Economics: Supply, Demand, and Market Dynamics
Chapter 1: Core Economic Principles
Economics: The study of how society manages its scarce resources.
Scarcity: The limited nature of society’s resources. Examples: Oil, Land, Human capital
Efficiency: The property of society getting the most it can from its scarce resources.
Equality: The property of distributing economic prosperity uniformly among the members of society.
Opportunity Cost: Whatever must be given up to obtain some item.
Rational People: People who systematically and purposefully do the best they can to achieve their objectives.
Marginal Change: A small incremental adjustment to a plan of action.
Incentive: Something that induces a person to act. Examples: Gas prices, food prices, etc.
Market Economy: An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
Property Rights: The ability of an individual to own, exercise, and control scarce resources.
Market Failure: A situation in which a market left on its own fails to allocate resources efficiently.
Externality: The impact of one person’s actions on the well-being of a bystander.
Market Power: The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.
Productivity: The quantity of goods and services produced from each unit of labor input.
Inflation: An increase in the overall level of prices in the economy.
Business Cycle: Fluctuations in economic activity, such as employment and production.
Trade-offs: Cost-Benefit. Example: Going to college instead of working.
Chapter 4: Supply, Demand, and Equilibrium
- Market: A group of buyers and sellers of a particular good or service.
- Competitive Market: A market in which there are many buyers and many sellers so that each has a negligible impact on the market price.
- Quantity Demanded: Simply, the amount of a good that buyers are willing and able to purchase.
- Law of Demand: With all other things being equal, the quantity demanded of goods falls when the price of the good rises.
- Demand Schedule: A table that shows the relationship between the price of a good and the quantity demanded.
- Market Demand: The sum of all the individual demands for a particular good or service.
- Individual Demand: Individual demand for a particular good or service.
- Normal Good: A good for which, other things equal, an increase in income leads to an increase in demand.
- Inferior Good: A good for which, other things equal, an increase in income leads to a decrease in demand.
- Substitutes: Two goods for which an increase in the price of one leads to an increase in the demand for the other.
- Complements: Two goods for which an increase in the price of one leads to a decrease in the demand for the other.
- Quantity Supplied: The amount of a good that sellers are willing and able to sell.
- Law of Supply: The claim that, other things equal, the quantity supplied of a good rises when the price of a good rises.
- Supply Schedule: A table that shows the relationship between the price of a good and the quantity supplied.
- Supply Curve: A graph of the relationship between the price of a good and the quantity supplied.
Influences on Supply
- Technology
- Expectations
- Number of Suppliers
Equilibrium
Definition: When supply and demand meet.
- Equilibrium Price: The price that balances quantity supplied and demanded.
- Equilibrium Quantity: The quantity supplied and demanded at the equilibrium price.
- Surplus: Quantity supplied is greater than quantity demanded.
- Shortage: Quantity demanded is greater than the quantity supplied.
Chapter 5: Elasticity
Elasticity: A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.
Price Elasticity of Demand: A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in the price.
Example: Pg. 91: 10% increase in price of ice cream results in 20% decrease in quantity demanded of ice cream.
Substitutes: Significant elastic demand between substitutes as the change in the price of one good directly influences the demand of the other good.
Example: Pepsi and Coke – if the price of Coke rises, there will be a substantial percentage increase in quantity demanded for Pepsi because of the more attractive price.
Necessities and Luxuries
- The former will have inelastic demand, whereas the latter will have elastic demand because of their relative importance to everyday living.
- There are exceptions as it depends on the preferences of actors – having a diverse shoe collection may be seen as a necessity to some instead of a luxury.