List of Economic Terms
The study of Economics is often called the "dismal science" due to the gloomy predictions and realities so often associated with the discipline. Economics deals with the choices that individuals, businesses and governments make regarding the use of the scarce resources available to them. The economic concepts you often hear or read about are easier to comprehend when you have an understanding of some basic and often used terms.
Supply is the amount of goods and services a business can produce with their available resources. Common resources are employees, machines and raw materials. For example, an automobile manufacturer's resources include the assembly line workers, the plant in which they work, sheet metal, engine parts and any other item that is used to produce a car. However, remember that these manufacturers have only so many employees, plants and machines. The task for management is to get the most production from those limited resources.
Demand is the amount of a good or service that consumers are willing to buy at a given price. With all other factors being equal, buyers will purchase (demand) more of a good at a lower price than they will at a higher price. Conversely, businesses will produce (supply) more of a good if consumers will buy it at the higher price. The reason: greater profits. If manufacturers earn very little profit on a good, they will cut back or halt production.
The delimma for manufacturers is to find the equilibrium price which is the price where the quantity demanded equals the quantity sold. In other words, if their supply exceeds the demand, their scarce resources were wasted by creating too much of the product. If the supply doesn't meet the demand, they will lose potential profits and customers who may seek alternative goods.
Opportunity cost is the value that consumers give up in one good or service by choosing another good or service. With scarce resources, people are forced to choose how they will satisfy their wants. For example, let's say a couple chooses to spend their $4000 income tax return to remodel their outdated kitchen. The opportunity cost is being unable to take the second honeymoon they had planned because the money was used for the kitchen.
The gross domestic product (GDP) is the total monetary value of all goods and services produced within that nation's borders. The gross national product (GNP) is the total monetary value of all goods and services produced by a nation's workers at home and abroad. Economists look at both of these values as indicators of how well our economy is functioning. Steady growth with these totals indicate a healthy economy while minimal or negative growth are signs of trouble.
The unemployment rate is the percentage of workers who are currently without a job. A worker has to be actively seeking employment or temporarily laid off in order to be considered unemployed by economists. A high unemployment rate can have dire consequences for any economy.
Inflation is a rise in the overall price level of goods and services. A rise in the price of goods, without a corresponding rise in wages, will result in less consumer spending. This reduction in spending will cause manufacturers to stop producing goods, resulting in layoffs and high unemployment. The economy will eventually stall or stagnate and a recession (a decline in GNP for six consecutive months) could very well be on the horizon.