supply-demand Terms
Complementary Goods
Goods that go together or are related, such as cameras and film. Demand for one is linked to demand for the other. If the price of one increases, demand for the other will fall and vice versa.
Consumer Tastes
A factor shaping demand. As consumers’ tastes change, for example in fashion, demand is affected.
Demand
The amount of a good or service that people are willing and able to buy at a specified price.
Diminishing Marginal Utility
Economic law stating that the amount of satisfaction derived from a particular good or service will diminish with each successive purchase of that good or service.
Equilibrium Price
The point at which supply and demand intersect. The price at which consumers’ willingness and ability to purchase a good or service converges with producers’ willingness and ability to supply that good or service.
Income Effect on Demand
As incomes change, demand changes. If people’s income declines, their willingness and ability to purchase an item at a given price will also decline. If people’s income increases, their willingness and ability to purchase an item at a given price will also increase.
Law of Demand
This fundamental economic principle states that as prices rise demand will fall, and as prices fall demand will rise.
Law of Supply and Demand
This fundamental economic principle states that as prices rise, supply will increase (in part because people who make the stuff will be excited to sell whatever it is for more money). And as prices fall, supply will decrease (some suppliers will go out of business or choose to make something that is worth more).
Example
Ryan Gosling declares his love of pretzels and suddenly everyone wants to buy pretzels to be just as cool. The price of pretzels goes up until each one costs $6. A bunch of people who are sitting around wondering what to do with their lives suddenly say "I know! I'll start making pretzels! I can make a bunch of cash because fools are buying them for $6 each."
Maybe before the Ryan Gosling announcement, there were 100 million pretzels made in the U.S. each year. With the great Pretzel Craze, there's now 200 million pretzels being made because the price went up.
But then, Ryan Gosling announces he hates pretzels now. Prices drop to a more reasonable $3 per pretzel. Everyone with a pretzel Pinterest board and blog stops talking pretzels and some of those people making soft dough start making other stuff, instead. It's no fun making pretzels when you're making half as much money for them.
In the next year, the U.S. is back to making 100 million pretzels a year.
Microeconomics
The study of small or unit-based economic transactions, which in total, can explain large trends, but whose analysis is designed to explore granular business transactions at a micro-level.
Oligopoly
An industry that is controlled by a small number of competitors. Collusion between these companies is prohibited, but it’s very difficult, if not impossible, for a new company to join the oligopoly. New participants may be barred by prohibitive start-up costs, or they may be shut out of a market because consumer attachment to an established brand may be too strong to challenge. The auto and oil oligopolies enjoy the first advantage; the soft drink oligopolies enjoy the second.
Price Elasticity of Demand
Refers to the extent to which the price of a particular product affects demand for that product. For products with “inelastic demand,” demand does not change when prices rise and fall. For products with “elastic demand,” demand does change when prices rise and fall.
Price Fixing
A form of collusion in which competitors agree to a common pricing schedule. Price fixing is illegal.
Substitution Goods
Goods that satisfy the same need as another good, such as Pepsi and Coke. When the price of one changes, demand for the other is affected.