ECONOMICS: KEY TERMS
Demand, Supply and Market Forces
Image Definition What that means
Change in demand
Demand curve shifts because people are now willing to buy
different amounts at the
same prices
Shifts to the left – less people want it
Shifts to the right – more people want it
Complements
Products that increase the
value of other products
Products related in such a way that an
increase in the price of one reduces the
demand in both
When price and demand match up
(higher price = lower demand)
DemandThe desire, ability, and
willingness to buy a product
How much stuff the customer wants
Demand curve
A graph showing the
quantity demanded at
each and every price that might
prevail in the market
A graph of how much a customer would by at each price
Demand schedule
A listing that shows the
various quantities
demanded of a particular
product at all prices that
might prevail in the market at a
given time
A list of how much a customer would buy at each price
Elastic
A given change in price causes
a relatively larger change in
quantity demanded
When the price affects the demand
If people don’t really need a product, the demand is elastic
Elasticity
A measure of responsiveness
that tells us how a dependent
variable such as quantity
responds to a change in an independent
variable such as price
Whether or not a price change will change the demand for a product
Equilibrium
The point at which prices are relatively
stable, and the quantity of goods or services
supplied is equal to the
quantity demanded
When supply and demand are in agreement
The point at which a company is producing an item at a price the customer is willing to pay
InelasticA given change in price causes
a relatively smaller change in the quantity
demanded
When the price does not affect the demand
Inputs
Factors of production
(land, labor, capital,
entrepreneurship)
Anything that makes production increase
Market demand curve
Demand curve that shows the
quantities demanded by
everyone who is interested in purchasing a
product
The total demand for a product in the market
Market supply curve
The supply curve that shows the quantities offered at
various prices by all firms that
offer the product for sale
in a given market
How much supply all companies in the country have (not just one company)
Price ceiling
Maximum legal price that can
be charged for a product
You can’t charge more than a legal limit for something you sell
Price floorLowest legal
price that can be charged for a
product
You can’t charge less than a legal limit for something you sell
Shortage
Situation where quantity
supplied is less than quantity
demanded at a given price
When the supply is less than the demand
When you sell out of something
Substitutes
Products used in place of other
products
A product that can be bought instead of another product
(ex – Coke or Pepsi)
Supply
The amount of a product that
would be offered for sale at all possible
prices that could prevail in
the market
How much stuff the business has
Surplus
Situation where quantity
supplied is greater than
quantity demanded at a
given price
When you have more stuff than people will buy
Business Organizations and Market Structure
Image Definition What that means
Perfect competition
many buyers and sellers, and prices reflect supply and
demand
Not real –
just the ideal that no one
company would ever control the market
Market structure
The collection of factors that
determine how buyers and sellers
interact in a market, how prices change, and how different levels of
the production and selling processes
interact
Types of markets (perfect,
monopolistic, oligopoly, duopoly,
monopoly)
Imperfect competition
a competitive market situation where there are many sellers, but they are selling
slightly different goods
Real world –
Everything other than
perfect competition
Monopolistic competition
a market structure in which firms have many competitors, but each one sells a
slightly different product
Many places selling a similar product
Like pizza places
Oligopoly a particular market is controlled by a
small group of firms
Few places selling a similar product
Monopolya single company or
group owns all or nearly all of the
market for a given type of product or
service
One company controls the market for a
product
(this is illegal)
Natural monopoly
A type of monopoly that exists as a
result of the high fixed or start-up
costs of operating a business in a
particular industry
Companies that a govt
regulates
Utilities, for example
Geographic monopoly
A condition that exists in a local area or region wherein one
company is the sole provider of a good
or service
When one business offers services without competition in a small town
Ex: Local bait shop
Technological monopoly
A monopoly that occurs when a
single firm controls manufacturing
methods necessary to produce a certain
product
One company has all the technology to control market
Government monopoly
A company that is operating as
a monopoly under a government mand
ate.
A company that the govt allows
& monitors
Ex., Post office
Market failures
a situation where free markets fail to allocate resources
efficiently
During Great Depression,
many Americans lost jobs & money
Externalities
an effect of a purchase or use
decision by one set of parties on others
Something that happens indirectly
Negative externality
the consumption or production of a good causes a
harmful effect to a third party.
