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Economic Problem

1. Choice and the allocation of resources

TermDefinition
“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.
Created by: deleted user
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