.

Law of Supply: In a given time period, the quantity supplied of a product is directly related to its price, ceteris paribus.

Individual Supply: Refers to the supply for a good or service by an individual producer.

Market Supply: refers to the sum of the individual supply for a good or service by all the producers in the market.

Change in price of good (SUPPLY): will affect the quantity supplied and cause a movement along the supply curve.

Change in non-price factor (SUPPLY): will affect the supply and cause a shift in the supply curve.

Non-price supply factors:

-      Expectations about future price changes

-      Changes in number of suppliers

-      Changes in price of factor inputs (cost of production)

-      Changes in state of technology

-      Events affecting availability of resources & the supply chain e.g. changes in weather conditions, disruptions due to war, etc.

Factor prices: refer to the cost of production, such as wages, rent payments, raw material prices, etc.

Exceptional supply curves: rare goods where quantity supplied is fixed. E.g. the mona lisa

Equilibrium: The state of the market where there is no tendency for either demand or supply to change.

Equilibrium price: The price that clears the market, where the quantity demanded equals the quantity supplied.

Market Price: actual price consumer pays for a good or service at any point in time.

Disequilibrium: When market in shortage or surplus.

Shortage: When the quantity demanded exceeds the quantity supplied.

Surplus: When the quantity supplied exceeds the quantity demanded.

-      Both shortage and surplus drive market prices to the equilibrium price.

Price mechanism: In a FREE market, prices will adjust whenever there is a shortage or surplus such that the market equilibrium will result.

Positive economics: testing and developing economic theory, with subjects being testable.

Normative economics: reflects opinions rather than fact and cannot be tested objectively.

Market economy: An economy that solves the ECONOMIC PROBLEM in a network of separate but interconnected markets.

Product Market: Market that deals in the buying and selling of goods and services.

Factor Market: Market that deals in buying and selling the factors of production (land, labour, capital, enterprise) or resources such as the labour market, the capital market, and the natural resource market.

Competitive Market: Has a large number of buyers and sellers, firms are price takers, homogenous (very similar) products, and it is an easy market to enter (no barriers to entry or exit).

Imperfect Market: a market that is not competitive, and has a small number of firms, product differentiation, firms are price setters, and the entry to market is restricted (barriers to entry).