Unit 3 Economics: Demand, GDP, and Growth

Free Market

 an economic system in which prices are determined by unrestricted competition between privately owned businesses

Demand

the desire to own something and the ability to pay for it 

Law of Demand

says that when a good’s price is lower, the quantity demanded (amount people are willing to buy) is greater 

Utility

term used to determine the worth or value of a good or service

Marginal Utility

added satisfaction that a consumer gets from having one more unit of a good or service

Law of Diminishing Marginal Utility

for any good or service, the marginal utility of that good or service decreases as the quantity of the good increases

Substitution Effect

when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good 

Income Effect

buying fewer of a good without increasing purchases of substitutions due to increasing prices and not being able to afford new prices 

Demand Schedule

a table that lists the quantity of a good that a person will purchase at various prices in a market 

Market Demand Schedule

shows the quantities demanded at various prices by all consumers in the market 

Demand Curve

a graphic representation of a demand schedule 

National Income Accounting

a system economists use to collect and organize macroeconomic statistics on production, income, investment, and savings

Gross Domestic Product (GDP)

 the total value of all final goods and services produced in a country in a given year 

Intermediate goods

products used in the production of final goods 

Durable Goods

those goods that last for a relatively long time, such as refrigerators, cars, and dvd players

Nondurable goods

those goods that last a short period of time such as food, light bulbs, and sneakers

Nominal GDP

GDP measured at current prices

Real GDP

GDP expressed in constant, or unchanging, prices

Gross National Product

the annual income earned by a nation’s companies and people

Depreciation

the loss of the value of capital equipment that results from normal wear and tear 

Price Level

the average of all prices in an economy

Aggregate Supply

the total amount of goods and services in the economy available at all possible price levels

Aggregate Demand

the amount of goods and services in the economy that will be purchased at all possible price levels

Business Cycle

a period of macroeconomic expansion or growth followed by a period of contraction or decline

Expansion

a period of economic growth as measured by a rise in real GDP

Economic Growth

a steady, long term increase in real GDP

Peak

the height of an economic expansion

Contraction

an economic decline marked by falling real GDP

Trough

 the lowest point in an economic contraction

Recession

a prolonged economic contraction

Depression

a deep recession with features such as high unemployment and low economic output

Stagflation

a decline in real GDP (output) combined with a rise in the price level (inflation)

Leading Indicators

a set of key economic variables that economists use to predict future trends in a business cycle

Real GDP per capita

 real GDP divided by the total population of a country 

Capital deepening

 the process of increasing the amount of capital per worker 

Saving

income not used for consumption

Savings Rate

the proportion of disposable income that is saved

Technological Progress

an increase in efficiency gained by producing more output without using more inputs

Ceteris Paribus

 (Latin) all other things held constant

Quantity Demanded

the total amount of goods or services demanded at any given point -depends on the price of a good or service in the marketplace, regardless of whether that market is in equilibrium

Change in Quantity Demanded

caused only by a change in price; results in movement along the demand curve 

Change or Shift in Demand

caused by a change in factors other than price; results in a shift of the entire demand curve

 the factors that cause a change or shift in demand

income, consumer expectations, population, and consumer tastes/advertising 

Normal Good

a good that experiences an increase in demand due to an increase in a consumer’s income

Inferior Good

a good in which demand decreases when consumer’s income increases

Complements

goods that are bought and used together 

Substitutes

a product/service that can be used in place of another

Elasticity of Demand

 a measure of how consumers react to a change in price

Formula to Calculate Elasticity

Percentage change in quantity demanded

Percentage change in price

Formula to Calculate Percentage Change

Original number – New number x100

    Original number

Inelastic

consumers are not very responsive to changes in price. A decrease in price will lead to only a small change in quantity demanded, or perhaps no change at all

Elastic

a small change in price leads to a relatively large change in the quantity demanded

Unitary Elastic

 the proportion of change in demand for goods and services is equal to proportion of change in its price

Factors that Affect Elasticity

availability of substitutes, relative importance, necessities versus luxuries, and change over time

Total Revenue

the total amount of money the company receives from selling its goods or services