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Equilibrium

Terms

Summary and Introduction to Equilibrium

Two Approaches to Market Equilibrium

Aggregate Demand  -  The combined demand of all buyers in a market.
Aggregate Supply  -  The combined supply of all sellers in a market.
Average Cost  -  Average cost incurred per unit of goods produced. Is equal to Total Cost divided by quantity, TC/q.
Average Fixed Cost  -  Average amount of fixed costs incurred per unit of goods produced. Is equal to Total Fixed Costs divided by quantity sold, TFC/q.
Average Revenue  -  Average amount of income generated per unit of goods sold. Is equal to Total Revenue divided by quantity sold, TR/q.
Average Variable Cost  -  Average amount of variable costs incurred per unit of goods produced. Is equal to Total Variable Costs divided by quantity sold, TVC/q.
Buyer  -  Someone who purchases goods and services from a seller for money.
Competition  -  In a market economy, competition occurs between large numbers of buyers and sellers who vie for the opportunity to buy or sell goods and services. The competition among buyers means that prices will never fall very low, and the competition among sellers means that prices will never rise very high. This is only true if there are so many buyers and sellers that no single one of them has a significant impact on the market equilibrium.
Demand  -  Demand refers to the amount of goods and services that buyers are willing to purchase. Typically, demand decreases with increases in price, this trend can be graphically represented with a demand curve. Demand can be affected by changes in income, changes in price, and changes in relative price.
Demand Curve  -  A demand curve is the graphical representation of the relationship between quantities of goods and services which buyers are willing to purchase and the price of those goods and services.
Equilibrium Price  -  The price of a good or service at which quantity supplied is equal to quantity demanded. Also called the market-clearing price.
Equilibrium Quantity  -  Amount of goods or services sold at the equilibrium price. Because supply is equal to demand at this point, there is no surplus or shortage.
Fixed Costs  -  Costs which vary with quantity produced that a firm has to pay in order to produce and sell its goods.
Firm  -  Unit of sellers in microeconomics. Because it is seen as one selling unit in microeconomics, a firm will make coordinated efforts to maximize its profit through sales of its goods and services. The combined actions and preferences of all firms in a market will determine the appearance and behavior of the supply curve.
Goods and Services  -  Products or work that are bought and sold. In a market economy, competition among buyers and sellers sets the market equilibrium, determining the price and the quantity sold.
Horizontal addition  -  The process of adding together all quantities demanded at each price level to find aggregate demand
Household  -  Unit of buyers in microeconomics. Because it is seen as one buying unit in microeconomics, a household will make coordinated efforts to maximize its utility through its choices of goods and services. The combined actions and preferences of all households in a market will determine the appearance and behavior of the demand curve.
Long Run  -  The distant future, for which buyers and sellers make "permanent" decisions, such as exiting the market or permanently decreasing consumption.
Marginal Cost  -  Additional cost incurred from each additional unit of goods produced.
Marginal Revenue  -  Additional income derived from each additional unit of goods sold.
Marginal Utility  -  Additional utility derived from each additional unit of goods acquired.
Market  -  A large group of buyers and sellers who are buying and selling the same good or service.
Market Economy  -  An economy in which the prices and distribution of goods and services are determined by the interaction of large numbers of buyers and sellers, none of whom have significant individual impact on prices or quantities.
Market Equilibrium  -  Point at which quantity supplied and quantity demanded are equal, and prices are market-clearing prices, leaving no surplus or shortage.
Market-Clearing Price  -  The price of a good or service at which quantity supplied is equal to quantity demanded. Also called the equilibrium price.
Monopoly  -  A firm that is the only seller of a good, with no competition.
Natural Monopoly  -  A monopoly that exists because, for that specific good, the average cost curve is downward-sloping, making it difficult for new firms to enter the market.
Optimization  -  To maximize utility by making the most effective use of available resources, whether they be money, goods, or other factors.
Price Ceiling  -  Maximum price set by the government on a specific good. Usually is set below market price, causing a shortage.
Price Floor  -  Minimum price set by the government on a specific good. Usually is set above market price, causing a surplus.
Price-taker  -  Concept that in a competitive market, buyers and sellers cannot decide what price they will accept, since they have no significant influence on the much larger market. Instead, they have to accept the market price and make their decisions accordingly.
Profit  -  Actual amount that a firm makes from selling a good. It is equal to Total Revenue (TR) - Total Cost (TC).
Seller  -  Someone who sells goods and services to a buyer for money.
Shortage  -  Situation in which the quantity demanded exceeds the quantity supplied for a good or service; price is below equilibrium price.
Short Run  -  The immediate future, for which buyers and sellers make "temporary" decisions, such as shutting down production or increasing consumption, for the time being.
Supply  -  Supply refers to the amount of goods and services that sellers are willing to sell. Typically, supply increases with increases in price, this trend can be graphically represented with a supply curve.
Supply Curve  -  A supply curve is the graphical representation of the relationship between quantities of goods and services that sellers are willing to sell and the price of those goods and services.
Surplus  -  Situation in which the quantity supplied exceeds the quantity demanded for a good or service; price is above equilibrium price.
Total Cost  -  All of the money a firm has to pay in order to be able to sell its products. Includes total variable costs and total fixed costs.
Total Fixed Costs  -  All costs which do not vary with quantity produced that a firm has to pay in order to produce and sell its goods. Example: rent.
Total Revenue  -  All of the income a firm makes from selling its products. Is equal to price per unit times quantity sold, (P)x(Q).
Total Variable Costs  -  All costs which vary with quantity produced that a firm has to pay in order to produce and sell its goods. Example: materials used in production.
Utility  -  An approximate measure for levels of "happiness."
Variable Costs  -  Costs which do not vary with quantity produced that a firm has to pay in order to produce and sell its goods.

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