By: Jane Buttarazzi AP Econ Final Project

Efficiency (Productive vs. Allocative) Productive efficiency occurs when the economy is utilizing all of its resources efficiently, and getting the most output for the least input. Allocative efficiency is a type of efficiency in which the economy/producers produce only that type of good which are more desirable in society. The point of allocative efficiency is where price equals marginal cost (P=MC)

Law of Demand An economic law that states that consumers buy more of a good when its price decreases and less of the same good when its price increases. If the income of the consumer, prices of the related goods, and tastes and preferences of the consumer remain unchanged, the consumer’s demand for the good will move opposite to the movement in the price of the good. For example: if someone was buying noodles, they would demand more noodles if the price were two dollars than if the price for them were four dollars.

Absolute price vs. Relative price The absolute price is the amount that you pay for a good or service in a definite amount in the form of currency. For example: if you went to buy a smoothie and paid for it with a five dollar bill. The relative price is the price of a good or service in terms of another. In other words, a comparative ratio. The leftover ratio is the opportunity cost. For example, if the price of gasoline is $0.25 per gallon and the wage rate is $1.00 per hour then the relative price of gasoline is 0.25 hours of labor per gallon.

Substitution Effect The idea that as prices rise (or incomes decrease) consumers will replace more expensive items with less costly alternatives. For example: If a person was demoted to a lower paying job, instead of buying coca-cola for their house, they might replace that with an inferior good such as the store brand version of coke.

Income Effect The income effect is the change in an individual's income and how that change will impact the quantity demanded of a good or service. The relationship between income and the quantity demanded is a positive one, as income increases, so does the quantity of goods and services demanded. For example: if a consumer spends one-half of his or her income on bread alone, a fifty-percent decrease in the price of bread will increase the free money available to him or her by the same amount which he or she can spend in buying more bread or something else.

Demand Curve (Schedule) The graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule. Demand curves are used to estimate behaviors in competitive markets, and are often combined with supply curves to estimate the equilibrium price.

Determinates of Demand 1. Income: A rise in a person’s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. 2. Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change lead to a decrease. 3. Number of Buyers: the more buyers lead to an increase in demand; fewer buyers lead to decrease. 4. Price of related goods: a. Substitute goods: price of substitute and demand for the other good are directly related. Example: If the price of coffee rises, the demand for tea should increase. b. Complement goods: price of complement and demand for the other good are inversely related. Example: if the price of ice cream rises, the demand for ice-cream toppings will decrease. 5. Expectation of future: a. Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices. b. Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income.

Normal Goods vs. Inferior Goods Normal goods are any goods for which demand increases when income increases and falls when income decreases but price remains constant. Inferior goods are any goods for which demand decreases when income increases and increases when income decreases but price remains constant. For example: if you chose to buy a new designer pair of shoes from the store, rather than a used pair of shoes, then that would mean you chose the normal good over the inferior good. The normal good was the new pair of designer shoes, and the inferior good was the used pair of shoes.