IAI CB2 key terms

The quantities of a good that buyers are willing and able to purchase at each price over a given period, other influences held constant. The whole relationship, not a single quantity.

The specific amount of a good buyers plan to purchase at one particular price. A change in price moves along the demand curve rather than shifting it.

The principle that, other things equal, a higher price reduces the quantity demanded and a lower price raises it, producing a downward-sloping demand curve.

A graph plotting quantity demanded against price, holding other determinants fixed. Its downward slope reflects the law of demand; a shift of the whole curve signals changed demand.

A movement of the entire demand curve caused by a change in a non-price determinant such as income, tastes, prices of related goods, or expectations. Quantity demanded changes at every price.

A change in quantity demanded caused solely by a change in the good's own price, shown as a slide along a fixed curve. It is not a shift in demand.

A good whose demand rises when consumer income rises and falls when income falls, so income and quantity demanded move in the same direction.

A good whose demand falls as consumer income rises, because buyers switch to preferred substitutes. Its income elasticity of demand is negative.

Goods that can replace one another for a similar purpose. A rise in the price of one increases demand for the other, giving a positive cross-price elasticity.

Goods consumed together, such as cars and fuel. A rise in the price of one reduces demand for the other, so cross-price elasticity is negative.

The price and quantity at which quantity demanded equals quantity supplied, so there is no tendency for price to change. At this point the market clears.

The price at which quantity demanded exactly matches quantity supplied. Above it surplus pushes price down; below it shortage pushes price up.

A shortage occurring when price is below equilibrium, so quantity demanded exceeds quantity supplied. Upward pressure on price usually removes it.

A surplus occurring when price is above equilibrium, so quantity supplied exceeds quantity demanded. Downward pressure on price usually removes it.

The percentage change in quantity demanded divided by the percentage change in price. Values above one indicate elastic demand; below one, inelastic demand.

Demand whose price elasticity exceeds one in absolute value, so quantity responds proportionately more than price. A price cut then raises total revenue.

Demand whose price elasticity is below one in absolute value, so quantity responds proportionately less than price. A price rise then raises total revenue.

A quick way to judge elasticity: if a price cut raises total revenue, demand is elastic; if it lowers total revenue, demand is inelastic.

The percentage change in quantity demanded divided by the percentage change in income. Positive values indicate normal goods; negative values indicate inferior goods.

The percentage change in quantity demanded of one good divided by the percentage change in the price of another. Positive for substitutes, negative for complements.

The percentage change in quantity supplied divided by the percentage change in price. It is larger when firms can adjust inputs quickly and when spare capacity exists.

The overall satisfaction a consumer obtains from consuming a given quantity of a good or bundle. It is the sum of the marginal utilities of the units consumed.

The extra satisfaction gained from consuming one additional unit of a good, holding other consumption constant. It equals the change in total utility per unit change in quantity.

The principle that as consumption of a good increases within a period, each extra unit adds less satisfaction than the previous unit, so marginal utility falls.

A utility-maximising consumer allocates spending so that marginal utility per unit of money is equal across all goods purchased, given a fixed budget.

The combinations of goods a consumer can afford given income and prices. Its slope equals the relative price ratio of the two goods.

A curve showing combinations of two goods that yield the same total utility, so the consumer is equally satisfied with any point on it. Curves are downward-sloping and convex.

The rate at which a consumer will trade one good for another while keeping total utility constant. It equals the absolute slope of an indifference curve.

In the short run, adding more of a variable input to fixed inputs eventually yields smaller increments of output, so marginal product falls.

The extra output produced by employing one additional unit of a variable input, such as labour, while other inputs stay fixed.

Total output divided by the number of units of an input employed, for example output per worker. It measures productivity per unit of input.

A period in which at least one factor of production is fixed, typically capital, so output can only be varied by changing variable inputs such as labour.

A period long enough for all factors of production to be varied, including plant size. Firms can enter or exit an industry in this horizon.

A cost that does not vary with output in the short run, such as rent on a factory. It must be paid even when production is zero.

A cost that changes directly with the level of output, such as wages of production workers or raw materials. It is zero when output is zero.

The addition to total cost from producing one more unit of output. Profit is maximised where marginal cost equals marginal revenue.

Falling long-run average cost as output expands, arising from specialisation, bulk buying, or better technology. They give larger firms a cost advantage.

A market with many small price-taking firms, identical products, free entry and exit, and perfect information. Firms earn only normal profit in long-run equilibrium.

A market with a single seller, no close substitutes, and high barriers to entry. The firm is a price maker and can sustain long-run supernormal profit.

A market dominated by a few large firms whose decisions are interdependent, often leading to strategic behaviour, non-price competition, and possible collusion.

A market with many firms selling differentiated products and free entry, giving each firm some price-setting power but only normal profit in the long run.

The market value of all final goods and services produced within a country's borders in a period, regardless of producer nationality.

GDP measured at constant prices from a base year, removing the effect of inflation so changes reflect true changes in output.

GDP measured at current market prices, so it rises with both output growth and price inflation. It must be deflated to compare output over time.

A broad price index equal to nominal GDP divided by real GDP, multiplied by 100. It measures price change across all domestically produced output.

The ratio of the change in bank deposits to the change in reserves that created them, equal to one divided by the reserve ratio in a simple model.

The proportion of deposits banks hold as reserves rather than lend out, whether required by regulation or held prudently. A higher ratio shrinks the money multiplier.

The institution that issues currency, sets interest rates, supervises the banking system, and acts as lender of last resort to maintain financial stability.

Rising prices caused by aggregate demand growing faster than the economy's productive capacity, often described as too much money chasing too few goods.

Rising prices driven by increases in the costs of production, such as higher wages or energy prices, which shift aggregate supply leftward.

The number of unemployed people as a percentage of the labour force, where the labour force comprises the employed plus those actively seeking work.

Short-term joblessness arising while people move between jobs or enter the labour market. It exists even when the economy is at full employment.

Joblessness caused by a lasting mismatch between workers' skills or locations and available jobs, often due to technological change or deindustrialisation.

A curve suggesting an inverse short-run relationship between inflation and unemployment. The trade-off is weaker or absent in the long run.

The use of government spending and taxation to influence aggregate demand, output, and employment. Expansionary policy raises spending or cuts taxes.

Central bank action to influence interest rates, money supply, and credit conditions in order to control inflation and stabilise output.

The reduction in private investment or consumption that occurs when government borrowing raises interest rates or absorbs scarce resources.

The process by which an initial change in spending generates a larger eventual change in national income, as recipients spend part of the extra income.