Unit 3/4 Terminology Flashcards
Firm
An organization that transforms resources “inputs” into products “outputs”. Firms are the primary producing units in a market economy.
Entrepeneur
A person who organizes, manages, and assumes the risks of a firm, taking a new idea or new product and turning it into a successful business.
Households
The consuming units in an economy.
Product or output markets
The markets in which goods and services are exchanged.
Input or factor markets
The markets in which resources used to produce goods or services are exchanged.
Circular flow of economic activity through a simple market economy
Firms supply goods/services to households. Households supply land/labor/capital to firms.
Quantity Demanded
The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.
Important thing 1
An Increase In price leads to a change in quantity demanded of a certain product. However, a change in other factors can lead to a change in the actual demand of that product, such as income.
Demand Schedule
Shows how much of a given product a household will be willing to buy at different prices for a given period of time.
Demand Curve
A graph illustrating how much a given household would be willing to buy at different prices.
There is a negative (inverse relationship between quantity demanded and price)
When prices rise, quantity demanded falls, and when price falls, quantity demanded rises. Therefore, there is a downward slope.
Law of Demand
The negative relationship between price and quantity demanded: Ceterus Paribus, as price rises, quantity demanded decreases, as price falls, quantity demanded increases, and during this given period of time, all other things remain constant.
Downward slopes of demand curves
It is reasonable to expect a downward slope of a demand curve because with each purchase of a product, you are likely to gain less and less satisfaction from it, leaving you demanding it less and less everytime you go to purchase it.
More Info on Demand Curves
They intersect the X axis (quantity demanded) because with each purchase, you want that product less and less. They intersect the Y axis (price) because no matter who you are, you do not have infinite resources (time/wealth). Demand curves are negative.
Normal Goods
Goods for which demand goes up when income is higher, and for which demand goes down when income is lower. Basically, when you have more saved money (wealth) you can afford to buy more things such as movie tickets, restaurant meals, and clothing.
Inferior Goods
Goods for which demand tends to fall when income rises. Basically, if I’m rich, I’m going to demand more filet mignon, leading to a decrease in quantity demanded of other fishes like salmon. These fishes are inferior goods. Inferior goods are usually bad things because why would you want to buy a bad thing (like a used car) when you can literally afford something better (a brand new car).
Substitutes
Goods that can serve as replacements for one another; when the price for one increase, demand for the other increases. For example, butter and margarine are basically the same thing. If Butter becomes expensive, I’m just gonna buy margarine. It is basically the same thing, but it is cheaper. It is a proportional relationship.
complements/complementary goods
Goods that “go together”; a decrease in the price of one results in the increase in demand for the other, and vice versa. For example, if cereal becomes cheaper (price decrease), people will buy more of it (basic law of demand). However, this also means that there will be an increase in demand for milk, because with more cereal, people will buy more milk.
Demand curves are the relationship between price of a good and quantity demanded. In these curves, we tend to hold things like taste, preference, and income constatnt.
However, when these factors change, we need to create entirely new relationships for the demand curves between price and quantity demanded.
When the price of a good changes, we move along the demand curve for that good. For example, if the price of gasoline increases, we move along the demand curve to determine the new quantity demanded of gasoline.
When the income/taste/preferences change, we shift the demand (shift the entire curve). Normal goods shift to the right.
Shift of demand curve
The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions.
Change in price of a good or service leads to change in quantity demanded (movement along a demand curve).
Change in the income/taste/preference of a good or service leads to a change in demand (movement of the entire demand curve).
Market Demand
The sum of all quantities of a good or service demanded per period by all the households buying in that market for that good or service.
Market demand is literally the quantity demanded (a specific number) from each of three different households at a specific price.
For example, if coffee was $1.50 per pound, and household A would purchase 8 pounds at this price, Household B would purchase 3 pounds at this price, and household C would purchase 9 pounds at this price, the Market Demand is 20 (8+3+9).
As income rises, inferior goods shift left, and normal goods shift right.
As income rises (I have more money) I will buy more of the nicer things, and less of the uglier things (inferior goods). Further, I will buy more things like clothes and fancy dinners, which are normal goods, just because I like products and I can financially afford more of them.
If the price of a good increase, the demand for that good will decrease, and the demand for it’s substitute will increase. The demand of a complement will also decrease in quantity demanded.
If the price of hamburgers increases, people will want to buy less hamburgers, leading to a lower quantity demanded. Further, more people will buy chicken (a substitute to hamburgers) because it is cheaper, leading to a higher quantity demanded for chicken. The quantity demanded of ketchup will also decrease, because less people need it, because less people are eating burgers and are eating more chicken.
Law of supply
As prices increase, the quantity supplied increases. Think of it like you being a business. If you are selling a product at a higher price, you want to sell as many of that product as you can to make the most money.
Supply shifts
If it becomes more expensive to produce a good (price increase), producers are less likely to produce it.
