Economics: Key Concepts of Supply and Demand

Key Concepts in Economics: Supply and Demand

Ceteris Paribus:

When changing one variable in a function (e.g., demand for some product), we assume everything else is held constant.

Demand:

The relationship between the price of a certain good or service and the quantity of that good or service someone is willing and able to buy.

Demand Curve:

A graphic representation of the relationship between price and quantity demanded of a certain good or service, with price on the vertical axis and quantity on the horizontal axis.

Demand Schedule:

A table that shows the quantity demanded for a certain good or service at a range of prices.

Law of Demand:

The common relationship that a higher price leads to a lower quantity demanded of a certain good or service, and a lower price leads to a higher quantity demanded, while all other variables are held constant.

Price:

What a buyer pays for a unit of the specific good or service.

Quantity Demanded:

The total number of units of a good or service consumers wish to purchase at a given price.

Complements:

Goods or services that are used together because the use of one enhances the use of the other.

Substitutes:

Goods or services that can be used in place of one another.

Inferior Good:

Good or service whose demand decreases when a consumer’s income increases, and demand increases when income decreases.


Normal Good:

Good or service whose demand increases when a consumer’s income increases, and demand decreases when income decreases.

Law of Supply:

The common relationship that a higher price leads to a higher quantity supplied of a certain good or service, and a lower price leads to a lower quantity supplied, while all other variables are held constant.

Quantity Supplied:

The total number of units of a good or service producers are willing to supply at a given price.

Supply:

The relationship between the price of a certain good or service and the quantity of that good or service producers are willing to offer for sale.

Supply Curve:

A graphic representation of the relationship between price and quantity supplied of a certain good or service, with price on the vertical axis and quantity on the horizontal axis.


Supply Schedule:

A table that shows the quantity supplied for a certain good or service at a range of prices.

Subsidy:

A government payment to firms to encourage production of some good or service.


Efficiency:

When the optimal amount of goods are produced and consumed, minimizing waste.


Equilibrium:

Price and quantity combination where supply equals demand.


Equilibrium Price:

The (only) price where the quantity supplied in a market equals the quantity demanded.


Equilibrium Quantity:

The quantity both supplied and demanded at the equilibrium price.


Shortage (or Excess Demand):

Situation where the quantity demanded in a market is greater than the quantity supplied; occurs at prices above the equilibrium (Qd > Qs).


Surplus (or Excess Supply):

Situation where the quantity demanded in a market is less than the quantity supplied; occurs at prices below the equilibrium (Qd < Qs).

Shift in Demand:

When a change in some economic factor (other than price) causes a different quantity to be demanded at every price.

Shift in Supply:

When a change in some economic factor (other than price) causes a different quantity to be supplied at every price.