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Economic Problem
1. Choice and the allocation of resources
| Term | Definition |
|---|---|
| “Ceteris Paribus” Assumption | In drawing a demand schedule, to show the relationship between the price of a good/service and the quantity demanded, we assume that all other factors that affect demand are held constant. |
| Demand Curve shifts to the right | An increase in demand due to a factor other than price. |
| Demand Curve shifts to the left | A decrease in demand due to a factor other than price. |
| D: If there is an increase in price,… | consumers will react by contracting demand |
| D: If there is a decrease in price,… | consumers will react by extending demand |
| S: If there is an increase in price,… | producers will react by extending supply |
| S: If there is a decrease in price,… | producers will react by contracting supply |
| Cost of Production: Decrease in Supply | Increase in cost (Price of Labour increases), thus decrease in profit, and therefore production becomes less attractive. |
| Cost of Production: Increase in Supply | Decrease in cost (Price of Labour decreases), thus increase in profit, and therefore production becomes more attractive. |
| Effective Demand | The willingness and ability of consumers to buy a product |
| Joint Demand | When the demand for two or more products is related because they are consumed together, for example, razors and razor blades or cartridges. |
| Excess Demand | An economic situation in which a market is in disequilibrium because product demand exceeds its supply. There will be upward pressure on the product price. |
| Excess Supply | An economic situation in which a market is in disequilibrium because product supply exceeds demand for it. As a result, there will be pressure on the product price to fall. |
| Substitutes | Products that compete to satisfy the same consumer demand, such as butter and margarine or tea and coffee. |
| Market Equilibrium | An economic situation in which the market demand for a product is exactly equal to its market supply. Market price tends to be stable in this situation. |
| Complement | A good/service that is in joint demand with another, for example, cars and petrol |
| Market Supply | The sum of supply decisions by all the firms producing a given product. |
| Supply | The desire and ability of producers to make and sell a given product |
| Market Demand | The sum of individual consumer demands for a given product. |
| Demand | The willingness and ability of consumers to buy a given product. |
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