Unit 2: Glossary of Important Terms

Allocative Efficiency
Definition: When resources are put to best use by producers to satisfy consumers
wants/needs
Example:

Ceteris Paribus
Definition: Latin phrase meaning when all things are equal. In economics it means
that all other external factors stay constant.
Complements
Definition: A good or service that accompanies/ is often bought with another
Example: Ice cream and sprinkles
Community Surplus
Definition: consumer and producer surplus together, the area that creates
equilibrium
Example:

Conspicuous Consumption
Definition: consumption of lavish products to enhance ones appearance
Example: buying a Lamborghini (even if you can barely afford it)

Consumer Surplus
Definition: The difference between what buyers are willing to pay and what they
actually need to pay
Example:

Demand
Definition: The quantity of a good/service that consumers are able to buy at a given
price in a certain time frame
Example:

Demand Curve
Definition: A visual interpretation showing the relationship between price and
quantity that changes the consumer ability to buy a good/service
Example:

Equilibrium
Definition: A state of balance between supply and demand of goods/services in a
certain market (Qd=Qs, quantity demanded=quantity supplied at a given price)
Example:

Income Effect
Definition: A change in consumption due to a change in real income
Example: If your income decreases you will begin to either purchase less, or just
purchase more smartly (buying products on sale or cheaper substitutes)
Indirect Taxes
Definition: a tax that is shifted from one taxpayer to another to increase the price of
a good/service
Inferior Goods
Definition: Products that are less in demand when income is increased
Example: cars

Law of Demand
As the price of a product falls the quantity demanded of the product will usually
increase, ceteris paribus.
Law of Supply
As the price of a product falls the quantity supplied of the product will usually
decrease, ceteris paribus.
Linear Demand Function
Definition: Dx= f(Px, Pc, Ps, T/F, Yd, Exp, NEF)
Px- price of product x
Pc- price of complement
Ps- price of substitute
T/F- taste and fashion/preferences
Yd- real income
Exp- expectations
NEF-non-economic factors
Linear Supply Function:
Definition: Sx= f(Px, COP, Po, Tech, Exp, NEF)
Px- price of product x
COP- cost of factors of production
Po- price of other products
Tech- technology
Exp- expectations
NEF- non-economic factors
Marginal Social Benefit
Definition: all private marginal benefits + the public marginal benefit that good
creates
Example: School books sell for $100 each and create jobs each worth $50000,
therefore the MSB is $50100
Marginal Social Cost
Definition: incremental cost of an activity- Marginal external costs+ marginal private
costs
Example: If a car company gains $5000 in profit but produces $1000 worth of
pollutants then the marginal social cost is $4000 (5000+ (-1000))

Market
Definition: A medium that facilitates the exchange between consumers and
producers of a certain good/service
Example: either online (eBay- cheap used products, Netflix- online movies) or at a
shop (the Green Room- organic/reused furniture, Traders Joes- organic food)
Market Efficiency
Definition: the maximum amount that can be provided to consumers and producers
at a minimum cost
Example:

Maximum Price
Definition: the highest possible price for a good/service acceptable
Minimum Price
Definition: the lowest possible price for a good/service acceptable
Non-Price Determinants of Demand
Definition: Factors that determine the movement of the demand curve Dx=F(Px, Pc,
Ps, Yd, T/F, Exp., N.E.F) either left (decrease in demand) or right (increase in
demand).
Pc- Price of complement
Ps- Price of substitute
Yd- Disposable income
T/F- Tastes and fashion
Exp.- Expectations
N.E.F- Non-economic factors
Non- Price Determinants of Supply
Definition: Factors that determine the movement of the curve Sx= F(Px, COP, Po,
Tech., Exp., N.E.F) either to the left (decrease of supply) or right (increase of supply)
COP-Cost of Production
Po-Price of other products
Tech-Technology
Exp-Expectations

N.E.F-Non-economic Factors
Normal Goods
Definition: A good/service thats demand increases when the income of an
individual increases
Example: Oil

Price Mechanism
Definition: when buyers and sellers determine the price of the products
Example: in India, the prices of oil will be determined by the demand of it and by
how much producers are willing to supply
Producer Surplus
Definition: The excess of earning that producers make compared to what there
where willing to receive
Example:

Self- Righting
Definition: being able to realign it self after falling apart. In economics, a market that
can become stable again after an imbalance (regain equilibrium by shifts in
Demand/Supply curves)
Example:

Substitutes
Definition: A good/service that can be purchased in place of another.
Example: Coca Cola and Pepsi
Supply
Definition: The quantity of a good/service that producers are willing and able to
supply at a given price and time period.
Example:

Supply Curve
Definition: A visual interpretation of the relationship between price and quantity of
a good/service supplied by producers.
Example:

Unrelated Goods
Definition: goods that do not have any connection by any means
Example: golf balls and butter