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The central principle of economics
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A change in the price of a good affects the quantity demanded of the good
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quantity demanded
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the amount of a good or service that a consumer is willing and able to purchase at a given price.
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A rise of price leads to a
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fall in the quantity demanded
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the fall of price leads to a
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rise in the quantity demanded
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Law of Demand
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the tendency for the price and quantity demanded to move in the opposing directions
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two reasons why a consumer buys less of a good after its price increases
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-substitution
-income
-income
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substitution effect
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when an increase in price of a good causes a consumer to switch away from that good to another; a decrease price turns consumers towards that good.
price goes up quantity demand down
price goes down quantity demand up
price goes up quantity demand down
price goes down quantity demand up
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income effect
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the change in consumption that occurs when a price increase causes consumers to feel poorer or when a price decrease causes them to feel richer
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Ceteris Paribus
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all other things held constant. "all else equal"
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demand schedule
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a table that shows the relationship between the price of a good and the quantity demanded
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demand curve
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a graph of the relationship between the price of a good and the quantity demanded
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normal goods
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A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.
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a shift of the demand curve means
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a change in demand at every price
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quantity demanded
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the amount of a good or service that a consumer is willing and able to purchase at a given price
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demand
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the relationship between price and the quantity demanded of a certain good or service
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What causes a shift in the demand curve?
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# of buyers, income, price of related goods, tastes, expectations, substitutes, and complements.
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inferior goods
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the demand for this good rises with prices falls. like can goods
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substitutes
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two goods for which an increase in the price of one leads to an increase in the demand for the other
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complements
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two goods for which an increase in the price of one leads to a decrease in the demand for the other
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inelastic demand
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A situation in which an increase or a decrease in price will not significantly affect demand for the product
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elasticity of demand
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a measure of how consumers react to a change in price. changed quantity demanded divided by change in price
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total revenue
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the total amount of money a firm receives by selling goods or services. price of good times quantity sold
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unit elastic demand
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when the percentage change in the quantity demanded equals the percentage change in price
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elastic demand
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A situation in which consumer demand is sensitive to changes in price
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profit
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total revenue minus total cost
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quantity supplied
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the amount of a good that sellers are willing and able to sell. the price goes down so will the quantity
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Law of Supply
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the tendency for the quantity supplied to be higher when the price is higher
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supply schedule
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a table that shows the relationship between the price of a good and the quantity supplied
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supply curve
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a graph of the relationship between the price of a good and the quantity supplied
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perfect competition
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the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product. All products are identical. new firms are free to enter, old are good to leave.
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elasticity of supply
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%change in quantity supplied/%change in price
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Unit elastic supply
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when the percentage change in the quantity supplied equals the percentage change in price
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Elastic Supply
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Exists when a small change in price causes a major change in quantity supplied.
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Inelatic supply
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quantity supplied changes by a smaller precentage than price
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What causes a shift in the supply curve?
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input prices, govt. policy, number of firms, tech change, natural disasters
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change in quantity supplied
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the change in amount offered for sale in response to a change in price
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subsidy
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a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.
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the costs of inputs
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if inputs costs change there will be a change in supply.
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a firm wants to produce when??
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when the prices rises for a good
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short run
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the period of time during which at least one of a firm's inputs is fixed
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long run
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the period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant
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a fixed input is
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like cranes and classrooms. It remains the same no matter the output
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variable inputs
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inputs that can be changed in the short run. like cement, plywood..
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marginal
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additional
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marginal product of labor
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the additional output a firm produces as a result of hiring one more worker
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diminishing marginal product
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the decrease of marginal product of a variable input associated with an increase of fixed inputs
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law of diminishing returns
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more variable inputs used in with fixed will eventually decrease the marginal product
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fixed costs
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Costs that do not vary with the quantity of output produced. license
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variable costs
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costs that vary with the quantity of output produced. wages and raw materials
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total cost
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fixed costs plus variable costs
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cost minimization
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a firm's goal of producing a specific quantity of output at minimum cost
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profit maximization
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setting prices so that total revenue is as large as possible relative to total costs
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marginal revenue
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the additional income from selling one more unit of a good; sometimes equal to price
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marginal cost
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the cost of producing one more unit of a good
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when the firm's total revenue is below its variable cost
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shut down. the firm's variable costs can only be paid if there is business
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when total revenue covers variable cost but not total
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stay opened, but slow down
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when total revenue exceeds total cost
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stay open...increase
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market equilibrium
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The point where the quantity of a product demanded is equal to the quantity of a product supplied. This creates the market clearing price and quantity where there is no excess demand or excess supply.
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equilibrium price
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the price that balances quantity supplied and quantity demanded
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equilibrium quantity
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the quantity supplied and the quantity demanded at the equilibrium price
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excess demand
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when quantity demanded is more than quantity supplied.. shortage
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excess supply
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when quantity supplied is more than quantity demanded...surplus
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when the market price is higher than the equilibrium price
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there is an excess in supply and market price falls
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When the market price is below the equilibrium price
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there is an excess demand and market price rises
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anything that causes a shift to the right on the demand curve
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leads to an increase of the price and quantity
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a left shift on the demand curve
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leads to a decrease of price and quantity
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a decrease in supply
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price increases and quantity decreases
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an increase in supply
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price decreases and quantity increases
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Changes in both supply and demand
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demand more left--- price falls
supply more left----price rises
supply more left----price rises
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demand increase,
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price increase, quantity increase
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demand decreases
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price decreases, quantity decreases
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price ceiling
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A legal maximum on the price at which a good can be sold. creates shortages
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price floors
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government imposed limits on how low a price can be charged. creates surplus
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sticky prices
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prices that move to their equilibrium values very slowly
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