Chapter 4: The working of competitive markets.
Price taker: A person for firm with no power to be able to influence the market price.
Perfectly competitive market (preliminary definition): A market in which all producers and consumers of the product are price takers. There are other features of a perfectly competitive market.
Free market: One in which there is an absence of government intervention. Individual producers and consumers are free to make their own economic decisions.
The price mechanism: The system in a market economy whereby changes in price in response to changes in demand and supply have the effect of making demand equal to supply.
Equilibrium price: The price where the quantity demanded equals the quantity supplied; the price where there is no shortage or surplus.
Equilibrium: A position of balance. A position from which there is no inherent tendency to move away from current prices and quantities.
The law of demand: The quantity of a good demanded per period of time will fall as the price rises and rise as the price falls, other things being equal (ceteris paribus).
Income effect: The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as result of the price change.
Substitution effect: The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative (substitute) products.
Quantity demanded: The amount of a good that a consumer is willing and able to buy at a given price over a given period of time.
Demand schedule for and individual: A table showing the different quantities of a good that a person is willing and able to buy at various prices over a given period of time.
Market demand schedule: A table showing the different total quantities of a good that consumers are willing and able to buy at various prices over a given period of time.
Demand curve: A graph showing the relationship between the price of a good and the quantity of good demanded over a given time period. Price is measured on the vertical axis; quantity demanded is measured on the horizontal axis. A demand curve can be for an individual consumer or a group pf consumers, or more usually for the whole market.
Substitute goods: A pair of goods which are considered by consumer to be alternatives to each other. As the price of one goes up, the demand for other rises.
Complementary goods: A pair of goods consumed together. As a price of one goes up, the demand for both goods will fall.
Normal goods: Goods whose demand rises as people's incomes rise.
Inferior goods: Goods whose demand falls as people's incomes rise.
Change in demand: The term used for a shift in the demand curve. It occurs when a determinant of demand other than price changes.
Change in the quantity demanded: The term used for a movement along the demand curve to a new point. It occurs when there is a change in price.
Supply schedule: A table showing the different quantities of a goods that producers are willing and able to supply at various prices over a given time period. A supply schedule can be for an individual producer or group of producers or for all producers (the market supply schedule).
Supply curve: A graph showing the relationship between the price of a good and quantity of the good supplied over a given period of time.
Substitutes in supply: These are two goods where an increased production of one means diverting resources away from producing the other.
Goods in joint supply: These are two goods where the production of more of one leads to the production of more of the other.
Change in the quantity supplied: The term used for a movement along the supply curve to a new point. It occurs when there is a change in price.
Change in supply: The term used for a shift in the supply curve. It occurs when a determinant other than price changes.
Market clearing: A market clears when supply matches demand, leaving no shortage or surplus.
Chapter 5: Business in a market environment.
Price elasticity of demand: A measure of the responsiveness of quantity demanded to a change in price.
Elastic: If demand is (price) elastic, then any change in price will cause the quantity demanded to change proportionately more. (Ignoring the negative sign) it will have a value greater then 1.
Inelastic: If demand is (price) inelastic, then any change will cause the quantity demanded to change by a proportionately smaller amount. (Ignoring the negative sign) it will have a value less than 1.
Unit elasticity: When the price elasticity of demand is unity, this is where quantity demanded changes by the same proportion as a price. Price elasticity is equal to 1.
Total (sales) revenue (TR): The amount a firm earns from its sales of a product at a particular price.
TR = P X Q. Note that we are referring to gross revenue: that is, revenue before the deduction of taxes or any other costs.
Income elasticity of demand: The responsiveness of demand to a change in consumer incomes: the proportionate change in demand divided by the proportionate change in income.
Cross-price elasticity of demand: The responsiveness of demand for one good to a change in the price of another: the proportionate change in demand for one good divided by the proportionate change in price of other.
Price elasticity of supply: The responsiveness of quantity supplied to a change in price: the proportionate change in quantity supplied divided by the proportionate change in price.
Speculation: This is where people make buying or selling decisions based on their anticipations of future prices.
Self-fulfilling speculation: The actions of speculators tend to cause the very effect that they has anticipated.
Stabilizing speculation: This is where the actions of speculators tend to reduce price fluctuations.
Destabilizing speculation: This is where the actions of speculators tend to make price movements larger.
Risk: This is when an outcome may or may not occur, but where its probability of occurring is known.
Uncertainty: This is when an outcome may or may not occur and where its probability of occurring is not known.
Futures or forward market: A market in which contracts are made to buy or sell at some future date at a price agreed today.
Future price: A price agreed today at which an item (eg commodities) will be exchanged at some set date in the future.
Spot price: The current market price.
Chapter 6: Demand and the consumer.
Total utility: The total satisfaction a consumer gets from the consumption of all the units of a good consumed within a given period.
Marginal utility: The extra satisfaction gained from consuming one extra unit of a good within a given time period.
Principle of diminishing marginal utility: As more units of good are consumed, additional units will provide less additional satisfaction then previous units.
Consumer surplus: The excess of what a person would have prepared to pay for a good (ie the utility) over what that person actually pays.
Marginal consumer surplus: The excess of utility from the consumption of one more unit of a good (MU) over the price paid
MCS = MU - P
Total consumer surplus: The excess of a person's total utility from a consumption of a goos (TU) over the amount that person spends on it (TE).
TCS = TU - TE
Relational consumer behavior: The attempt to maximize total consumer surplus.
Consumer durable: A consumer good that lasts a period of time, during which consumer can continue gaining utility from it.
Diminishing marginal utility of income: Where each additional pound earned yields less additional utility.
Spreading risks (for an insurance company): The more policies an insurance company issues and the more independent the risks of claims from these policies are, the more predictable will be a number of claims.
Law of large numbers: The larger the number of events of a particular type, the more predictable will be their average outcome.
Independent risks: Where two risky events are unconnected. The occurrence of one will not affect the likelihood of the occurrence of the other.
Diversification: Where a firm expands into new types of business.
Adverse selection: Where information is imperfect, high-risk groups will be attracted to profitable market opportunities to the disadvantage of the average buyer (or seller).
Moral hazard: Following a deal, there is an increased likelihood that one party will engage in problematic (immoral and hazardous) behavior to the detriment of another.
Characteristics (or attributes) theory: The theory that demonstrates how consumer choice between different varieties of a product depends on the characteristics of these varieties, along with prices of the different varieties, the consumer's budget and consumer's tastes.
Efficiency frontier: A line showing the maximum attainable combinations of two characteristics for a given budget. These characteristics can be obtained by consuming one or a mixture of two brands or varieties of a products.
Indifference curve: A line showing all those combinations of two characteristics of a good between which a consumer is indifferent: ie those combination that give a particular level of utility.
Indifference map: A diagram showing a whole set of indifference curves. The further away a particular curve is from the origin, the higher the level of utility it represents.
Diminishing marginal rate of substitution of characteristics: The more a consumer gets of characteristic A the less of characteristic B, the less and less of B the consumer will be willing to give up an extra unit of A.
Market segment: A part of a market for a product where the demand is for a particular variety of that product.