Vocabulary: Unit Three Flashcards
Income effect
The same amount of money can buy less of a good when the price increases, so consumers buy less
Substitution effect
The relative price of an alternative good decreases when the price of a good increases, so consumers buy less of the initial good and more of the alternative good
Determinants of demand
Things that help determine how much of a good or service consumers are willing and able to buy at different price
Supply
The quantity of a good or service that a firm is willing and able to sell at different prices; the relationship between price and quantity supplied
Determinants of supply
Things that help determine how much of a good or service suppliers are willing and able to supple at different prices
Equilibrium price
The price where quantity demanded equals quantity supplied
Equilibrium price
The corresponding quantity
Price ceiling
A maximum legal price for a good or service; results in a shortage
Price floor
A minimum legal price for a good or service; results in a surplus
Price elasticity of demand
Measures how much he quantity demanded changes when the price changes; the sensitivity of consumers to price changes
Price elasticity of supply
Compares the change in quantity supplied to a change in price; responsiveness of suppliers to a price
Income elasticity of demand
Measures how the demand for a good changes as a result of a change in income
Normal goods
Goods whose demand increases as income increases
Inferior goods
Goods whose demand decreases as income increases
Cross-price elasticity of demand
Measures the responsiveness of demander so to a change in the price of another good
Substitute good
A good with positive cross-price elasticity; an alternative good
Complement good
A good with negative cross-price elasticity used in correspondence with another good
Utility
The satisfaction or service a person obtains from consuming a good or service
Marginal utility
The increase in utility a person gains from consuming an additional unit of a good
Total utility
The total satisfaction a person receives from consuming a good
Diminishing marginal returns
As a good is consumed, each additional unit of the good consumed generates less utility
Consumer surplus
The difference between what consumers actually pay for a good and the maximum amount they would’ve been willing to pay; the difference between the total value consumers place on a good and what they pay for a good; the additional amount consumers would be willing and able to pay for a good
