Chapter 8 Vocab
1. Voluntary exchange-Principle that is the basis of activity in a market economy: a buyer
and a seller exercise their economic freedoms by working out their own terms of
exchange.
2. Law of demand-economic rule which states that the quantity demanded and price
move in opposite directions; as price goes up, quantity demanded goes down; as price
goes down, quantity demanded goes up. There is an inverse, or opposite, relationship
between demand and price.
3. Utility-ability of any good or service to satisfy consumer wants.
4. Law of diminishing marginal utility-economic rule stating that the additional
satisfaction a consumer gets from purchasing one more unit of a product will lessen with
each additional unit purchased.
5. real income effect-economic rule stating that individuals cannot keep buying the same
quantity of a product if its price rises while their income stays the same; this works in
reverse also if the price of a product decreases and income remains the same, purchasing
power is increased and the amount of product purchased will likely increase.
6. substitution effect-economic principle sating that if two items satisfy the same need
and the price of one rises, people will buy the other.
7. demand curve-line plotted on a graph showing the quantity demanded of a good or
service at each possible price.
8. elasticity-economic concept dealing with consumers' responsiveness to an increase or
decrease in prices; price responsiveness.
9. price elasticity of demand-economic concept that deals with how much demand varies
according to changes in price.
10. elastic demand-situation in which the rise or fall in price of a product greatly affects
the amount of that product which people are willing to buy; if the price of certain
products rise, consumers will buy cheaper substitutes.
11. inelastic demand-situation in which a price change of a product has little impact on
the quantity demanded by consumers.
12. complementary good-one product often used with another product; as the price of the
second product decreases, the demand for the first product will increase; as the price of
the second product increases, the demand for the first product will decrease.
13. law of supply-economic rule stating that as the price rises for a good, the quantity
supplied rises. As the price falls the quantity supplied also falls.
14. law of diminishing returns-economic rule stating that after some point, adding units
of a factor of production to all the other factors of production increase total output for a
time; after a certain point, the extra output for each additional unit will begin to
decrease.
15. supply curve-line plotted on a graph that shows the quantities supplied of a good or
service at each possible price.
16. equilibrium price-price o a product or service at which the amount producers are
willing to supply is equal to the amount consumers are willing to buy. On a graph, the
equilibrium price is where the supply curve and the demand curve intersect.
17. technology-any use of land, labor, and capital that produces goods and services more
efficiently. Today, generally means the use of science to develop new products and new
methods for producing and distributing goods and services.
18. shortages-situations occurring when, at the going price, the quantity demanded is
greater than the quantity supplied.
19. surplus-situations occurring when, at the going price, the quantity demanded is less
than the quantity supplied.