QUANTITY DEMANDED
-The amount of a good or service consumers are
willing and able to purchase during a given
period of time (week, month, etc.).
GENERAL DEMAND FUNCTION
The relation between quantity demanded and
the six factors that affect quantity demanded:
Qd = f (P, M, PR, 7, PE, N ) where
f means “is a function of” or “depends on,” and
Qd = quantity demanded of the good or service
P = price of the good or service
M = consumers’ income (generally per capita)
PR = price of related goods or services 7 5 taste
patterns of consumers
PE = expected price of the good in some future
period
N = number of consumers in the market
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 in the general demand function
constant.
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.
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, holding all other factors 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 things held constant
SLOPE PARAMETERS
-Parameters in a linear function that measure
the effect on the dependent variable (Qd) of
changing one of the independent variables (P,
M, PR, 7, PE, and N) while holding the rest of
these variables constant
DIRECT DEMAND FUNCTION
- A table, a graph, or an equation that shows
how quantity demanded is related to product
price, holding constant the five other variables
that influence demand: Qd = f(P)
DEMAND SCHEDULE
-A table showing a list of possible product prices
and the corresponding quantities demanded.
DEMAND CURVE
-A graph showing the relation between quantity
demanded and price when all other variables
influencing quantity demanded are held
constant.
INVERSE DEMAND FUNCTION
-The demand function when price is expressed
as a function of quantity demanded: P = f(Qd)
DEMAND PRICE
-The maximum price consumers will pay for a
specific amount of a good or service.
LAW OF DEMAND
-Quantity demanded increases when price falls,
and quantity demanded decreases when price
rises, other things held constant.
CHANGE IN QUANTITY DEMANDED
-A movement along a given demand curve that
occurs when the price of the good changes, all
else constant.
INCREASE IN DEMAND
-A change in the demand function that causes
an increase in quantity demanded at every price
and is reflected by a rightward shift in the
demand curve.
DECREASE IN DEMAND
-A change in the demand function that causes a
decrease in quantity demanded at every price
and is reflected by a leftward shift in the
demand curve.
DETERMINANTS OF DEMAND
-Variables that change the quantity demanded
at each price and that determine where the
demand curve is located: M, PR, 7, PE, and N.
CHANGE IN DEMAND
-A shift in demand, either leftward or rightward,
that occurs only when one of the five
determinants of demand changes.
QUANTITY SUPPLIED
-The amount of a good or service offered for
sale during a given period of time (week,
month, etc.).
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) The quantity of a good
or service offered for sale (Qs ) is determined
not only by the price of the good or service (P)
but also by the prices of the inputs used in
production (PI ), the prices of goods that are
related in production (Pr ), the level of available
technology (T), the expectations of producers
concerning the future price of the good (Pe ),
and the number of firms or amount of
productive capacity in the industry (F).
SUBSTITUTES 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 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.
TECHNOLOGY
-The state of knowledge concerning the
combination of resources to produce goods and
services
DIRECT SUPPLY FUNCTION
-A table, a graph, or an equation that shows
how quantity supplied is related to product
price, holding constant the five other variables
that influence supply: Qs = f(P).
DETERMINANTS OF SUPPLY
-Variables that cause a change in supply (i.e., a
shift in the supply curve).
CHANGE IN QUANTITY SUPPLIED
-A movement along a given supply curve that
occurs when the price of a good changes, all
else constant
SUPPLY SCHEDULE
-A table showing a list of possible product prices
and the corresponding quantities supplied.
SUPPLY CURVE
-A graph showing the relation between quantity
supplied and price, when all other variables
influencing quantity supplied are held constant.
INVERSE SUPPLY FUNCTION
-The supply function when price is expressed as
a function of quantity supplied: P = f(Qs ).
SUPPLY PRICE
-The minimum price necessary to induce
producers to offer a given quantity for sale
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.
DECREASE IN SUPPLY QUANTITATIVE FORECAST

