Voluntary exchange
Principle that is the basis of activity in a market economy; a buyer and a seller exercise their economic freedoms by working out their own terms of exchange.
Law of demand
Economic rule which states that the quantity demanded and prince move in opposite directions; as price goes up, quantity demanded goes down; as price goes down, quantity demanded goes up. Inverse relationship.
Utility
Ability of any good or service to satisfy consumer wants.
Law of diminishing marginal utility
Economic rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased.
Real income effect
Economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same.
Substitution effect
Economic principle stating that if 2 items satisfy the same need and the price of one rises, people will buy the other.
Demand curve
Line plotted on a graph showing the quantity demanded of a good or service at each possible price.
Elasticity
Economic concept dealing with consumers' responsiveness to an increase or decrease in prices; price responsiveness.
Price elasticity of demand
Economic concept that deals with how much demand varies according to changes in price.
Elastic demand
Situation in which the rise or fall in price of a product greatly affects the amount of that product which people are willing to buy; if the prices of certain products rise, consumers will buy cheaper substitutes.
Inelastic demand
Situation in which a price change of a product has little impact on the quality demanded by consumers.
Complementary good
One product often used with another product; as the price of the second product decreases, the demad for the first product will increase; as the price of the 2nd product increases, the demand for the first product will decrease.
Law of supply
Economic rule stating that as the price rises for a good, the quantity supplied rises. As the price falls, the quantity supplied also falls.
Law of diminishing returns
Economic rule stating that after some point, adding units of a factor of production (such as labor) to all the other factors of production (such as equipment) increases total output for a time; after a certain point, the extra output for each additional u
Supply curve
Line plotted on a graph that shows the quantities supplied of a good or service at each possible price.
Equilibrium price
Price of a product or serve at which the amount producers are willing to supply is equal to the amount consumers are willing to buy. On a graph, the equilibrium price is where the supply curve and the demand curve intersect.
Technology
Any use of land, labor, and capital that produces goods and services more efficiently. Today, generally means the use of science to develop new products and new material for producing and distributing goods and services.
Shortages
Situations occuring when, at the going price, the quantity demanded is greater than the quantity supplied.
Surplus
Situation occuring when supply is greater than demand.
The buyer and the seller works out the terms of an exchange. The seller sets a price on the market; the buyer agrees to the product and price by purchasing the product.
How does the principle of voluntary exchange operate in a market economy?
Diminishing marginal utility is the lower level of satisfaction that results from additional purchases of a good or service. The income effect goes up more than their income rises. The substitional effect states that if 2 items satisfy the same want, the
How do dimishing marginal utility, the real income effect, and the substitution effect influence the quantity demanded for a given product or service?
As the price goes up, the quantity demanded goes down. As the price goes down, the quantity demanded goes up.
What does graphing the demand curve show you about the relationship between price and quantity demanded?
For elastic demand, consumers consider the many competing brands to be almost the same. A small rise in the price of one brand will probably cause many consumers to purchase the cheaper substitute brands. Inelastic demand means that price changes have lit
What is the difference between a good that has elastic demand and one that has inelastic demand?
Changes in population, and in people's tastes and preferences.
What are the determinants of demand?
The higher the price of a good, the greater the incentive is for a producer to produce more.
How does the incentive of greater profit affect the supply of a given good or service?
It shows the quantities supplied at each possible price. It slopes upward from left to right. Direct relationship.
What does the supply curve show?
1) The price of input drops 2) Technology improves 3) Taxes increase.
What are some of the determinants of supply?
It will shift to the right.
When one of these determinants changes, what happens to the supply curve?
Shortages put pressure on prices to rise. When shortages occur, the market ends up taking care of itself. The price goes up to eliminate the surplus when surpluses occur. The price falls to eliminate the surplus.
How do shortages and surpluses affect price?
The supply curve shifts outward to the right. The new equilibrium price occur?
The supply curve shifts outward to the right. The new equilibrium price will fall, and the quantity both supplied and demanded will increase.
Many forces operate in the economy. On the demand side are people's income and their tastes and preferences. On the supply side are the ability of suppliers to produce, profit incentive, and costs of production. The forces underlying supply and demand rea
How do the forces underlying supply and demand affect prices?