Econ Chapter Three
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Law of demand
A principle that states there is an inverse relationship between the price of a good and the quantity of it buyers are willing to purchase. as the price of a good increases, consumers will wish to purchase less of it. as the price of a good decreases, consumers will wish to purchase more of it.
Products that serve similar purposes. an increase in the price of one will cause an increase in the demand for the other. (ex: hamburgers and tacos, butter and margarine, fords and nissans).
The difference between the maximum price consumers are willing to pay and the price they actually pay. it is the net gain derived by the buyers of the good.
Products that are usually consumed jointly (ex: bread and butter, hot dogs and hot dog buns). an decrease in the price of one will increase the demand of the other.
Opportunity cost of production
the total economic cost of producing a good or service. the cost component includes the opportunity cost of all resources, including those owned by the firm. the opportunity cost is equaal to the value of the production of other goods sacraficed as a result of producing the good.
an excess of sales revenue relative to the opportunity cost of production. profit accrues only when the value of the good produced is greater than the value of the resources used for its production.
a defecit of sales revenue relative to the opportunity cost of the production. Losses are when people produce goods even though they are valued less than the resources required for their production.
Law of supply
a principle that states there is a direct relationship between the price of a good and the quantity of it the producers are willing to supply. as the price of a good increases, producers will wish to supply more of it. as the price decreases, producer will wish to supply less.
the difference between the price suppliers actually receive and the minimum price they would be willing to accept. it measures the net gains to producers and resource suppliers from market exchange. it is not the same as profit.
an abstract concept encompassing the forces of supply and demand, and the interaction of buyers and sellers with the potential for exchange to occur.
a state in which the conflicting forces of supply and demand are in balance. when a market is in equillibrium, the decisions of consumers and producers are brought into harmony with one another, and the quantity supplied will equal the quantity demanded.
a situation in which all of the potential gains from trade have been realized. an action is efficient only if it creates more benefit than cost. with well-defined property rights and competition, market equillibrium is efficient.
Invisible hand principle
the tendancy of market prices to direct individuaals pursuing their own intersts to engage in activities promoting the economic well-being of society.
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