Economics Chapter 3
Terms
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- Define market.
- any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service.
- What is the law of demand?
- the principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price.
- Define income effect.
- a change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.
- What is the substitution effect?
- (1) a change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the product's price; (2)the effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.
- Define demand curve.
- a curve illustrating demand.
- What are determinants of demand?
- factors other than price that determine the quantities demanded of a good or service.
- What are normal goods?
- a good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.
- What are inferior goods?
- a good or service whose consumption declines as income rises.
- What are substitute goods?
- products or services that can be used in place of each other. When the price of one falls, the demand for the other falls; conversely, when the price of one product rises, the demand for the other product rises.
- What is a complementary good?
- products and services that are used together. When the price of one falls, the demand for the other increases (and conversely.)
- Define change in demand.
- a change in the quantity demanded of a good or service at every price; a shift of the demand curve to the left or right.
- Define supply.
- a schedule showing the amounts of a good or service that sellers (or a seller) will offer at various prices during some period.
- What is the law of supply?
- the principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease.
- Define supply curve.
- a curve illustrating supply.
- What are determinants of supply?
- factors other than price that determine the quantities supplied of a good or service.
- Define change in supply.
- a change in the quantity supplied of a good or service at every price; a shift of the demand curve to the left or right.
- Define surplus.
- the amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.
- Define shortage.
- the amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price.
- What is the equilibrium price?
- the price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for the price to rise or fall.
- What is the equilibrium quantity?
- (1)the quantity demanded and supplied at the equilibrium price in a competitive market; (2) the profit-maximizing output of a firm.
- What is the rationing function of prices?
- the ability of market forces in competitive markets to equalize quantity demanded and quantity supplied and to eliminate shortages and surpluses via changes in prices.
- What is a price ceiling?
- a legally established maximum price for a good or service.
- What is a price floor?
- a legally determined price above the equilibrium price.