Ex: pollution
Positive externality
when an individual or firm making a decision does not receive the full benefit of the
decision
Ex: need for more workers
Public goods
An item whose consumption is not
decided by the individual consumer
but by the society as a whole, and
which is financed by taxation
Things that the govt supplies
TrustsA relationship in which a trustor
gives the trustee the right to hold
title to property or assets
When someone gives someone else rights to
their money or stuff
Price discrimination
A pricing strategy that charges
customers different prices for the same product or service
Charging different people different amounts for the same product
Public disclosure
the act of making information or data readily accessible and available to all
interested individuals and
institutions
Telling the public
information that they need
Moneya current medium of exchange in the form of coins and banknotes; coins and banknotes
collectively
Coins and bills
Commodity money
a raw material or primary agricultural product that can be
bought and sold, such as copper or
coffee
Something that you trade
Specie money in the form of coins
rather than notesGold or silver-backed money
Continental dollars
currency issued by the Continental
Congress to finance the Revolutionary
War; had no backing in gold or
silver
Money without gold or silver
backing
Greenbacks
a fiat currency issued during the
American Civil War
Money printed during Civil
War that eventually
became worthless
Gold certificates
A physical document
resembling a paper bank note that
entitles the holder to a specified value
of gold
A piece of paper that says you own gold
Silver certificates
Former legal tender (paper currency) issued by the U.S.
government beginning in 1878
A piece of paper that says you own silver
Treasury coin notes
paper currency issued by the
Treasury that was redeemable in both
gold and silver
Money that you could trade for gold or silver
Gold standard
A monetary system in which a country's government allows its currency unit to be freely converted into fixed amounts
of gold and vice versa
A concept where money is
backed by (equal to) an
amount of gold
Federal Reserve notes
paper currency backed by fiat money (govt
declaration that they were legal)
Dollar bills
National Bank notes
US currency banknotes issued by National banks usually backed by
US bonds the bank deposited in the
Treasury
Money backed by US bonds
Demand deposit accounts
Funds held in an account from which deposited funds can
be withdrawn at any time without
any advance notice to the depository
institution
Checking or savings
accounts
Federal Reserve System
central bank of the United States
Made of committee that
discusses economic
issues
Central bank
The entity responsible for overseeing the
monetary system for a nation (or
group of nations)
Main bank (like Fed
Reserve) that monitors economy
National banks
a commercial bank chartered by the
comptroller of the currency of the U.S.
Treasury
Private banks that US govt
monitors
State banks
a financial institution that is
chartered by a state.
Private banks that states monitor
Macroeconomics Key Terms
Image Definition What that means
Aggregate demand
The total quantity of goods and
services demanded at
different price levels
Total demand for a country
Aggregate supply
The total value of goods and
services that all firms would produce in a
specific period of time at various
price levels
Total supply for a country
Business cycle
Systematic changes in real GDP marked by
alternating periods of
expansion and contraction
The up and down of business
Capital expenditures
Funds used by a company to acquire or
upgrade physical assets such as
property, industrial
buildings or equipment
Money spent to improve the
business
Commodity
a raw material or primary
agricultural product that can be bought and sold, such as
copper or coffee
Something that can be traded
Consumer price index
Index used to measure price changes for a
market basket of frequently used consumer items
Looking at how much something used to cost
compared to today
Creeping inflation
Relatively low rate of inflation,
usually 1 to 3 percent annually
Expected rate of inflation
Current GDPGross Domestic
Product measured in current prices, unadjusted for
inflation
GDP without inflation
Cyclical unemployment
Unemployment directly related to
swings in the business cycle
When demand is low and workers are
not needed
DeflationDecrease in the
general level of the prices of goods and
servicesPrices drop
Depreciation Gradual wear on capital goods during
production
Cost of something goes down over
time
Depression
State of the economy with
large numbers of unemployed, declining real
incomes, overcapacity in manufacturing plants, general
economic hardship
Extremely low economic growth
Estate taxTax on the transfer of
property when a person dies
Tax paid when property is
transferred (after death)
Excise taxGeneral revenue tax levied on the manufacture or sale of selected
items
Tax on specific things (just paper,
etc) – usually things not needed
ExpansionPeriod of growth
of real GDP; recovery from
recessionEconomy grows
External shock
An event that produces a
significant change within an
economy, despite occurring outside
of it
Unpredictable change in economy
War, natural disaster
FICA
Federal Insurance Contributions Act;
tax levied on employers and employees to
support Social Security and
Medicare
Taxes that pay Social Security &
Medicare
Flat taxProportional tax
on individual income after a
specified threshold has been reached
Limit to how much income tax that
people have to pay
Benefits the wealthiest tier
Frictional unemployment
Unemployment caused by workers changing jobs or waiting to go to
new ones
When people are in between jobs
Full employment
A situation in which all available
labor resources are being used in
the most economically efficient way.
