Unit 2: Demand, Supply, and Consumer Choice – Flashcards
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There is an INVERSE relationship between price and quantity demanded
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Law of Demand
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If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa)
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Substitution Effect
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If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more.
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Income Effect
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Satisfaction
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Utility
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As you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease.
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Law of Diminishing Marginal Utility
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The property of a resource allocation of maximizing the total benefits received by all members of society.
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Efficiency
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Occurs at point E, where the supply curve and the demand curve intersect.
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Market Equilibrium
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When price the quantity supplied.
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Shortage
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A legal maximum on the price at which a good can be sold.
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Price Ceiling
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Result of price ceilings, where there is shortage dure to being below the equilibrium price.
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Binding Constraint
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When price > equilibrium price, then quantity supplied > quantity demanded.
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Surplus
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A legal minimum on the price at which a good can be sold.
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Price Floor
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When beyond some level of output, additional units of output require larger amounts of the variable input (more production is more expensive).
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Law of Diminishing Marginal Returns
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What changes quantity supplied and demanded?
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Price
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Shows how sensitive quantity is to a change in price.
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Elasticity
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Quantity is INsensitive to a change in price.
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Inelastic Demand
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Quantity is sensitive to a change in price.
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Elastic Demand
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Measurement of consumers responsiveness to a change in price.
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Elasticity of Demand
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Shows how sensitive producers are to a change in price, and is based on time limitations, as producers need time to produce more.
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Elasticity of Supply
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Shows how sensitive a product is to a change in price of another good.
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Cross-Price Elasticity of Demand
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Shows how sensitive a product is to a change in INCOME and if the good is normal or inferior.
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Income-Elasticity of Demand
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The change in total utility that results from a one-unit increase in the quantity of a good consumed.
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Marginal Utility
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The total benefit a person gets from the consumption of goods.
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Total Utility
