ECON 1110 Chapter 3

Demand Curve

A graph illustrating how much of a given product a household would be willing to buy at different prices.

Supply Curve

A graph illustrating how much of a product a firm will sell at different prices.

Entrepreneur

A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

Shortage

Also known as excess demand. The condition that exists when quantity demanded exceeds quantity supplied at the current price.

Surplus

Also known as excess supply. The condition that exists when quantity supplied exceeds quantity demanded at the current price.

Firm

An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

Community Indifference Curve (CIC)

Captures the trade-off in consumption for consumers for a given level of utility. A CIC is just the sum of all the individual indifference curves of consumers in an economy.

Normal Goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

Inferior Good

Goods for which demand tends to fall when income rises.

Complementary Goods

Goods that "go together;"a decrease in the price of one results in an increase in demand for the other and vice versa.

Substitutes

Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.

Circular Flow of Economic Activity

Here, goods and services flow counter-clockwise: Labor services supplied by households flow to firms, and goods and services produced by firms flow to households. Payment flows in the opposite direction: Payment for goods and services flows from households to firms, and payment for labor services flows from firms to households.

Perfect Substitutes

Identical products.

Demand Schedule

Shows how much of a given product a household would be willing to buy at different prices for a given time period.

Supply Schedule

Shows how much of a product firms will sell at alternate prices.

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.

Quantity Supplied

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

Movement Along a Demand Curve

The change in quantity demanded brought about by a change in price.

Movement Along a Supply Curve

The change in quantity supplied brought about by a change in price.

Shift of a 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.

Shift of a Supply Curve

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.

Equilibrium

The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.

Households

The consuming units in an economy.

Profit

The difference between revenue and cost.

Land Market

The input/factor market in which households supply land or other real property in exchange for rent.

Capital Market

The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

Labor Market

The input/factor market in which households supply work for wages to firms that demand labor.

Factors of Production

The inputs into the production process. Land, labor, and capital are the three key factors of production.

Output Markets

The markets in which goods and services are exchanged. Also known as Product Markets.

Input Markets

The markets in which the resources used to produce goods and services are exchanged. Also known as Factor Markets.

Law of Demand

The negative relationship between price and quantity demanded: Ceteris paribus, as price rises, quantity demanded decreases; as price falls, quantity demanded increases.

Law of Supply

The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

Income

The sum of all a household's wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

Market Supply

The sum of all that is supplied each period by all producers of a single product.

Market Demand

The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

Net Worth

The total value of what a household owns minus what it owes. It is a stock measure.