Demand
the desire to own something and the ability to pay for it
law of demand
when a good's price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it
Substitution effect
a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good
income effect
a consumer reacts to a rise in the price of a good by cutting back on the purchase of that good
demand schedule
a table that lists the quantity of a good that a person will purchase at each price in the market
market demand schedule
shows the quantities of a good demanded at each price by all consumers in the market
demand curve
a demand schedule on a graph (prices on y axis, quantities demanded on x axis)
ceteris paribus
Latin phrase for "all other things held constant" assumption
normal goods
goods that consumers demand more of when their incomes increase
inferior goods
an increase in income causes demand for these goods to fall (used cars, generic cereals)
consumer expectations
expectations of a sale or a price increase increase or decrease our immediate demand
population
a rise or fall in population strongly effects the demand of certain goods (houses, food)
consumer tastes and advertising
social trends and advertising campaigns can increase or decrease demand for certain objects
complements
two goods that are bought and used together, demand rises and falls together (skis and ski boots)
substitutes
goods used in place of one another, demand rises and falls inversely (skis and snowboards)
elasticity of demand
the way consumers respond to price changes
inelastic
a demand that is relatively unresponsive to price changes (<1)
elastic
a demand that is very responsive to price changes (>1)
formula for elasticity of demand
% change in quantity demanded / % change in price
percentage change
(original number-new number) / original number X 100
unitary elastic
the percentage change in quantity demanded is exactly equal to the percentage change in the price (=1)
factors affecting elasticity
availability of substitutes, relative importance, necessities versus luxuries, change over time (as people respond to price changes)
total revenue
the amount of money the company receives by selling its goods
supply side
where sellers decide how much to produce or supply
law of supply
the higher the price, the larger the quantity produced
supply
amount of goods available
quantity supplied
describes how much of a good is offered for sale at a specific price
ceteris paribus
increase in price
supply schedule
shows the relationships between price and quantity supplied for a specific good
variables
factors that can change
supply schedule set of conditions
only the price of the product affects output
supply
the relationship between price and quantity supplied
market supply schedule
all the supply schedule of individual firms added up
supply curve
graph of data points from supply schedule
market supply curve
supply curve of individual firms added up
elasticity of supply
a measure of the way suppliers respond to a change in price
elasticity of supply in the short run
supply is inelastic because a firm cannot easily change its output level
elasticity of supply in the long run
firms are more flexible, so supply is more elastic
marginal product of labor
the change in output from hiring one more worker
increasing marginal returns
specialization increases output per worker
diminishing marginal returns
adding more workers increases total output, but at a decreasing rate
negative marginal returns
workers get in each other's way and disrupt the production process, so overall output decreases
fixed cost
a cost that does not change, no matter how much of a good is produced (cost of building and equipping a business)
variable costs
costs that rise or fall depending on the quantity produced (labor, electricity and heating bills)
total cost
fixed costs and variable costs added
marginal cost
the additional cost of producing one more unit
profit
total revenue - total cost
find the level of output with highest profit
look for the biggest gap between total revenue and total cost
marginal revenue
the additional income from selling one more unit of a good
best level of output
where marginal revenue is equal to the marginal cost
operating cost
the cost of operating the facility (includes variable costs, but not fixed costs which owners must pay whether the factory is open or closed)
when should firm keep factory open?
if the total revenue from the goods and services the factory produces is greater than the cost of keeping it open
build new factory or stay in the market?
