IB Economics: Demand related terms

Aggregate demand

• The total spending in an economy consisting of consumption, investment, government expenditure and net exports.
• A measure of the responsiveness of the quantity demanded of exports when there is a change in the price of exports.
• This is where an increase in the price of a good or service leads to a fall in the quantity demanded of the good or service to zero. (PED would be infinity.)

Aggregate demand curve

• A curve showing the relationship between the average price level and real GDP.
• A measure of the responsiveness of the quantity demanded of imports when there is a change in the price of imports.
• This is where a fall in the price of a good or service leads to a fall in the quantity supplied of the good or service to zero. (PES would be infinity.)

Demand

• The willingness and ability of consumers to purchase a quantity of a good or service.
• The percentage change of a price index over a certain time period.
• The use of a screening process to gain more information regarding a participant in a transaction, in order to reduce asymmetric information, and so reduce adverse selection.

Demand curve

• This shows the relationship between the price of a good or service and the quantity demanded. It is normally downward sloping.
• The situation where total spending (aggregate demand) is greater than the full employment level of output, thus causing inflation.
• Equilibrium unemployment that exists when people are out of work because their usual job is out of season, for example, a ski instructor in the summer.

Demand management

• A (Keynesian) policy emphasising the importance of government intervention in managing the level of aggregate demand in the economy, through fiscal and monetary policies.
• The part of an economy that is neither taxed nor monitored by the government. The activities of the informal economy are not included in a country’s national income figures.
• Aggregate supply that varies with the level of demand for goods and services and that is shifted by changes in the costs of factors of production.

Demand-pull inflation

• Inflation that is caused by increasing aggregate demand in an economy, i.e. a shift of the AD curve to the right.
• The large-scale capital usually provided by government that is necessary for economic activity to take place.
• A curve showing the inverse relationship between the rate of unemployment and the rate of inflation, which suggests a trade-off between inflation and unemployment.

Elasticity of demand for exports

• A measure of the responsiveness of the quantity demanded of exports when there is a change in the price of exports.
• The savings, taxes and import expenditure that remove spending from the circular flow of income.
• This shows the relationship between the price of a good or service and the quantity supplied. It is normally upward sloping.

Elasticity of demand for imports

• A measure of the responsiveness of the quantity demanded of imports when there is a change in the price of imports.
• Aggregate supply that is dependent upon the resources in the economy and that can only be increased by improvements in the quantity and/ or quality of factors of production.
• Government policies designed to shift the long run aggregate supply curve to the right, thus increasing potential output in the economy.

Excess demand

• This occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied.
• Mandated choices are when consumers are required to state whether or not they wish to take part in an action.
• The aggregate revenue gained by a firm from the sale of a particular quantity of output (equal to price times quantity sold).

Income elasticity of demand (YED)

• A measure of the responsiveness of the demand for a good or service to a change in income.
• Aid that is provided to a country by another government or multilateral agency.
• The total spending in an economy consisting of consumption, investment, government expenditure and net exports.