1. Demand And Supply Intro Flashcards
Goods markets
markets for the output of production. From an economics perspective, firms, which ultimately are owned by individuals either singly or in some corporate form, are organizations that buy the services of those factors. Firms then transform those services into intermediate or final goods and services.
Factor markets
markets for the purchase and sale of factors of production. In capitalist private enterprise economies, households own the factors of production (the land, labor, physical capital, and materials used in production).
Intermediate goods and services
those purchased for use as inputs to produce other goods and services, whereas final goods and services are in the final form purchased by households.)
Labor markets
In one type of factor market, called labor markets, households offer to sell their labor services when the payment they expect to receive exceeds the value of the leisure time they must forgo. In contrast, firms hire workers when they judge that the value of the productivity of workers is greater than the cost of employing them. A major source of household income and a major cost to firms is compensation paid in exchange for labor services.
Savings
Income not spent. through which households can accumulate financial capital, the returns on which can produce other sources of household income, such as interest, dividends, and capital gains. Households may choose to lend their accumulated savings (in exchange for interest) or invest it in ownership claims in firms (in hopes of receiving dividends and capital gains). Households make these savings choices when their anticipated future returns are judged to be more valuable today than the present consumption that households must sacrifice when they save.
Capital markets
Firms use capital markets (markets for long-term financial capital—that is, markets for long-term claims on firms’ assets and cash flows) to sell debt (in bond markets) or equity (in equity markets) in order to raise funds to invest in productive assets, such as plant and equipment. They make these investment choices when they judge that their investments will increase the value of the firm by more than the cost of acquiring those funds from households. Firms also use such financial intermediaries as banks and insurance companies to raise capital, typically debt funding that ultimately comes from the savings of households, which are usually net accumulators of financial capital.
Demand
The willingness and ability of consumers to purchase a given amount of a good or service at a given price.
Supply
The willingness of sellers to offer a given quantity of a good or service for a given price.
Law of demand
The principle that as the price of a good rises, buyers will choose to buy less of it, and as its price falls, they will buy more.
Demand function
A relationship that expresses the quantity demanded of a good or service as a function of own-price and possibly other variables.
Inverse demand function
A restatement of the demand function in which price is stated as a function of quantity.
Demand curve
Graph of the inverse demand function.
Supply function
The quantity supplied as a function of price and possibly other variables.
Technology of production
The “rules” that govern the transformation of inputs into finished goods and services.
Supply curve
Graph of the inverse supply function
Law of supply
The principle that a rise in price usually results in an increase in the quantity supplied.
Change in supply
A shift in the supply curve.
Change in quantity supplied
Shift along the supply curve
Market equilibrium
The condition in which the quantity willingly offered for sale by sellers at a given price is just equal to the quantity willingly demanded by buyers at that same price.
Behavioral equations
With respect to demand and supply, equations that model the behavior of buyers and sellers.
Exogenous variables
Variables whose equilibrium values are determined outside of the model being considered.
Endogenous variables
Variables whose equilibrium values are determined within the model being considered.
Equilibrium condition
A condition necessary for the forces within a system to be in balance. Q demanded =Q supplied
Partial equilibrium analysis
An equilibrium analysis focused on one market, taking the values of exogenous variables as given.
General equilibrium analysis
An analysis that provides for equilibria in multiple markets simultaneously.
Excess supply
A condition in which the quantity ready to be supplied is greater than the quantity demanded.
Stable
With reference to an equilibrium, one in which price, when disturbed away from the equilibrium, tends to converge back to it.
Unstable
With reference to an equilibrium, one in which price, when disturbed away from the equilibrium, tends not to return to it.
Common value auction
An auction in which the item being auctioned has the same value to each auction participant, although participants may be uncertain as to what that value is.
Private value auction
An auction in which the value of the item being auctioned is unique to each bidder.
Ascending price auction
An auction in which an auctioneer calls out prices for a single item and potential buyers bid directly against each other, with each subsequent bid being higher than the previous one.
Reservation prices
The highest price a buyer is willing to pay for an item or the lowest price at which a seller is willing to sell it.
Sealed bid auction
An auction in which bids are elicited from potential buyers, but there is no ability to observe bids by other buyers until the auction has ended.
First price sealed bid auction
An auction in which envelopes containing bids are opened simultaneously and the item is sold to the highest bidder.
Winners curse
The tendency for the winner in certain competitive bidding situations to overpay, whether because of overestimation of intrinsic value, emotion, or information asymmetries.
Second price sealed bid
An auction (also known as a Vickery auction) in which bids are submitted in sealed envelopes and opened simultaneously. The winning buyer is the one who submitted the highest bid, but the price paid is equal to the second highest bid.
Dutch auction
An auction in which the auctioneer begins at a high price, then lowers the called price in increments until there is a willing buyer for the item being auctioned.
Single price auction
A Dutch auction variation, also involving a single price, is used in selling US Treasury securities.
Consumer surplus
The difference between the value that a consumer places on units purchased and the amount of money that was required to pay for them.
Producer surplus
The difference between the total revenue sellers receive from selling a given amount of a good and the total variable cost of producing that amount.
Marginal value curve
A curve describing the highest price consumers are willing to pay for each additional unit of a good.
Consumer surplus
The difference between the value that a consumer places on units purchased and the amount of money that was required to pay for them.
Total expenditure
The total amount spent over a time period.
Producer surplus
The difference between the total revenue sellers receive from selling a given amount of a good and the total variable cost of producing that amount.
Variable costs
Costs that fluctuate with the level of production and sales.
Total surplus
The difference between total value to buyers and the total variable cost to sellers; made up of the sum of consumer surplus and producer surplus.
Externality
An effect of a market transaction that is borne by parties other than those who transacted.
Negative externality
A negative effect (e.g., pollution) of a market transaction that is borne by parties other than those who transacted; a spillover cost.
Positive externality
A positive effect (e.g., improved literacy) of a market transaction that is borne by parties other than those who transacted; a spillover benefit.
Deadweight loss
A net loss of total (consumer and producer) surplus.
Price floor
A minimum price for a good or service, typically imposed by government action and typically above the equilibrium price.
Elasticity
The percentage change in one variable for a percentage change in another variable; a measure of how sensitive one variable is to a change in the value of another variable.
Own-price elasticity
The percentage change in quantity demanded for a percentage change in own price, holding all other things constant.
Inelastic
Insensitive to price changes.
Unit elastic
An elasticity with a magnitude of 1.
Elastic
Said of a good or service when the magnitude of elasticity is greater than one.
Arc elasticity
An elasticity based on two points, in contrast with (point) elasticity. With reference to price elasticity, the percentage change in quantity demanded divided by the percentage change in price between two points for price.
Perfectly Inelastic
Said of a good or service that is completely insensitive to a change in the value of a specified variable (e.g., price).
Perfectly elastic
Said of a good or service that is infinitely sensitive to a change in the value of a specified variable (e.g., price).
Normal good
A good that is consumed in greater quantities as income increases.
Inferior good
A good whose consumption decreases as income increases.
Cross price elasticity of demand
The percent change in quantity demanded for a given small change in the price of another good; the responsiveness of the demand for Product A that is associated with the change in price of Product B.
Complements
Said of goods which tend to be used together; technically, two goods whose cross-price elasticity of demand is negative.
