The law of demand shows that as the price of a good rises, consumers tend to buy less of it, and vice versa. This inverse relationship between price and quantity demanded is a cornerstone of economic theory.

GDP stands for Gross Domestic Product, which represents the total market value of all final goods and services produced within a country. It is a fundamental indicator of a nation's economic performance.

Capitalism is defined by private ownership and competitive markets where supply and demand determine prices. This system relies on market forces rather than centralized planning.

Scarcity arises because human wants are unlimited while resources to meet those wants are limited. This fundamental issue forces societies to make choices about resource allocation.

In a market economy, consumer preferences drive the demand for goods and services. As a result, producers adjust their output based on what consumers are willing to buy.

Opportunity cost is defined as the value of the next best alternative that is sacrificed when a decision is made. It emphasizes the trade-offs that are an inherent part of economic decision-making.

Price elasticity of demand measures how much the quantity demanded of a good responds to a change in its price. A high elasticity indicates that consumers are very responsive to price changes.

A price ceiling, when set below the equilibrium price, results in a shortage because it increases the quantity demanded while discouraging producers from supplying enough. This imbalance can lead to inefficiencies in the market.

The Consumer Price Index (CPI) is widely used to track changes in the price level of a basket of consumer goods and services. It is one of the most recognized measures of inflation in an economy.

For normal goods, an increase in consumer income typically leads to an increase in demand as consumers have more purchasing power. This relationship is fundamental in understanding consumer behavior in economics.

A subsidy reduces production costs for firms, which can lead to an increase in supply and a lower market price. This intervention often makes products more affordable for consumers and increases overall market output.

GDP is calculated by summing up final goods and services to avoid double counting. Intermediate goods, which are used in the production process, are excluded from GDP computations.

Marginal cost refers to the extra cost incurred from producing one more unit of a good. It is a key concept for firms when determining the optimal level of production.

Market equilibrium occurs when the quantity of a good demanded by consumers is exactly matched by the quantity supplied by producers. This balance results in a stable market price.

The equilibrium price in a competitive market is found at the intersection of the supply and demand curves. This intersection ensures that the quantity demanded by consumers is equal to the quantity supplied by producers.

When a good has inelastic demand, consumers are less responsive to price increases. Therefore, an excise tax results in only a small decrease in quantity demanded, leaving consumers to bear most of the tax burden.

The concept of diminishing marginal returns indicates that after a certain point, each additional unit of input contributes less to overall output. This is a critical concept in production theory as it impacts decisions on resource allocation.

The substitution effect occurs when consumers react to a rise in the price of a good by choosing less expensive substitutes. This behavior helps maintain overall satisfaction while minimizing expenditure.

Contractionary monetary policy is used primarily to combat inflation by reducing the money supply. This reduction raises interest rates and cools down spending, thereby helping to contain inflation.

The multiplier effect quantifies how an initial increase in spending leads to a larger overall increase in national income. This effect is central to understanding the impact of fiscal policy on the broader economy.