all of the workers are employed
Galloping inflation
Relatively intense inflation, usually ranging from 100 to 300% annually
Period of high inflation
Gross Domestic Product (GDP)
The most complete measure
of total outputHow much money a
country makes
Hyperinflation
Extremely rapid or out of control
inflation
Almost slang – inflation out of
control
Implicit GDP price deflator
Index used to measure price
changes in Gross Domestic Product
How GDP changes are measured
Inflation Rise in the general level of
pricesPrices go up
Innovation
knowledge, technology,
entrepreneurship, and innovation are positioned at the
center of the model rather than
seen as independent
forces
Innovation (making new
things)at center of
economic model – not side factor
Luxury tax Tax on good that has low supply
and high demand
Tax on luxury items (expensive cars,
jewelry)
Mandatory spending
Federal spending authorized by law
that continues without the need
for annual approvals of
Congress
Govt spending that doesn’t need
approval every year
Soc Sec, vet benefits
Marginal tax rate
Tax rate that applies to the next dollar of taxable
income
Tax rate increases when income
increases
The more you make, the more taxes you
pay
MedicareFederal health-
care program for senior citizens, regardless of
income
Health care for elderly
Monetary factors
A cause of the business cycle that
depends on ease/availability of
loans
Available loan $$
PeakPoint in time
when real GDP stops expanding
and begins to decline
Highest point of business cycle
Per capital spending
Govt spending per person;
total divided by population
How much the govt spends on the
average person
Can also be ‘per capita output’
– how much a person produces for
the country’, etc
Price index
Tracks price changes over time and can be used to
remove the distortions of
inflation from other statistics
Method of tracking prices
Private sector
That part of the economy made up
of private individuals and
businesses
Private businesses
Producer price index
Index used to measure prices
received by domestic producers;
formerly called the wholesale price
index
Like consumer price index,
but only measures domestic products (stuff made in US),
and not services
Progressive taxes
A tax that imposes a higher
percentage rate of taxation on
persons with higher incomes
Tax rate goes up as income goes up
Proportional taxes
Tax in which percentage of
income paid in tax is the same
regardless of the level of income
Tax rate stays the same, regardless of
income
Public sectorThat part of the
economy made up of the local, state, and federal govts
Govt businesses
Real GDP Constant dollar GDPHow much a
country made without inflation
Real GDP per capita
How long-term economic growth is
measuredLong-term growth
RecessionDecline in real GDP lasting at
least two quarters or more
When economic growth is going
down
Regressive tax
Tax where percentage of
income paid in tax goes down as income rises
Tax rate goes down as income goes up
Seasonal unemployment
Unemployment caused by annual
changes in the weather or other conditions that
prevail at certain times of the year
Some workers have less work
during certain seasons
(construction, etc)
Sectors of macro economy (4)
Consumer, investment,
government, foreign sectors
GDP = C + I + G + F
Parts of the economy that
control how much money a country
makes
Structural unemployment
Unemployment caused by a fundamental change in the economy that reduces the
demand for some workers
When workers lose jobs because they are not needed (skills outdated,
products no longer needed)
Technological unemployment
Unemployment caused by
technological development or automation that
make some workers’ skills
obsolete
When workers are replaced by
machines/computers
TroughPoint in time
when real GDP stops declining and begins to
expand
When GDP stops declining
Unemployment rate
Ratio of unemployed individuals
divided by total number of persons
in the civilian labor force,
expressed as a percentage
People out of work divided by
number of able workers
Welfare
Government or private agency programs that
provide general economic and
social assistance to needy
individuals
Govt agency that gives $$ to people
in need
Fiscal & Monetary Policy
Image Definition What that means
Monetary policy
Changes in the money supply of a nation in order to
influence its economy
Bank actions
Changing supply of money in order to
change the economy
Fiscal policy
Expenditures, taxes, and
borrowing made by a government in
order to influence an economy
Government actions
Changing supply of money in order to
change the economy
Federal Reserve System
(‘The Fed’)
Nation’s central bank
Housed in 12 banks across the country
Ensures that money placed in US banks will not disappear if
they go out of business
Goals of Federal Reserve
Control inflation
