Economics Online Tutor
Glossary and Dictionary of
Economics Terms

Page 5
INCREASE IN SUPPLY: A change in a determinant of supply which causes the quantity supplied to increase at every potential price.  
This is represented on a supply & demand diagram as a rightward shift in the supply curve.

INCREASING OPPORTUNITY COSTS: The concept that as more and more resources are devoted to a particular activity, the
marginal cost becomes increasingly higher.  This concept explains the bowed-out (convex) shape of the PPC.

INCOME: Payments received (earnings) by the factors of production.

INCOME ACCOUNT: The portion of the current account in the balance of payments that includes transactions involving income
between countries.  Investment income and wages earned in another country is a positive (credit).  Investment income and wages
earned from domestic activity by foreigners is a negative (debit).
INCOME APPROACH: A method of calculating GDP by adding up the income received by the factors of production.  The formula is:
GDP = compensation of employees + net interest + rent + profits (proprietors' income + corporate profits) + indirect business
taxes + capital consumption allowance (or depreciation) - net factor income from abroad.

INCOME ELASTICITY OF DEMAND: A measurement of the responsiveness of quantity demanded to a change in income.

INDICATORS: Variables that tend to change as the phase of the business cycle changes.  Also known as economic indicators.  
Indicators can be leading indicators, coincident indicators, or lagging indicators.

INDIFFERENCE CURVE: A graph plotting all combinations of the quantities of two goods for which a consumer has no preference.

INDIFFERENCE ANALYSIS: A simplified, graphical economic model that helps to explain consumer choices.

INDIFFERENCE MAP: A graph showing various indifference curves as well as a budget line.

INDIRECT BUSINESS TAXES: Taxes collected through businesses that are not related to the amount of income.  Sales tax plus
excise tax.

INDUSTRY: A sector of the economy in which firms use similar resources to produce similar products.  Often used in this site and
in economics textbooks interchangeably with the term market.

INELASTIC: A variable that is relatively unresponsive to changes in another variable.  Indicated by an absolute value of less than
one.

INFANT INDUSTRY: An industry that currently cannot compete with more efficient foreign competition, but is believed to be capable
of becoming competitive if the government imposes trade restrictions to protect the industry while it grows.

INFERIOR GOOD: A good for which demand changes in the opposite direction as income.

INFLATION: A sustained rise in the average level of prices.  Alternatively, a sustained decline in the purchasing power of the
currency.

INFLATION RATE: The percentage change in the average price level from one year to the next.

INFORMAL ECONOMY: Economic activity that is not reported for tax purposes and is not included in official government statistics.  
Also known as the black market, underground economy, hidden economy, shadow economy, and parallel economy.

INFRASTRUCTURE: Basic public institutions and facilities including an education system and a system of roads and bridges.

INPUTS: The use of factors of production.  Used interchangeably with the term resources.

INTEREST: Payment made for the use of somebody else's money.

INTEREST RATE: The amount of interest, as an annualized percentage of the principle amount of a loan.

INTEREST RATE EFFECT: A price factor of aggregate demand.  As the price level increases, more money is needed for purchases.  
This increases the transaction demand for money, and lowers the demand for other financial assets such as bonds.  A lower
demand for bonds will decrease the price of bonds, increasing interest rates.  Higher interest rates will create a decrease in
aggregate investment spending.

INTERMEDIATE GOODS: Goods that are produced for use in producing other goods.

INTERMEDIATE TARGET: A goal for which another goal is the real aim.  For example, the Fed uses a target level of the money supply
in order to achieve another goal, which is a desired level of real output and prices.

INTERNATIONAL CARTEL: A cartel composed of firms from different countries.

INTERNATIONAL SECTOR: The sector of the economy that involves other countries.  This would be the import / export component
of the economy.

INTERNATIONAL TRADE EFFECT: A price factor of aggregate demand.  Changes in the relative prices of foreign and domestic
goods will cause changes in net exports.  These changes will change the overall price level, creating a movement along the
aggregate demand curve.

INTERSECTION: On a graph, the point where two curves cross, usually indicating a point of equilibrium.

INVENTORY: Goods that have been produced but not yet sold.

INVESTMENT: Spending by firms, or the business sector of the economy.  Another definition used in this site is spending by people
on financial assets for the purpose of earning a profit.

KEY RESOURCE: A scarce resource for which there are no close substitutes.

KEYNES, JOHN MAYNARD: Economist who developed Keynesian Economics, which challenged classical economic thinking during
the Great Depression by advocating for targeted government activism.

KEYNESIAN ECONOMICS: The economic school of thought that developed as a result of the theories of John Maynard Keynes.  This
school of thought has evolved over time and is not identical to the actual theories of Keynes.

KINKED DEMAND CURVE: In oligopoly theory, a demand curve composed of different segments of two demand curves with
different elasticities and slopes, thus forming a kink at the point where the two curves are joined.

LABOR: The input that involves the physical and intellectual services of people, including training, education, and peoples' abilities.

LABOR FORCE: The number of employed persons plus the number of persons counted as unemployed.  Also known as the total
labor force.

LABOR FORCE PARTICIPATION RATE: The percentage of the working age population that is counted in the total labor force.

LABOR MARKET: The supply & demand for workers.

LAGGING INDICATORS: Variables that tend to change after a change in the phase of the business cycle.

LAISSEZ-FAIRE: The economic concept that efficiency in the economy is best achieved through government non-intervention,
when people are left alone to pursue their own self interests.

LAND: The factor of production that includes minerals, timber, and water, as well as the actual land itself.

LAW OF DEMAND: The quantity of a specific good or service that people are willing and able to purchase decreases as the price
increases, and increases as the price decreases, as long as the price is the only thing that changes.

LAW OF SUPPLY: The quantity of a specific good or service that producers are willing and able to offer for sale increases as the
price increases, and decreases as the price decreases, as long as the price is the only thing that changes.

LEADING INDICATORS: Variables that tend to change prior to a change in the phase of the business cycle.

LIMITED RESOURCES: The part of the scarcity concept of economics that says that resources are not infinite.

LIQUIDITY TRAP: A theory that a certain nominal interest rate exists where expansionary monetary policy would be ineffective in
lowering interest rates any further.

LONG RUN: A time frame long enough to make all inputs variable.  No fixed inputs or fixed costs exist in the long run.  Also called
the planning horizon.

LONG RUN AGGREGATE SUPPLY CURVE: With the theory that in the long run all costs and prices have time to adjust, higher prices
will not increase profits and therefore will not lead to an increase in real GDP.  This makes the long run aggregate supply curve a
vertical line.  Many economists believe that the level of output associated with the vertical long run aggregate supply curve is at
the level of potential GDP (the natural rate of unemployment).

LONG RUN AVERAGE TOTAL COST: In the long run, all costs are variable, and all short run situations are possible.  The long run
average total cost curve connects all possible short run average total cost curves.  This can take different shapes, but a
downward sloping portion would indicate economies of scale while an upward sloping portion would indicate diseconomies of
scale.
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