Chapter 3: Supply, Demand, and the Market Process Flashcards
Law of Demand
A principle that states there is an inverse relationship between the price of a good and the quantity of it buyers are willing to purchase. As the price of a good increases, consumers will wish to purchase less of it. As the price decreases, consumers will wish to purchase more of it.
Substitutes
Products that serve similar purposes. An increase in the price of one will cause an increase in demand for the other.
Consumer surplus
The difference between the maximum price consumers are willing to pay and the price they actually pay. It is the net gain derived by the buyers of the good.
Complements
Products that are usually consumed jointly (for example, bread and butter, hot dogs, and hot dog buns). A decrease in the price of one will cause an increase in demand for the other.
Opportunity cost of production
The total economic cost of producing a good or service. The cost component includes the opportunity cost of all resources, including those owned by the firm. The opportunity cost is equal to the value of the production of other goods sacrificed as the result of producing the good.
Profit
An excess of sales revenue relative to the opportunity cost of production. The cost component includes the opportunity cost of all resources, including those owned by the firm. Therefore, profit accrues only when the value of the good produced is greater than the value of the resources used for its production.
Loss
A deficit of sales revenue relative to the opportunity cost of production. Losses are a penalty imposed on those who produce goods even though they are valued less than the resources required for their production.
Law of supply
A principle that states there is a direct relationship between the price of a good and the quantity of it producers are willing to supply. As the price of a good increases, producers will wish to supply more of it. As the price decreases, producers will supply less.
Producer surplus
The difference between the price that suppliers actually receive and the minimum price they would be willing to accept. It measures the net gains to producers and resource suppliers from market exchange. It is not the same as profit.
Market
An abstract concept encompassing the forces of supply and demand and the interaction of buyers and sellers with the potential for exchange to occur.
Equilibrium
A state in which the conflicting forces of supply and demand are in balance. When a market is in equilibrium, the decisions of consumers and producers are brought into harmony with one another, and the quantity supplied will equal the quantity demanded.
Economic efficiency
A situation in which all of the potential gains from trade have been realized. An action is efficient only if it creates more benefit than cost. With well-defined property rights and competition, market equilibrium is efficient.
Invisible hand principle
The tendency of market prices to direct individuals pursuing their own interests to engage in activities promoting the economic well-being of society.
