the cheaper something is, the more of it we will buy
Law of demand
is the desire to own something and the ability to pay for it.
Demand
The law of demand is the result of two separate patterns of behavior that overlap
Substitution and income effect
takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good.
Substitution effect
occurs when the change in consumption results from a change in income.
Income effect
is a table that lists the quantity of a good that a person will purchase at each price in a market.
Demand schedule
is a table that lists the quantity of a good all consumers in a market will buy at each different price.
Market demand schedule
a graphic representation of a demand schedule.
Demand curve
a Latin phrase that means “all other things held constant”
Ceteris paribus
a good that consumers demand more of when their incomes increase.
Normal good
a good that consumers demand less of when their income increases.
Inferior good
two goods that are bought and used together.
Compliments
goods used in place of one another.
Substitutes
a measure of how consumers react to a change in price.
Elasticity of demand
not very sensitive to price change
Inelastic
sensitive to price change
Elastic
take the percentage change in the demand of a good, and divide this number by the percentage change in the price of the good.
Elasticity formula
describes demand whose elasticity is exactly equal to one.
Unitary elastic
the total amount of money a firm receives by selling goods or services.
Total revenue
Elastic demand comes from one or more of these factors:
- availability of substitute goods
- a limited budget that does not allow price changes
- the perception of the good as a luxury item
Supply: the amount of goods available.
Supply
the tendency of suppliers to offer more of a good at a higher price.
Law of supply
is used to described how much of a good is offered for sale.
Quantity supplied
shows the relationship between price and quantity supplied for a specific good.
Supply schedule
is all of the supply schedules of individual firms in a market.
Market supply schedule
is a measure of the way suppliers respond to a change in price.
Elasticity of supply
the change in output from hiring one additional unit of labor.
Marginal product of labor
is a level of production in which the marginal product of labor increases as the number of workers increase.
Increasing marginal returns
is a level of production in which the marginal product of labor decreases as the number of workers increases.
Diminishing marginal returns
a cost that does change, no matter how much of a good is produced.
Fixed costs
a cost that rises or falls depending on how much is produced
Variable costs
is the total of the fixed and variable costs added together
Total costs
The additional cost of producing one more unit
Marginal costs
the cost of operating a facility.
Operating cost
is a government payment that supports a business or market
Subsidy
is a tax on the production or sale of a good.
Excise tax
are interventions in a market that affects the production of a good.
Regulations
is the point of balance between price and quantity.
Equilibrium
occurs when quantity supplied is not equal to quantity demanded in a market.
Disequilibrium
occurs when quantity demanded is more than quantity supplied.
Excess demand
occurs when quantity supplied exceeds quantity demanded.
Excess supply
when the quantity supplied is greater than the quantity demanded.
Surplus
occurs when the quantity demanded is greater than the quantity supplied.
Shortage
the costs consumers pay to find the good.
Search costs
is a sudden shortage of a good.
Supply shock
is when goods are allocated using criteria other than price
Rationing
is a forum for illegal goods
Black market
is a market structure in which a large number of firms all produce the same product.
Perfect competition
Four Conditions for Perfect Competition
- Many buyers and sellers participate in the market.
- Sellers offer identical products.
- Buyers and sellers are well informed about products.
- Sellers are able to enter and exit the market freely.
A product that is considered the same regardless of who makes or sells it
Commodity
are factors that make it difficult for a new firm to enter a market.
Barriers to entry
are expenses that a firm must pay before it can begin to produce and sell goods.
Start up costs
forms when barriers prevent firms from entering a market that has a single supplier.
Monopoly
factors that cause a producer’s average cost per unit to fall as output rises.
Economies of scale
An industry that enjoys economies of scale can easily become a
Natural monopoly
is a monopoly created by the government.
Government monopoly
issued by the government may turn a market into a monopoly
Patent
is a contract that gives a single firm rights to sell goods in an exclusive market
Franchise
gives firms the right to operate a business.
License
monopolist will charge different prices to different groups of consumers
Price discrimination
For price discrimination to work, a market must meet three conditions:
- Some market power.
- Distinct customer groups.
- Difficult resale.
is a market structure in which many companies sell products that are similar but not identical.
Monopolist competition
enables a monopolistically competitive seller to profit from the differences between his or her products and competitors’ products.
Differentiation
Nonprice Competition takes several forms:
- Physical characteristics.
- Location.
- Service label.
- Advertising, image, or status.
describes a market dominated by a few large, profitable firms.
Oligopoly
is when firms in an oligopoly agree to set prices and production.
Collusion
is stronger than a collusive agreement.
Cartel
selling a product below cost to drive out competition.
Predatory pricing
are laws that encourage healthy competition in the market.
Antitrust laws
means that the government no longer decides what role each company can play in a market and how much it can charge its customers.
Deregulations
