DICTIONARY OF ECONOMICS
CHANGE IN DEMAND: A change in a determinant of demand which would change the quantity demanded at every potential price. A
change in demand would shift the entire demand curve. The determinants of demand are: consumer income, consumer tastes,
the prices of the number of potential the number of potential buyers.buyers.
CHANGE IN QUANTITY DEMANDED: A change in the quantity of a good or service that consumers would be willing and able to
purchase, due to a change in the price of the good or service in question. This would be shown as a movement along an existing
demand curve as opposed to a shift in the demand curve.
CHANGE IN QUANTITY SUPPLIED: A change in the quantity of a good or service that producers are willing and able to offer for sale
due to a change in the price of the good or service in question. This would be shown as a movement along an existing supply
curve as opposed to a shift in the supply curve.
CHANGE IN SUPPLY: A change in a determinant of supply which would change the quantity supplied at every potential price. A
change in supply would shift the entire supply curve. The determinants of supply are: the prices of resources, technology and
productivity, expectations of producers, the number of suppliers, and the prices of alternative goods and services that a firm
CIRCULAR FLOW MODEL: A model in economics showing the inter-relationships between different sectors of an economy. These
inter-relationships include flows of inputs and output; physical products and financial assets; leakages and injections. The
sectors of the economy are: households, firms, the government sector, the international sector, and financial intermediaries.
CLASSICAL ECONOMICS: The traditional economic school of thought associated with zero government activist policies. This
school of thought involves the assumption that the business cycle and economy are self-correcting.
COINCIDENT INDICATORS: Variables that tend to change at the same time that the business cycle changes stages.
COLA: Cost of Living Adjustment. An automatic adjustment to wages or prices based on the rate of inflation.
COLLUSION: Cooperation among firms in an oligopoly industry based on secret agreements.
COMMAND ECONOMY: An economic system in which economic decisions are made by a central authority.
COMMUNISM: A political philosophy in which utopia can be reached through a series of stages in the economy. First, a market
economy is replaced by a command economy. Eventually the government sector will disappear, leaving the people to make
economic decisions for the common good, without the aid of market forces. Since the last stage only exists in theory, and all
governments that are based on the communist philosophy have succeeded in only advancing as far as the command economy,
communism is closely associated with socialism.
COMPANY: A private organization that produces goods and / or services. The term as used here is interchangeable with firm,
business firm, enterprise, business, and producer.
COMPARATIVE ADVANTAGE: The advantage one person or country has because of a lower opportunity cost in one specific
activity, such as production of a specific good.
COMPLEMENTS: Goods that tend to be purchased together, as if the combination was one unit. A change in the price of one good
would cause the demand for a complement to change in the opposite direction.
CONSUMER: The purchaser of a final good or service. Collectively, consumers comprise the household sector of the economy.
CONSUMER EQUILIBRIUM: When a consumer has maximized utility, which is the point where the marginal utility per cost for every
consumption choice is equal. Also known as the Equimarginal Principle.
CONSUMER PRICE INDEX: A measurement of price changes for a "typical" bundle of goods purchased by consumers.
CONSUMER SECTOR: The sector of the economy that purchases final goods and services.
CONSUMER SURPLUS: The difference between what consumers are willing to pay and the amount that they actually pay. On a
supply & demand diagram, consumer surplus would be the area that lies below the demand curve and above the market price.
CONSUMPTION: Overall spending in the economy by the household sector.
CONTRACTION: The portion of the business cycle in which real GDP is falling. This would be associated with a recession and high
COST OF LIVING ADJUSTMENT: An automatic adjustment to wages or prices based on the rate of inflation. Commonly referred to
COST-PUSH INFLATION: Inflation caused by a decrease in aggregate supply. A decrease in aggregate supply is also associated
with an increase in unemployment. The combination of an increase in inflation and an increase in unemployment is called
stagflation. If the cause of the decrease in aggregate supply is a sudden increase in the price of a key product or resource in the
economy, it is called a supply shock.
CPI: Consumer Price Index. A measurement of price changes for a "typical" bundle of goods purchased by consumers.
CROSS ELASTICITY OF DEMAND: A measure of the amount that the demand for one good changes due to a change in the price of
another good. A cross elasticity of demand that is not equal to zero will indicate that the goods are related. A positive elasticity
indicates substitutes. A negative elasticity indicates complements. Same as cross-price elasticity of demand.
CROSS-PRICE ELASTICITY OF DEMAND: A measure of the amount that the demand for one good changes due to a change in the
price of another good. A cross elasticity of demand that is not equal to zero will indicate that the goods are related. A positive
elasticity indicates substitutes. A negative elasticity indicates complements. Same as cross elasticity of demand.
CROWDING OUT: A reduction in consumption or investment spending caused by an increase in government borrowing.
CURRENT ACCOUNT: The combination of the merchandise account, services account, income account, and unilateral transfers
account. Associated with net exports and a trade deficit / surplus.
CYCLICAL UNEMPLOYMENT: The portion of unemployment associated with a downturn in the economy, which would be the
contraction stage of the business cycle.
DECENTRALIZED DECISION MAKING: Economic activity in which the cumulative effect of decisions of individuals in the economy
determine prices and output.
DECREASE IN DEMAND: A change in demand in which the quantity demanded decreases at every potential price. The demand
curve shifts to the left.
DECREASE IN SUPPLY: A change in supply in which the quantity supplied decreases at every potential price. The supply curve
shifts to the left.
DEBT: The balance of all outstanding government obligations arising from deficit spending.
DEFICIT: The amount by which government expenditures exceeds tax revenue in a given year.
DEFLATION: A period of time in which the general price level decreases. Alternatively, a period of time in which the purchasing
power of the currency increases.
DEMAND: The quantities that consumers would be willing and able to purchase at every potential price. When shown on a graph,
it becomes a demand curve.
DEMAND CURVE: A graph of the demand schedule. The demand curve is a downward sloping curve, indicating a negative
relationship between price and quantity demanded.
DEMAND FOR MONEY: The quantity of money that people want to hold at each potential interest rate. An inverse relationship
exists between the interest rate and the quantity of money demanded.
DEMAND SCHEDULE: A table of demand.
DEMAND SIDE ECONOMICS: Discretionary government policies designed to influence the level of aggregate demand in the
DEMAND-PULL INFLATION: Inflation caused by an increase in aggregate demand.
DEPOSIT EXPANSION MULTIPLIER: The maximum amount by which a deposit in a bank can increase the money supply throughout
the banking system. It is the reciprocal of the reserve requirement. Also called the money multiplier.
DEPRECIATION: The replacement cost of worn-out machinery and equipment.
DETERMINANTS OF DEMAND: Factors that determine the quantity demanded at every potential price. Determinants of demand are
consumer income, consumer tastes, the prices of complements, the prices of substitutes, consumer expectations, and the
number of potential buyers.
DETERMINANTS OF SUPPLY: Factors that determine the quantity supplied at every potential price. Determinants of supply are the
prices of resources, technology and productivity, expectations of producers, the number of suppliers, and the prices of
alternative goods and services that the firm could produce.
DI: Disposable income. The amount of personal income available for spending or saving after personal income taxes.
DIFFERENTIATED PRODUCTS: Products of competing firms that consumers consider to be close substitutes, but not identical.
DIMINISHING MARGINAL RETURNS: The concept that after some output level, output per unit of input will decrease.