circular flow model
a simplified diagram of the economy, showing the product market(production flows from businesses to consumers and dollars flow in the opposite direction) and the factor market (households sell their factors to businesses in return for dollars).
sales of consumer products; the final goods and services that are bought by households.
where businesses buy natural resources, labor, and capital needed to produce their goods and services.
the willingness on the part of people to buy certain quantities of a product at different price levels.
law of demand
states that people will buy more of a product at a lower price than at a higher price, if nothing else changes.
a table that shows how many products people will buy at various prices.
a graphic representation of a demand schedule. it generally slopes downward from left to right. this shows the lower price, the more people are likely to buy.
determinants of demand
the things that cause demand to change: for example, consumer taste, income, price of substitutes and complementary goods, and a change in number of potential customers.
a good that is interchangeable with another, such as butter and margerine
a good that is used with another good, such as a bow to its arrow.
the quantity of goods and services that sellers will offer at various prices during a given time and place.
at a certain level of production, the cost per unit of producing additional units increases. this occurs because when one factor of production increase but other factors are held constant, a point is reached where the additional inputs will add less production than preceding inputs.
law of supply
at higher prices producers are willing to offer more products for sale than at lower prices.
a table showing the relationship of price and the quantity sellers will offer in the market.
a graph of a supply schedule, showing the relationship between price and quantity.
point of equilibrium
the intersection of the demand and supply curves, indicating the price and quantity at which a product will be sold in the market.
when the equilibrium price is above the intersection of supply and demand, a surplus remains. at that price the quantity demanded is less than the quantity supplied.
when the equilibrium price is below the offered price, a shortage develops. at that price, the quantity demanded is greater than the quantity supplied
price inelastic demand
people want the same amount no matter what the price. demand for necessities is inelastic.
price elastic demand
a change in price causes a change in the quantity sold. demand for luxuries is elastic