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ECO 001
Vocabulary
| Term | Definition |
|---|---|
| absolute advantage | ability of an individual, firm, or country to produce more of a good or service than competitors, using the same amount of resources |
| accounting profit | a firm's net income, measured as revenue minus operating expenses and taxes paid |
| adverse selection | one party to a transaction takes advantage of knowing more than the other party to the transaction |
| aggregate demand | relationship between price level and quantity of real GDP demanded |
| aggregate demand and aggregate supply model | explains short-run fluctuations in real GDP and the price level |
| aggregate expenditure (AE) | total spending in the economy: AE=C+I+G+NX |
| aggregate expenditure model | short-run relationship between total spending and real GDP, assuming constant price level |
| allocative efficiency | production is in accordance with consumer preferences: every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it |
| antitrust laws | laws aimed at eliminating collusion and promoting competition among firms |
| asset | anything of value owned by a person or firm |
| asymmetric information | a situation in which one party to an economic transaction has less information than the other party |
| autarky | a situation in which a country does not trade with other countries |
| autonomous expenditure | an expenditure that does not depend on the level of GDP |
| average fixed cost | fixed cost divided by the quantity of output produced |
| average product of labor | the total output produced by a firm divided by the quantity of workers |
| average revenue (AR) | total revenue divided by the quantity of the product sold |
| average tax rate | total tax paid divided by total income |
| average total cost | total cost divided by the quantity of output |
| average variable cost | variable cost divided by the quantity of output produced |
| balance of trade | difference between the value of goods a country exports and the value of goods a country imports |
| bank panic | a situation in which many banks experience runs at the same time |
| bank run | a situation in which many depositors simultaneously decide to withdraw money from a bank |
| barrier to entry | anything that keeps new firms from entering an industry in which firms are earning economic profits |
| behavioral economics | the study of situations in which people make choices that do not appear to be economically rational |
| black market | a market in which buying and selling take place at prices that violate government price regulations |
| bond | a financial security that represents a promise to repay a fixed amount of funds |
| brand management | the actions of a firm to maintain the differentiation of a product over time |
| budget deficit | the situation in which the government's expenditures are greater than its tax revenue |
| budget surplus | the situation in which the government's expenditures are less than its tax revenue |
| business cycle | alternating periods of economic expansion and economic recession |
| capital | manufactured goods that are used to produce other goods and services |
| cartel | a group of firms that collude by agreeing to restrict output to increase prices and profits |
| cash flow | the difference between the cash revenues received by a firm and the cash spending by the firm |
| centrally planned economy | an economy in which the government decides how economic resources will be allocated |
| circular-flow diagram | a model that illustrates how participants in markets are linked |
| Coase theorem | if transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities |
| collusion | an agreement among firms to charge the same price or otherwise not to compete |
| command-and-control approach | a policy that involves the government imposing qualitative limits on the amount of pollution firms are allowed to emit or requiring firms to install specific pollution control devices |
| commodity money | a good used as money that also has value independent of its use as money |
| common resource | a good that is rival but not excludable |
| comparative advantage | the ability of an individual, firm, or country to produce a good or service at a lower opportuntiy cost than competitors |
| compensating differentials | higher wages that compensate workers for unpleasant aspects of a job |
| competitive market equilibrium | a market equilibrium with many buyers and sellers |
| complements | goods and services that are used together |
| consumer price index (CPI) | measure of the average change over time in the prices a typical urban family of four pays for the goods and services they purchase |
| consumer surplus | difference between highest price a consumer is willing to pay and the actual price the consumer pays |
| consumption function | relationship between consumption spending and disposable income |
| consumption | spending by households on goods and services |
| contractionary monetary policy | Fed's policy of increasing interest rates to reduce inflation |
| cooperative equilibrium | equilibrium in a game in which players cooperate to increase their mutual payoff |
| copyright | a government-guaranteed exclusive right to produce and sell a creation |
| corporation | a legal form of business that provides owners with protection from losing more than their investment should the business fail |
| corporate governance | the way in which a corporation is structured and the effect that structure has on the corporation's behavior |
| coupon payment | an interest payment on a bond |
| cross-price elasticity of demand | the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good |
| crowding out | a decline in private expenditures as a result of an increase in government purchases |
| cyclical unemployment | unemployment caused by a business cycle recession |
| deadweight loss | reduction in economic surplus resulting from a market not being in competitive equilibrium |
| deflation | decline in the price level |
| demand curve | curve that shows the relationship between price and quantity demanded |
| demographics | characteristics of a population with respect to age, gender, and race |
| derived demand | demand for a factor of production; depends on demand for the good produced |
| direct finance | flow of funds from savers to firms through financial markets |
| discount loans | loans the Fed makes to banks |
| discount rate | interest rate the Fed charges on discount loans |
| discouraged workers | people available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them |
| diseconomies of scale | situation in which a firm's long-run average costs rise as the firm increases output |
| dividends | payments by a corporation to its shareholders |
| dominant strategy | a strategy that is best for a firm, no matter what strategies other firms use |
| dumping | selling a product for a price below its cost of production |
| economic discrimination | paying a person a lower wage or excluding a person from an occupation on the basis or an irrelevant characteristic such as race or gender |
| economic efficiency | marginal benefit to consumers of the last unit produced is equal to the marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum |
| economic growth | the ability of an economy to produce increasing quantities of goods and services |
| economic loss | the situation in which a firm's total revenue is less than its total costs, including all implicit costs |
| economic profit | a firm's revenues minus all its costs, implicit and explicit |
| economic surplus | sum of consumer surplus and producer surplus |
| economics | the study of the choices people make to attain their goals, given their scarce resources |
