firm
An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.
entrepreneur
A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.
households
The consuming units in an economy. A household may consist of any number of people.
product or output markets
The markets in which goods and services are exchanged. Firms supply and households demand.
input or factor markets
The markets in which the resources used to produce goods and services are exchanged. Households supply resources and firms demand
labor market
The input/factor market in which households supply work for wages to firms that demand labor
capital market
The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods
land market
The input/factor market in which households supply land or other real property in exchange for rent
factors of production
The inputs into the production process. Land, labor, and capital are the three key factors of production.
Features of Input and Output markets
Input and output markets are connected through the behavior of both firms and households. Firms determine the quantities and character of outputs produced and the types and quantities of inputs demanded. Households determine the types and quantities of pr
Factors that determine a household's decision about what quantity of a particular output, or product, to demand
1. The price of the product in question., 2. The income available to the household., 3. The household's amount of accumulated wealth., 4. The prices of other products available to the household., 5. The household's tastes and preferences., 6. The househol
quantity demanded
The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.
quantity demanded vs. demand
Changes in the price of a product affect the quantity demanded per period. Changes in any other factor, such as income or preferences, affect demand.
demand schedule
A table showing how much of a given product a household would be willing to buy at different prices.
demand curve
A graph illustrating how much of a given product a household would be willing to buy at different prices.
law of demand
The negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as price falls, quantity demanded increases.
properties of demand curves
1. They have a negative slope. An increase in proce is likely to lead to a decrease in quantity demanded, and a decrease in price is likely to lead to an increase in quantity demanded., 2. They intersect the quantity (X-) axis, a result of time limitation
determinants of an individual household demand curve
income, wealth or net worth, normal goods, inferior goods, substitutes, perfect substitutes, complementary goods, tastes and preferences, and expectations.
income
The sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.
wealth or net worth
The total value of what a household owns minus what it owes. It is a stock measure: it is measured at a given point in time.
normal goods
Goods for which demand goes up when income is higher and for which demand goes down when income is lower.
inferior goods
Goods for which demand tends to fall when income rises.
substitutes
Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.
perfect substitutes
Identical products.
complements, complementary goods
Goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa.
tastes and preferences
They are volatile and they are idiosyncratic.
shift of demand curve
The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought by a change in the original conditions.
movement along a demand curve
The change in quantity demanded brought about by a change in price.
market demand
The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.
profit
The difference between revenues and costs.
factors determining costs of production
1. the kinds of inputs needed to produce the product, 2. the amount of each input required, and 3. the prices of inputs.
quantity supplied
The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.
supply schedule
A table showing how much of a product firms will sell at alternate prices.
law of supply
The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.
supply curve
A graph illustrating how much of a product a firm will sell at different prices.
factors influencing a firm's decision about what quantity of output, or product, to supply
1. The price of a good or service., 2. The cost of producing the product, which in turn depends on (a.) The price of required inputs (labor, capital, and land; (b.) The technologies that can be used to produce the product., 3. The prices of related produc
movement along a supply curve
The change in quantity supplied brought about by a change in price.
shift of a supply curve
The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.
market supply
The sum of all that is supplied each period by all producers of a single product.
equilibrium
The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.
excess demand or shortage
The condition that exists when quantity demanded exceeds quantity supplied at the current price.
price rationing
When quantity demanded exceeds quantity supplied, price tends to rise. When the price in a market rises, quantity demanded falls and quantity supplied rises until an equilibrium is reached at which quantity demanded and quantity supplied are equal.
excess supply or surplus
The condition that exists when quantity supplied exceeds quantity demanded at the current price.
changes in equilibrium
When quantity supplied exceeds quantity demanded at the current price, the price tends to fall. When price falls, quantity supplied is likely to decrease and quantity demanded is likely to increase until an equilibrium price is reached where quantity supp