# Unit 2: Demand, Supply, and Consumer Choice

Law of Demand
There is an INVERSE relationship between price and quantity demanded
Substitution Effect
If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa)
Income Effect
If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more.
Utility
Satisfaction
Law of Diminishing Marginal Utility
As you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease.
Efficiency
The property of a resource allocation of maximizing the total benefits received by all members of society.
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Market Equilibrium
Occurs at point E, where the supply curve and the demand curve intersect.
Shortage
When price < equilibrium price, then quantity demanded > the quantity supplied.
Price Ceiling
A legal maximum on the price at which a good can be sold.
Binding Constraint
Result of price ceilings, where there is shortage dure to being below the equilibrium price.
Surplus
When price > equilibrium price, then quantity supplied > quantity demanded.
Price Floor
A legal minimum on the price at which a good can be sold.
Law of Diminishing Marginal Returns
When beyond some level of output, additional units of output require larger amounts of the variable input (more production is more expensive).
Price
What changes quantity supplied and demanded?
Elasticity
Shows how sensitive quantity is to a change in price.
Inelastic Demand
Quantity is INsensitive to a change in price.
Elastic Demand
Quantity is sensitive to a change in price.
Elasticity of Demand
Measurement of consumers responsiveness to a change in price.
Elasticity of Supply
Shows how sensitive producers are to a change in price, and is based on time limitations, as producers need time to produce more.
Cross-Price Elasticity of Demand
Shows how sensitive a product is to a change in price of another good.
Income-Elasticity of Demand
Shows how sensitive a product is to a change in INCOME and if the good is normal or inferior.
Marginal Utility
The change in total utility that results from a one-unit increase in the quantity of a good consumed.
Total Utility
The total benefit a person gets from the consumption of goods.