Economics | Definitions

Exceptions to the Law of Demand

1. High Status Goods/Goods of Ostentation/Veblen Goods 2. Giffen Goods 3. Experience Goods 4. Bandwagon Effects

Factors of production

1. Land 2. Labour 3. Capital 4. Entrepeneurship

Market

A market is a medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. The price that individuals pay during the transaction may be determined by a number of factors, the forces of supply and demand often determine price.

Bandwagon Effects (Future Prices)

A price change for a share in company, for example, may be seen as an indication of further price changes to come. A rational consumer might, therefore, increase demand, in order to be well positioned for future price increases. Similarly, a fall may be considered a sign of more falls to come so it is best to sell.

Factors Affecting Demand

ALL REPRESENT SHIFTS EXCEPT PRICE 1. Price 2. Tastes, fashion or preferences 3. Prices of related products

Factors Affecting Supply

ALL REPRESENT SHIFTS EXCEPT PRICE 1. Price 2. Technology 3. Input costs 4. Level and nature of government regulations

Agflation

An increase in the price of food that occurs as a result of increased demand from human consumption and use as an alternative energy resource. While the competitive nature of retail supermarkets allows some of the effects of agflation to be absorbed, the price increases that agflation causes are largely passed on to the end consumer. The term is derived from a combination of the words "agriculture" and "inflation".

Complementary Goods (Help each other)

Complementary goods are goods which rely on each other. ATV's and fuel are complementary goods.

Staple Goods

Consumer goods (such as bread, milk, paper, sugar) that are bought often and consumed routinely. Staples offer little differentiation and are usually compete on the basis of price.

Cross Price Elasticity of Demand (XED)

Cross price elasticity of demand (XED) measures the responsiveness of the demand for a good relative to a change in the price of another good. XED = 1 | Close substitutes XED 0<x<1 | Weak substitutes XED = 0 | Independent goods XED -1<x<0 | Weak complements XED = -1 | Strong complements

Elasticity of Demand (EOD)

Elasticity of Demand (EOD) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price, ceteris paribus.

Elasticity of Supply (EOS)

Elasticity of Supply (EOS) is a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.

Elasticity

Elasticity refers the degree to which individuals (consumers/producers) change their demand/amount supplied in response to price or income changes.

Inferior Goods

For inferior goods demand decreases when incomes rise.

Normal Goods

For normal goods demand increases when incomes rise.

Giffen Goods (Essential Goods)

Giffen Goods are inferior, staple goods. Goods for which demand falls as income rises are described as inferior good. Staple goods, such as basic foods, take up a large share of a person's income. They cannot be forgone.

Substitute Goods (Compete against each other)

Goods in competition with one another. Mars bars and Snickers are an example of substitute goods.

Income Elasticity of Demand (YED)

Income elasticity of demand (YED) measures the responsiveness of the demand for a good relative to a change in the income of the people demanding the good, ceteris paribus. YED < 0 | Inferior goods YED 0<x<1 | Necessity goods YED > 1 | Normal goods

Market Supply

Marker supply is the total supply of all of the producers supplying the product to the market at a price level over a period of time.

Market Demand

Market demand is the total demand of all the individual consumers in the market for a product at each price over a period of time.

Equilibrium

Markets are in equilibrium when quantity demanded equals quantity supplied. The equilibrium price is said to be the clearance price.

Price Elasticity of Demand (PED)

Price elasticity of demand (PED) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price, ceteris paribus. Determinants: S: Substitutes P: Proportion of income L: Luxury or necessity A: Addictive or not T: Time to respond PED = Infinity | Perfectly elastic PED > 1 | Relatively elastic PED = 1 | Unit elasticity PED < 1 | Relatively inelastic PED = 0 | Perfectly inelastic

Experience Goods (Plasma TV)

Quality is based on experience and as you have to buy something to experience it, consumers must assume that as price increases, so does quality. This is illustrated in the example of a plasma TV.

Demand Curve

Represents the relationship between the price and the quantity demanded of a product based on the economic assumption, ceteris paribus.

The Law of Demand

The Law of Demand states that quantity demanded and the price are inversely related. In most cases, when the price of a product rises consumers buy less of this product and when price falls consumers buy more. The reasons of this are the substitution effect and the income effect.

The Price Effect

The impact that a change in value has on the consumer demand for a product or service in the market. The price effect can also refer to the impact that an event has on something's price. The price effect consists of the substitution effect and the income effect.

Individual Demand

The individual demand is the demand of one individual or firm. It represents the quantity of a good that a single consumer would buy at a specific price point at a specific point in time.

Price and Demand

The relationship between price and quantity demanded is negative; as price increases, quantity demanded decreases. This occurs because people want to pay less in order to satisfy their self interested endeavours.

Veblen Goods (Luxury Goods)

Veblen Goods for which as price increases, demand increases, making them exclusive. Their benefit comes from being observed by other people consuming the good.

The Substitution Effect

When a product becomes more expensive it is no longer such good value for money. If there are alternatives consumers may switch their purchases to these substitute products.

The Income Effect

When things become more expensive the overall purchasing power of a person's income falls. There has been a fall in their real income. As they have suffered a loss of real income they cut back on some of their purchases.