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Economic Terms

All   0-9   A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Degree of concentration

A measure of how much of a good or service is supplied by the largest suppliers in a market.


When the structure of an economy changes because activity shifts from the secondary to the tertiary sector.


The amount of a good or service consumers will buy at any given price over a certain period of time.

Below is a diagram to show the demand curve for a good in a specific goods market.



Demand curve

A curve (typically drawn as a straight line) which shows the amount of a good or service consumers would buy at any given price. The inverse relationship between the price and quantity demanded of a good or service is explained by the 'Law of Demand'.

Demand for substitute goods

When there is demand for a good that is cheaper but satisfies the same wants or needs as another good.

Demand movement

A demand curve movement is created when the price of a good or service, that the demand curve represents, changes. Because of the inverse relationship between the price and quantity demanded of a good, when the price of a good falls the quantity demanded rises, whilst in the case of a price rise the opposite occurs. This i all subject to the law of demand. If any non-price factor changes then this causes the demand curve to shift at every given price.


Demand pull inflation

An increase in the price level due to a positive shift in the aggregate demand curve i.e. prices rise as demand pulls the AD curve up the supply curve.

The increase in AD can arise from any positive changes in: consumption, investment, government spending or net exports.

Below is a set of diagrams to highlight the two different approaches to showing demand-pull inflation in an economy. The Keynesian AS curve provides a clearer path to evaluating the impact of demand curve shifts on the inflation rate. In the classical case, the inflation is created by an outward AD shift with no change in the SRAS curve assuming ceteris paribus.

However, when evaluating this type of inflation it is important to understand the main cause of the positive AD shift. This is because if the AD shift was caused by increased consumption brought on by higher consumer confidence, then it is likely to create an inflationary spiral, in which real output remains unchanged but the price level increases significantly. This is essentially an inflationary movement up the LRAS curve without any real gains for economic agents. However, if the AD curve shift was brought about through higher investment, this is likely to have strong productivity links to the economy (e.g. increase in rate of capital accumulation). As a result, it can create pressure for the LRAS curve to outwardly shift and the economy goes through a period of disinflationary growth. So it is important to consider what factor has driven the demand-pull inflation to evaluate its impact on the performance of the economy. 


Also the degree and extent of demand-pull inflation introduced in the economy from an AD shift depends crucially on the level of spare capacity in the economy. This Is because if an economy is at or close to full capacity, majority of the economic resources (e.g. factors of production) are in use. Therefore, any increase in demand creates pressure on an economy's existing endowment of resources to produce a higher level of output. It is this that creates the inflationary pressure for prices to rise as factors of production demand higher rewards for the increase in effort and work they have to put in to produce the extra output. This causes the economy to overheat and creates significant rises in prices.

However, when an economy has a significant level of spare capacity (significant amount of unemployed resources) an increase in demand and output does not put pressure on the existing set of resources currently employed, as firms can increase the amount of economic resources they employ in their production to fuel the higher output. This means the strain on the economy is lessened and the inflationary pressures are not as severe. This explains why the Bank of England closely monitor labour market data when making a decision on setting the base rate, in order to control inflationary pressures (e.g. the lower the unemployment rate, the greater the chance an increase in economic activity stokes inflation).

To illustrate the impact of spare capacity on inflationary pressures, it is best to use the Keynesian AS curve. 

Demand side fiscal policy

Changes in taxation or expenditure that are designed to influence (positive or negative) AD in the economy. 

There are two types of demand side fiscal policy:

  • Contractionary Fiscal Policy - shifs AD curve to AD2.
  • Expansionary Fiscal Policy - shifts AD curve to AD3.

Demand side shock

This a major economic event that leads to a shift (positive or negative) in the AD curve. The event is often sudden and unexpected e.g. credit crunch leading to a demand-side shock due to an almost immediate reduction in credit availability.


Occurs when a firm decides to sell off a part of its operations in order to focus on core products, remove any diseconomies of scale, meet new regulations or meet changes in demand. This highlights that buinesses do not always decide to grow.

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