Law of Demand Flashcards
Total Value
The total value of all goods and services produced by a firm or an economy over a given period of time. This value is typically measured in terms of money, and it is calculated by multiplying the quantity of goods or services produced by the price at which they are sold.
Marginal Value
The additional value that a person derives from consuming one additional unit of a good or service.
Principle #3 : Diminishing Marginal Value
The principle of diminishing marginal value states that as a person consumes more and more units of a good or service, the additional value or utility that they derive from each additional unit will eventually decrease.
In other words, the marginal value of a good or service will decrease as the quantity of the good or service consumed increases. This principle is based on the idea that as a person consumes more of a good or service, they will eventually reach a point of satiation where they derive no additional benefit from consuming additional units.
This behaviour depends on real income and relative prices, not nominal income and nominal prices
Nominal Income
income that includes the effects of inflation or deflation - represented through money
Real Income
income that has been adjusted for changes in the purchasing power of money over time - expressed by the quantity of goods and services that could be purchased with the income
M/p²
Nominal Price
Nominal price of a good or service is expressed in current monetary terms, without any adjustments for changes in the purchasing power (inflation and defleation) of money over time. Does not reflect the true cost of the good or service in terms of the quantity of other goods and services that it can be exchanged for.
Relative Price
Relative price is the price of a good or service relative to the prices of other goods and services. This means that relative price is expressed as the ratio of the price of the good or service to the price of another good or service.
1=p1/p2
Law of Demand
The Law of Demand describes the relationship between the price of a good or service and the quantity of that good or service that is demanded by consumers: as the price of a good or service increases, the quantity of that good or service that is demanded by consumers decreases, and vice versa. This relationship is often represented graphically as a downward-sloping curve. It is based on the idea of scarcity and choices are made in order to maximize satisfaction.
Marginal Condition for Equilibrium
Condition satisfied for market equilibrium: when the quantity supplied is equal to the quantity demanded.
It states that for market equilibrium, the marginal cost of production (the cost of producing one additional unit of the good or service) must be equal to the marginal revenue (the revenue generated by selling one additional unit of the good or service).
MC = MR (condition for equilibrium)
This condition ensures that producers are able to cover their costs and make a profit by supplying the good or service, and that consumers are willing to pay the market price for the good or service.
Alchian-Allen Theorem
Principle in economics that states that, in a competitive market, firms will produce the quantity of a good or service that maximizes their profits. Firms will respond to changes in market conditions by adjusting their production levels to maximize their profits.
For example, if the price increases, firms will produce more to take advantage of the higher price and increase their profits. If the price decreases, firms will produce less to minimize their losses.
The Allen-Alchian Theorem is often used to explain why firms in competitive markets are able to achieve efficient outcomes, even without government intervention.
Water-Diamond Paradox
The paradox states that, although diamonds are much scarcer than water, water is typically more valuable because it is necessary for human survival.
This paradox arises because the value of a good is determined by utility, not just scarcity.
Total Expenditure
Total expenditure is the total amount of money that is spent on goods and services within a given period of time. It is one of the key measures of economic activity, and it is often used as an indicator of the overall health of an economy.
Total expenditure is calculated by adding up all of the individual expenditures made by households, businesses, and governments within a particular time period, such as a quarter or a year. This measure is also known as total spending or total demand.
Consumer’s Surplus
social surplus and consumer’s surplus, in economics, the difference between the price a consumer pays for an item and the price he would be willing to pay rather than do without it
Marginal Utility
Marginal utility is personal, and what has utility for one person might not have the same utility for another.