only if the market price of beanbags is high enough to cover all the costs of production, including the cost of building a new factory
effect of rising costs
rise in the cost of labor or raw materials translates into higher marginal cost. If firm has no control over price, must cut production
effect of technology
lowers costs and increases supply at all price levels
subsidy
a government payment that supports a business or market (protect industries from foreign competition, farm subsidies to keep prices high)
excise tax
a tax on the production or sale of a good, increases production cost and causes supply to decrease at all price levels
regulation
government intervention that affects the price, quantity, and quality of a good
expectations of higher prices
reduce supply now and increase supply later
effect of inflation
encourages suppliers to hold on to goods as long as possible (because cash loses its value rapidly)
effect of number of suppliers
if more suppliers enter the market to produce a specific good, the market supply of the good will rise
Demand
the desire to own something and the ability to pay for it
law of demand
when a good's price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it
Substitution effect
a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good
income effect
a consumer reacts to a rise in the price of a good by cutting back on the purchase of that good
demand schedule
a table that lists the quantity of a good that a person will purchase at each price in the market
market demand schedule
shows the quantities of a good demanded at each price by all consumers in the market
demand curve
a demand schedule on a graph (prices on y axis, quantities demanded on x axis)
ceteris paribus
Latin phrase for "all other things held constant" assumption
normal goods
goods that consumers demand more of when their incomes increase
inferior goods
an increase in income causes demand for these goods to fall (used cars, generic cereals)
consumer expectations
expectations of a sale or a price increase increase or decrease our immediate demand
population
a rise or fall in population strongly effects the demand of certain goods (houses, food)
consumer tastes and advertising
social trends and advertising campaigns can increase or decrease demand for certain objects
complements
two goods that are bought and used together, demand rises and falls together (skis and ski boots)
substitutes
goods used in place of one another, demand rises and falls inversely (skis and snowboards)
elasticity of demand
the way consumers respond to price changes
inelastic
a demand that is relatively unresponsive to price changes (<1)
elastic
a demand that is very responsive to price changes (>1)
formula for elasticity of demand
% change in quantity demanded / % change in price
percentage change
(original number-new number) / original number X 100
unitary elastic
the percentage change in quantity demanded is exactly equal to the percentage change in the price (=1)
factors affecting elasticity
availability of substitutes, relative importance, necessities versus luxuries, change over time (as people respond to price changes)
total revenue
the amount of money the company receives by selling its goods
supply side
where sellers decide how much to produce or supply
law of supply
the higher the price, the larger the quantity produced
supply
amount of goods available
quantity supplied
describes how much of a good is offered for sale at a specific price
ceteris paribus
increase in price
supply schedule
shows the relationships between price and quantity supplied for a specific good
variables
factors that can change
supply schedule set of conditions
only the price of the product affects output
supply
the relationship between price and quantity supplied
market supply schedule
all the supply schedule of individual firms added up
supply curve
graph of data points from supply schedule
market supply curve
supply curve of individual firms added up
elasticity of supply
a measure of the way suppliers respond to a change in price
elasticity of supply in the short run
supply is inelastic because a firm cannot easily change its output level
elasticity of supply in the long run
firms are more flexible, so supply is more elastic
marginal product of labor
the change in output from hiring one more worker
increasing marginal returns
specialization increases output per worker
diminishing marginal returns
adding more workers increases total output, but at a decreasing rate
negative marginal returns
workers get in each other's way and disrupt the production process, so overall output decreases
fixed cost
a cost that does not change, no matter how much of a good is produced (cost of building and equipping a business)
variable costs
costs that rise or fall depending on the quantity produced (labor, electricity and heating bills)
total cost
fixed costs and variable costs added
marginal cost
the additional cost of producing one more unit
profit
total revenue - total cost
find the level of output with highest profit
look for the biggest gap between total revenue and total cost
marginal revenue
the additional income from selling one more unit of a good
best level of output
where marginal revenue is equal to the marginal cost
operating cost
the cost of operating the facility (includes variable costs, but not fixed costs which owners must pay whether the factory is open or closed)
when should firm keep factory open?
if the total revenue from the goods and services the factory produces is greater than the cost of keeping it open
build new factory or stay in the market?
only if the market price of beanbags is high enough to cover all the costs of production, including the cost of building a new factory
effect of rising costs
rise in the cost of labor or raw materials translates into higher marginal cost. If firm has no control over price, must cut production
effect of technology
lowers costs and increases supply at all price levels
subsidy
a government payment that supports a business or market (protect industries from foreign competition, farm subsidies to keep prices high)
excise tax
a tax on the production or sale of a good, increases production cost and causes supply to decrease at all price levels
regulation
government intervention that affects the price, quantity, and quality of a good
expectations of higher prices
reduce supply now and increase supply later
effect of inflation
encourages suppliers to hold on to goods as long as possible (because cash loses its value rapidly)
effect of number of suppliers
if more suppliers enter the market to produce a specific good, the market supply of the good will rise