ECO Chapter 2

Pe, (Qd)

expected future price of a product, direct, positive

producer surplus

for each unit supplied, the difference between the market price and the minimum price producers would accept to supply the unit (its supply price)

substitutes in production

goods for which an increase in price of one good relative to the price for another good causes producers to increase production of the now higher-priced good and decrease production of the other good

complements in production

goods for which an increase in the price of one good, relative to the price of another good, causes producers to increase production of both goods

demand curve

graph showing the relationship between quantity demanded and price when all other variables influencing quantity demanded are held constant

M, for normal goods, (Qd)

income of consumers, direct, positive

M, for inferior goods, (Qd)

income of consumers, inverse, negative

direct supply function

table, graph, or equation that shows how quantity supplied is related to product price, all other things constant : Qs = f (P)

T*, (the astrisc means it's the fancy T), (Qd)

taste patterns of consumers, direct, positive

indeterminate

term referring to the unpredictable change in either equilibrium price or quantity when the direction of change depends upon the relative magnitudes of the shifts in the demand and supply curves

quantity supplied

the amount of a good or service offered for sale during a given period of time

equilibrium quantity

the amount of good bought and sold in the market equilibrium

inverse demand function

the demand function when price is expressed as a function of quantity demanded: P = f(Qd)

consumer surplus

the difference between the economic value of a good (its demand price) and the market price the consumer must pay

economic value

the maximum amount any buyer in the market is willing to pay for the unit, which is measured by the demand price for the unit

demand price

the maximum price consumers will pay for a specific amount of a good or service

ceiling price

the maximum price the government permits sellers to charge for a good. When the price is below equilibrium, a shortage occurs.

supply price

the minimum price necessary to induce producers to offer a given quantity for sale

floor price

the minimum price the government permits sellers to charge for a good. When the price is above equilibrium, a surplus occurs.

general demand function

the relation between quantity demanded and the six factors that affect quantity demanded (Qd = f (P, M, PR, T*, Pe, N)

general supply function

the relation between quantity supplied and the six factors that jointly affect quantity supplied: Qs = f (P, PI, Pr, T, Pe, F)

technology

the state of knowledge concerning the combination of resources to produce goods and services

social surplus

the sum of consumer surplus and producer surplus, which is the area below demand and above supply over the range of output produced and consumed

inverse supply function

the supply function when price is expressed as a function of quantity supplied: P = f(Qs)

P, (Qd)

Price of a good or service, inverse, negative

PR (*note* the capital R is important), for substitute goods, (Qd)

Price of related goods or services, direct, positive

PR (*note* the capital R is important), for complement goods, (Qd)

Price of related goods or services, inverse, negative

Quantity Demanded

(used to describe movements ALONG the curve), the amount of a good or service consumers are willing and able to purchase during a given period of time

decrease in supply

a change in the supply function that causes a decrease in quantity supplied at every price, and is reflected by a LEFTWARD shift in the supply curve

increase in supply

a change in the supply function that causes an increase in quantity supplied at every price, and is reflected by a RIGHTWARD shift in the supply curve

inferior good

a good or service for which an increase (decrease) in income causes consumers to demand less (more) of the good, all other factors held constant

normal good

a good or service for which an increase (decrease) in income causes consumers to demand more (less) of the good, holding all other variables constant

supply curve

a graph showing the relation between quantity supplied and price, all other things constant

change in quantity demanded

a movement ALONG the given demand curve that occurs when the PRICE of the good changes, all else constant

change in quantity supplied

a movement ALONG the supply curve from a change in PRICE, all else constant

change in quantity supplied

a movement ALONG the supply curve that occurs when the PRICE of a good changes

change in demand

a shift in demand, either left or right, that occurs only when one of the determinants of demand changes

market equilibrium

a situation in which, at the current price, consumers can buy all of the good they want and producers can sell all of the good they want: Qd = Qs ; also called "market clearing price"

demand schedule

a table showing a list of possible product prices and the corresponding quantities demanded

supply schedule

a table showing a list of possible product prices and the corresponding quantities supplied

direct demand function

a table, graph, or equation that shows how quantity demanded is related to product price, all other factors held constant : Qd = f(P)

decrease in demand

causes a decrease in quantity demanded at every price and is reflected by a LEFTWARD SHIFT of the demand curve

increase in demand

causes increase in quantity demanded at every price and is reflected by a RIGHTWARD SHIFT of the demand curve

N, (Qd)

number of consumers in the market, direct, positive

slope parameters (of demand)

parameters in a linear function that measure the effect on the dependent variable (Qd) of changing one of the independent variables (P, M, PR, T*, Pe, and N)

quantitative forecast

predicts both direction and magnitude of the change in an economic variable

qualitative forecast

predicts only the direction in which an economic variable will move

equilibrium price

price at which Qd = Qs

law of demand

quantity demanded increases when price falls and decreases when price rises, all other things held constant

complements

two goods are complements if an increase (decrease) in the price of one of the goods causes consumers to demand less (more) of the other good, all other factors held constant

substitutes

two goods are substitutes if an increase (decrease) in the price of one of the goods causes consumers to demand more (less) of the other good, all other factors held constant

determinants of supply

variables that cause a change in supply (a SHIFT in the supply curve)

determinants of demand

variables that change the quantity demanded at each price and determine where the demand curve is located: (M, PR, T*, Pe, and N)

excess demand (shortage)

when Qs < Qd

excess supply (surplus)

when Qs > Qd