Glossary
Complements
Two goods that are typically consumed together; an increase in the price of one leads to a decrease in the demand for the other.
Example:
If the price of hot dog buns increases significantly, the demand for hot dogs themselves might decrease, as they are complements.
Consumer Surplus
The monetary gain consumers receive when they purchase a good for a price lower than the maximum price they were willing to pay.
Example:
If you were willing to pay 30, your consumer surplus is $20.
Cross-Price Elasticity of Demand
A measure of how responsive the quantity demanded of one good is to a change in the price of another related good.
Example:
Calculating the cross-price elasticity of demand between coffee and tea would help determine if they are substitutes or complements.
Deadweight Loss
The reduction in total surplus (consumer plus producer surplus) that results from an inefficient allocation of resources, often caused by market distortions like taxes or price controls.
Example:
A government-imposed price ceiling on rent can lead to a deadweight loss because fewer apartments are rented than would be in an unregulated market.
Demand
The quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period.
Example:
The demand for fidget spinners surged when they became a viral trend, even at higher prices.
Demand Curve
A downward-sloping graph that illustrates the inverse relationship between the price of a good and the quantity demanded.
Example:
Drawing a demand curve for organic vegetables would show that as their price decreases, more people are willing to buy them.
Disequilibrium
A state in a market where the quantity demanded does not equal the quantity supplied, leading to either a surplus or a shortage.
Example:
If a new smartphone model is released with overwhelming demand but limited production, the market is in disequilibrium, experiencing a shortage.
Elastic Demand
A situation where the percentage change in quantity demanded is greater than the percentage change in price, indicating high consumer responsiveness.
Example:
If the price of a specific brand of designer jeans increases by 10% and sales drop by 30%, it indicates elastic demand.
Elastic Supply
A situation where the percentage change in quantity supplied is greater than the percentage change in price, indicating high producer responsiveness.
Example:
A company that can easily scale up production of digital software has elastic supply because they can quickly respond to price increases.
Equilibrium
The state in a market where the quantity demanded equals the quantity supplied, resulting in a stable price and quantity with no tendency to change.
Example:
When the number of concert tickets available perfectly matches the number of tickets fans are willing to buy at a certain price, the market is at equilibrium.
Excise Taxes
A tax levied on the production or sale of a specific good or service, often intended to discourage consumption or raise revenue.
Example:
A tax on cigarettes is an excise tax designed to reduce smoking and generate revenue for public health programs.
Income Elasticity of Demand
A measure of how responsive the quantity demanded of a good is to a change in consumers' income.
Example:
Analyzing the income elasticity of demand for luxury vacations would likely show that as incomes rise, people demand significantly more of them.
Inelastic Demand
A situation where the percentage change in quantity demanded is less than the percentage change in price, indicating low consumer responsiveness.
Example:
Despite a 20% increase in price, people still buy nearly the same amount of life-saving medicine, demonstrating inelastic demand.
Inelastic Supply
A situation where the percentage change in quantity supplied is less than the percentage change in price, indicating low producer responsiveness.
Example:
The inelastic supply of rare antique furniture means that even a huge price increase won't significantly increase the number of pieces available.
Inferior Good
A good for which demand decreases as consumer income rises, assuming all other factors remain constant.
Example:
Instant noodles might be an inferior good for some, as they switch to more expensive, healthier meal options once their income increases.
Law of Demand
An economic principle stating that, all else being equal, as the price of a good or service increases, the quantity consumers are willing and able to buy decreases.
Example:
The Law of Demand explains why fewer people buy gourmet coffee when its price jumps from 7 a cup.
Law of Supply
An economic principle stating that, all else being equal, as the price of a good or service increases, the quantity producers are willing and able to sell increases.
Example:
The Law of Supply explains why more farmers are willing to grow corn when its market price is high.
Markets
A place or system where buyers and sellers interact to exchange goods and services.
Example:
The online marketplace for vintage sneakers is a vibrant market where collectors and sellers connect.
Normal Good
A good for which demand increases as consumer income rises, assuming all other factors remain constant.
Example:
Organic produce is often considered a normal good because people tend to buy more of it as their income increases.
Price Ceiling
A legal maximum price that can be charged for a good or service, set below the equilibrium price to be effective, leading to shortages.
Example:
During a natural disaster, a government might impose a price ceiling on bottled water to prevent price gouging.
Price Controls
Government-mandated maximum or minimum prices for specific goods or services, intended to influence market outcomes.
Example:
Rent control policies are a form of price controls designed to make housing more affordable.