-A change in the supply function that causes a -A forecast that predicts both the direction and
decrease in quantity supplied at every price, the magnitude of the change in an economic
and is reflected by a leftward shift in the supply variable
curve

MARKET EQUILIBRIUM
-A situation in which, at the prevailing price,
consumers can buy all of a good they wish and INDETERMINATE
producers can sell all of the good they wish. The
price at which Qd = Qs . -Term referring to the unpredictable change in
either equilibrium price or quantity when the
EQUILIBRIUM PRICE direction of change depends upon the relative
magnitudes of the shifts in the demand and
-The price at which Qd = Qs .
supply curves
EQUILIBRIUM QUANTITY
CEILING PRICE
-The amount of a good bought and sold in
-The maximum price the government permits
market equilibrium
sellers to charge for a good. When this price is
EXCESS SUPPLY (SURPLUS) below equilibrium, a shortage occurs.

-Exists when quantity supplied exceeds quantity FLOOR PRICE

demanded.
-The minimum price the government permits
EXCESS DEMAND (SHORTAGE) sellers to charge for a good. When this price is
above equilibrium, a surplus occurs
-Exists when quantity demanded exceeds
quantity supplied. price elasticity of demand (E) The percentage
change in quantity demanded, divided by the
MARKET CLEARING PRICE
percentage change in price. E is always a
-The price of a good at which buyers can negative number because P and Q are inversely
purchase all they want and sellers can sell all related.
they want at that price. This is another name for
total revenue (TR) The total amount paid to
the equilibrium price.
producers for a good or service (TR 5 P 3 Q).
ECONOMIC VALUE
price effect The effect on total revenue of
-The maximum amount any buyer in the market changing price, holding output constant.
is willing to pay for the unit, which is measured
quantity effect The effect on total revenue of
by the demand price for the unit of the good.
changing output, holding price constant
CONSUMER SURPLUS
interval (or arc) elasticity Price elasticity
-The difference between the economic value of calculated over an interval of a demand curve:
a good (its demand price) and the market price
the consumer must pay

QUALITATIVE FORECAST
point elasticity A measurement of demand
-A forecast that predicts only the direction in
elasticity calculated at a point on a demand
which an economic variable will move.
curve rather than over an interval.
marginal revenue (MR) The addition to total average product of labor (AP) Total product
revenue attributable to selling one additional (output) divided by the number of workers (AP
unit of output; the slope of total revenue. 5 Q/L). marginal product of labor (MP) The
additional output attributable to using one
additional worker with the use of all other
income elasticity (EM) A measure of the inputs fixed (MP 5 DQ/DL).
responsiveness of quantity demanded to
law of diminishing marginal product The
changes in income, holding all other variables in
principle that as the number of units of the
the general demand function constant. cross-
variable input increases, other inputs held
price elasticity (EXR) A measure of the
constant, a point will be reached beyond which
responsiveness of quantity demanded to
the marginal product decreases
changes in the price of a related good, when all
the other variables in the general demand
function remain constant

production The creation of goods and services

from inputs or resources

production function A schedule (or table or

mathematical equation) showing the maximum
amount of output that can be produced from
any specified set of inputs, given the existing
technology. variable proportions production
Production in which a given level of output can
be produced with more than one combination
of inputs. fixed proportions production
Production in which one, and only one, ratio of
inputs can be used to produce a good

technical efficiency Producing the maximum

output for any given combination of inputs and
existing technology. economic efficiency
Producing a given level of output at the
lowestpossible total cost

variable input Input for which the level of usage

may be varied to increase or decrease output.
fixed input An input for which the level of usage
cannot be changed and which must be paid
even if no output is produced.

quasi-fixed input A lumpy or indivisible input for

which a fixed amount must be used for any
positive level of output, and none is purchased
when output is zero. Now try Technical Problem
3. short run Current time span during which at
least one input is a fixed input. long run Time
period far enough in the future to allow all fixed
inputs to become variable inputs.