Buyers, sellers and the price where they meet. Master the vocabulary of how markets set prices and quantities.
These terms were extracted from Principles of Microeconomics by Dr. Emma Hutchinson, University of Victoria, eCampusOntario which is licensed under a Creative Commons Attribution 4.0 International License. Based on Principles of Microeconomics by OpenStax, licensed under CC BY 4.0.
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all else equal
Economists call this assumption ceteris paribus, a Latin phrase meaning “other things being equal.”
the difference between a consumer’s willingness to pay, and the price they actually pay
By examining the marginal net benefit at each level of consumption, we can measure a consumer’s total net benefit from their purchase, or their consumer surplus.
a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis
This concept of a consumer’s willingness to pay (WTP) serves as a starting point for the demand curve.
a table that shows a range of prices for a certain good or service and the quantity demanded at each price
Using this we can make a demand schedule, as shown in Figure 3.2a, for a typical student.
the relationship between price and the quantity demanded of a certain good or service
In economic terminology, demand is not the same as quantity demanded.
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
Economists call this inverse relationship between price and quantity demanded the law of demand.
the additional satisfaction or utility that a person receives from consuming an additional unit of a good or service, equal to WTP
A consumer’s Willingness to Pay is equal to that consumer’s Marginal Benefit (MB).
an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity, used as a decision-making tool
This is useful information if we want to use Marginal Analysis.
what a buyer pays for a unit of the specific good or service
Under the assumption of buyer power, no single consumer has the power to influence the price at which they purchase a good.
the total number of units of a good or service consumers are willing to purchase at a given price
The total number of units purchased at that price is called the quantity demanded.
the largest sum of money an individual is willing to give up to receive a product or service
This concept of a consumer’s willingness to pay (WTP) serves as a starting point for the demand curve.
goods that are often used together so that consumption of one good tends to enhance consumption of the other
Demand for complements is positively correlated with the other goods price.
a good in which the quantity demanded falls as income rises, and in which quantity demanded rises and income falls
A millionaire food connoisseur may regard a food you view as a delicacy as an inferior good that they would only eat if they couldn’t afford such a luxurious lifestyle.
The aggregate of the demands of all potential customers (market participants) for a specific product over a specific period in a specific market.
To illustrate market demand (also known as aggregate demand), we can start with two demand curves.
a good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls
On the other hand, as your income increases, you will likely consume more steak and other fine dining foods, making them normal goods.
when a change in some economic factor (other than price) causes a different quantity to be demanded at every price
A rise in income causes a shift in demand for normal goods, moving the whole demand curve to the right.
a good that can replace another to some extent, so that greater consumption of one good can mean less of the other
These improvements encourage people to substitute away from cars, decreasing the demand for gasoline regardless of price.
at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus
This excess supply is also known as a surplus.
the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant
Similarly, the law of supply shows that a higher price will lead to a higher quantity supplied.
the additional cost that a firm incurs for producing an additional unit of a good or service.
As long as the consumer’s marginal benefit is greater than their marginal cost, they will purchase the good.
the difference between a producers costs, and the price they are paid
In section 3.4, we will examine the market from the eyes of the producer and introduce the concept of producer surplus.
the total number of units of a good or service producers are willing to sell at a given price
We can now use our supply curve to examine how our quantity supplied interacts with price, and how this will affect producer surplus.
a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis
The assumption behind a demand or supply curve is that no economic factors other than the product’s price are changing.
a table that shows a range of prices for a good or service and the quantity supplied at each price
A supply schedule lists how many cupcakes the baker will offer for sale at each possible price.
the relationship between price and the quantity supplied of a certain good or service
As with demand and quantity demanded, supply is not the same as quantity supplied.
total of all goods and services (including exports and imports) supplied at every price level, within a national economy during a given period. Also called total output
By adding all the suppliers together, we get aggregate supply.
direct costs of production such as rent, salaries, wages, or other input costs. Easily recognizable for classification and recording
Recall in Topic 1 that the opportunity costs of an action include all implicit and explicit costs.
the combination of labor, materials, and machinery that is used to produce goods and services; also called inputs
Also known as ‘Factors of Production’, these are the combination of labor, materials, and machinery used to produce goods and services.
the opportunity costs of an action, associated with an actions trade-offs
The $75 we could be earning from working is equal to our implicit costs of going out.
when a change in some economic factor (other than price) causes a different quantity to be supplied at every price
The first way to view a shift in supply is as a vertical shift.
A cost to society created by a market inefficiency, occurs when quantity is different from equilibrium quantity
The difference in green regions from Figure 3.6j and Figure 3.6k is called Deadweight Loss, because it is cost to society made by an inefficiency.
the price where quantity demanded is equal to quantity supplied
There is only one price that corresponds with equilibrium quantity, and that is equilibrium price (PE).
the quantity at which quantity demanded and quantity supplied are equal for a certain price level
We looked at an example of the government regulating prices, and concluded that a deviation from the equilibrium quantity is what causes a deadweight loss.
the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change
Equilibrium is formally defined as a state of rest or balance due to the equal action of opposing forces.
at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage
This excess demand is known as a shortage.
the total welfare to society, includes producer surplus, consumer surplus, and government expenditure
To calculate market surplus, simply find the area of the shaded regions.
at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand
When we have a shortage, the consumers who are able to buy the good are happy, but due to the low price, not enough will be produced and not every consumer will get thier hands on a hotdog.
at the existing price, quantity supplied exceeds the quantity demanded; also called excess supply
When the price is above equilibrium, the excess supply is also known as a surplus.