Price Elasticity of Demand (PED)
A measure of the responsiveness of the quantity demanded of a good to a change in its price.
Example:
Calculating the Price Elasticity of Demand for luxury cars would likely show a high sensitivity to price changes.
Price Elasticity of Supply (PES)
A measure of the responsiveness of the quantity supplied of a good to a change in its price.
Example:
The Price Elasticity of Supply for fresh produce in the short run is often low because farmers cannot instantly grow more crops.
Price Floor
A legal minimum price that can be charged for a good or service, set above the equilibrium price to be effective, leading to surpluses.
Example:
Minimum wage laws act as a price floor in the labor market, setting a lowest allowable hourly rate for workers.
Producer Surplus
The monetary gain producers receive when they sell a good for a price higher than the minimum price they were willing to accept.
Example:
If a baker was willing to sell a cake for 35, their producer surplus is $15.
Quantity Demanded
The exact amount of a good or service that consumers are willing and able to purchase at a given price point.
Example:
If a new video game costs $60, the quantity demanded might be 100,000 copies in the first week.
Quantity Supplied
The exact amount of a good or service that producers are willing and able to offer for sale at a given price point.
Example:
If a bakery can sell a loaf of specialty bread for $8, their quantity supplied might be 50 loaves per day.
Quotas
A government-imposed limit on the quantity of a particular good that can be imported into a country during a specific period.
Example:
A country might impose a quota on imported textiles to protect its domestic textile industry from foreign competition.
Shifts in the Demand Curve
A movement of the entire demand curve, either to the left or right, caused by changes in non-price determinants such as income, consumer tastes, or the price of related goods.
Example:
A new health study praising the benefits of avocados would cause a shift in the demand curve for avocados to the right.
Shifts in the Supply Curve
A movement of the entire supply curve, either to the left or right, caused by changes in non-price determinants such as production costs, technology, or government policies.
Example:
A new, more efficient robot for car manufacturing would cause a shift in the supply curve for cars to the right.
Shortage
A situation in a market where the quantity demanded of a good exceeds the quantity supplied at a given price, typically occurring when the price is below equilibrium.
Example:
When a popular concert sells out instantly, it indicates a shortage of tickets at the initial price.
Substitutes
Two goods that can be used in place of each other; an increase in the price of one leads to an increase in the demand for the other.
Example:
If the price of Netflix subscriptions rises, some consumers might switch to Hulu, making them substitutes.
Supply
The quantity of a good or service that producers are willing and able to offer for sale at various prices during a specific period.
Example:
The supply of custom-made artisanal chocolates is limited by the time and skill required for production.
Supply Curve
An upward-sloping graph that illustrates the direct relationship between the price of a good and the quantity supplied.
Example:
A supply curve for solar panels would show that as the price of panels increases, manufacturers are incentivized to produce more.
Supply and Demand Model
A foundational economic model that illustrates how the interaction between buyers (demand) and sellers (supply) determines market prices and quantities.
Example:
Understanding the supply and demand model helps explain why the price of concert tickets fluctuates based on artist popularity and venue availability.
Surplus
A situation in a market where the quantity supplied of a good exceeds the quantity demanded at a given price, typically occurring when the price is above equilibrium.
Example:
If a toy company produces too many action figures that no one wants, they'll end up with a surplus of unsold inventory.
Tariffs
A tax imposed by a government on goods and services imported from other countries, typically to protect domestic industries or raise revenue.
Example:
A tariff on imported cars would make foreign cars more expensive, potentially encouraging consumers to buy domestically produced vehicles.
Total Surplus
The sum of consumer surplus and producer surplus, representing the total benefits to buyers and sellers from market transactions.
Example:
At market equilibrium, the total surplus from selling handmade jewelry is maximized, benefiting both the artisans and their customers.
Unit Elastic Demand
A situation where the percentage change in quantity demanded is exactly equal to the percentage change in price.
Example:
If a 5% discount on a streaming service leads to exactly a 5% increase in new subscribers, it's a case of unit elastic demand.
Unit Elastic Supply
A situation where the percentage change in quantity supplied is exactly equal to the percentage change in price.
Example:
If a 10% rise in the price of custom t-shirts leads to exactly a 10% increase in the number of t-shirts a small print shop produces, their unit elastic supply is demonstrated.
World Price
The prevailing price of a good or service in the international market, which a small country takes as given when engaging in trade.
Example:
If the world price of steel is lower than a country's domestic production cost, that country will likely import steel.