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