Curb recessionsWants to stabilize
the economy
Government securities
Things Fed uses to meet their goals by buying and selling them in the open
market
Sell - decreases money supply
(takes cash out)
Buy - increases money supply (puts
cash in)
Open market operations
Buying and selling government securities
Immediately affects money supply, which will change interest
rate
Discount rate
Interest rate that the Fed charges on loans it makes to
banks
Low - encourages banks to borrow
money (give more loans, put more
money in economy)
High - discourages banks to borrow money (give less loans, put less
money in economy)
Factors that affect the national economy
Taxes, expenditure, borrowing
GDP = C+I+G+Xn
Things that can change the economy
Taxes affects (C) & (I)
Reduce - boosts GDP (consumers
buy more, producers increase
their supply)
Government spending
Affects G Increase - boosts GDP
FOMC
Federal Open Market Committee
7 members of Board of Governors
5 presidents of district banks
Decides monetary policy
Reserve Requirement
Percentage of cash that banks have to
keep in reserve (now 12%)
Gives Fed control over money supply
Fractional reserve system
Requires banks and other depository
institutions to keep a fraction of their
deposits in the form of legal reserves
System that banks operate under
Excess reserves can be loaned out to
consumers
Board of Governors
7 members appointed by President Supervises Federal
Reserve System
Federal Reserve District Banks
12 district banks Serve the district’s banks
Easy money policy
Fed allows money supply to grow and interest rates to fall
Stimulates the economy
Tight money policy
Fed restricts the growth of money
supply
Drives interest rates up
Limits inflation
Moral persuasion (suasion)
People make decisions based on
their feelings/reports in media
Influences economy (not rationally)
International Economics
Image Definition What that means
Absolute advantage
A producer can produce a given output by using
fewer inputs than any competing
producer
Same input, more
output
more stuff produced
Comparative
advantage
A producer can produce one
product with a smaller amount of inputs than
the competition
Less input, same output
Same amount of
stuff
produced for a
cheaper price
Fixed rate
System under which the value
of currencies were fixed in
relation to one another
The exchange rate system in
effect until 1971
Rate that does NOT
change based on supply &
demand (China)
Floating rate
System that relies on supply &
demand to determine the value of one currency in
terms of another
Exchange rate system in
effect since 1971
Rate that changes based on supply & demand
Protective tariff
Tax on an imported product
designed to protect less
efficient domestic producers
Protects domestic
businesses
Revenue tariff
Tax placed on imported goods to raise revenue
designed to increase all
revenue &bring more
money in
QuotaLimit on the amount of a
good that can be allowed
into a country
limits amount
traded internationall
y
EmbargoProhibition on the export or import of a
product
no trade - against certain
products or countries
(Cuba)
WTO
International agency that administers
trade agreements, settles trade
disputes btwn govts,
organizes trade
negotiations, & provides technical
assistance & training for developing countries
World Trade Organization
Mediates trade
disputes
Promotes free trade
NAFTA Agreement signed in 1993 to reduce tariffs
btwn the US, Canada, & Mex
North
American Free Trade Agreement
Trading bloc of North
American countries
N Amer – US, Canada, Mex
EU
Successor of the European
Community established in 1993 by the Maastricht
Treaty
Trading bloc of
European countries
ASEAN
Group of ten Southeast Asian nations working
to promote regional
cooperation, economic
growth, and trade
Trading bloc of SE
Asian countries
OPECOrganization of
Petroleum Exporting Countries
Set world oil prices since they are so
large
Foreign exchange
rate
Price of one country’s
currency in terms of another
currency
When exchange
takes place btwn
residents of country, one money has to be
exchanged for another
Balance of payments
Summary of payments to foreigners for imports and receipts from foreigners for exports
Current – involve trade Capital – involve financial assets
Deficitan excess of
expenditure or liabilities over
income or assets in a given period
Paying out more abroad than we
take in
Imports more than exports
Price of currency will rise
Depreciation of US dollar
Surplus
Situation where quantity
supplied is greater than
quantity demanded at a
given price
Receiving more from abroad than we are spending
Exports larger than imports
Appreciation of US dollar &
depreciation of foreign currency
Appreciate
An increase in the value of an asset over time.
Value goes up
depreciate
Gradual wear on capital goods
during production
Value goes down