| economies of scale | a firm's long-run average cost falls as it increases the quantity of output it produces |
| elastic demand | demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value |
| elasticity | a measure of how much one economic variable responds to changes in another economic variable |
| endowment effect | the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it |
| entrepreneur | someone who operates a business, bringing together factors of production to produce goods and services |
| equity | the fair distribution of economic benefits |
| excess burden | a measure of the efficiency loss to the economy that results from a tax having reduced the quantity of a good produced; (Deadweight loss) |
| excess reserves | reserves banks hold over the legal requirement |
| excludability | anyone who does not pay for a good cannot consume it |
| expansion | total production and total employment are increasing |
| explicit cost | a cost that involves spending money |
| exports | goods and services produced domestically but sold in other countries |
| externality | a benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service |
| factor market | a market for the factors of production, such as labor, capital, natural resources or entrepreneurial ability |
| factors of production | labor, capital, natural resources; inputs used to produce goods and services |
| federal open market committee (FOMC) | Fed committee responsible for open market operations and managing money supply in the US |
| Federal reserve | central bank of the US |
| fee-for-service | system under which doctors and hospitals receive a payment for each service they provide |
| fiat money | money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money |
| final good or service | a good or service purchased by a final user |
| financial intermediaries | firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers |
| financial markets | markets where financial securities, such as stocks and bonds, are bought and sold |
| financial system | system of financial markets and financial intermediaries through which firms acquire funds from households |
| fiscal policy | changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives |
| fixed costs | costs that remain constant as output changes |
| foreign direct investment (FDI) | purchase or building by a corporation of a facility in a foreign country |
| foreign portfolio investment | purchase by an individual or a firm of stocks or bonds issued in another country |
| free market | market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed |
| free riding | benefiting from a good without paying for it |
| free trade | trade between countries that is without government restrictions |
| frictional unemployment | short-term unemployment that arises from the process of matching workers with jobs |
| game theory | study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of a firm depend on its interactions with others |
| globalization | process of countries becoming more open to foreign trade and investment |
| government purchases | spending by federal, state, and local governments on goods and services |
| gross domestic product (GDP) | market value of all final goods and services produced in a country during a period of time |
| health care | goods or services, such as prescription drugs, consultations, and surgeries, that are intended to maintain or improve a person's health |
| health insurance | a contract under which a buyer agrees to make payments, or premiums, in exchange for the provider agreeing to pay some or all of the buyer's medical bills |
| horizontal merger | merger between firms in the same industry |
| human capital | accumulated knowledge and skills that workers acquire from formal training and education or from life experiences |
| implicit cost | a nonmonetary opportunity cost |
| imports | goods and services bought domestically but produced in other countries |
| income effect | the change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power |
| income elasticity of demand | measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income |
| indirect finance | flow of funds from savers to borrowers through financial intermediaries such as banks |
| inelastic demand | demand is inelastic when change in Q is less than change in P |
| inferior good | a good for which the demand increases as income falls and decreases as income rises |
| interest rate | cost of borrowing funds, expressed as a percentage change of the amount borrowed |
| intermediate good or service | good or service that is an input into another good or service, such as a truck tire |
| inventories | goods that have been produced but not yet sold |
| investment | spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households on new houses |
| isocost line | combinations of two inputs that have the same total cost |
| isoquant | all the combinations of two inputs that product the same level of output |
| labor force participation rate | percentage of working-age population in the labor force |
| labor force | sum of employed and unemployed workers in the economy |
| labor productivity | quantity of goods and services that can be produced by one worker or by one hour of work |
| labor union | organization of employees that has a legal right to bargain with employers about wages and working conditions |
| law of demand | when the price of a product falls, the quantity demanded of the product will increase (and vice versa) |
| law of diminishing marginal utility | consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time |
| law of diminishing returns | at some point, adding more of a variable input, such as labor, to a fixed input, such as capital, will cause the marginal product of the variable input to decline |
| law of supply | increases in price cause increases in quantity supplied (and vice versa) |
| liability | anything owed by a person or a firm |
| limited liability | legal provision that shields owners of a corporation from losing more than they have invested in the firm |
| long run | period of time in which a firm can vary all its inputs, adopt new technology, and increase or decrease the size of its physical plant |
| long-run aggregate supply curve (LRAS) | curve that shows the relationship between price level and quantity of real GDP supplied in the long run |
| long-run average cost curve | a curve that shows the lowest cost at which a firm is able to produce a given quantity of output, when no inputs are fixed |
| long-run economic growth | process by which rising productivity increases the average standard of living |
| long-run supply curve | shows the relationship in the long run between market price and the quantity supplied |
| MI | definition of the sum of money supply: sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks |
| macroeconomics | study of the economy as a whole, including topics such as inflation, unemployment, and economic growth |
| marginal benefit | additional benefit to a consumer from consuming one more unit of a good or service |
| marginal cost | additional cost to a firm of producing one more unit of a good or service |
| marginal product of labor | additional output a firm produces as a result of hiring one more worker |
| marginal propensity to consume (MPC) | slope of the consumption function: amount by which consumption spending changes when disposable income changes |
| marginal revenue (MR) | change in total revenue from selling one more unit of a product |
| marginal revenue product of labor (MRP) | change in a firm's revenue as a result of hiring one more worker |
| marginal utility (MU) | change in total utility a person receives from consuming one additional unit of a good or service |
| market | group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade |
| market demand | demand by all the consumers of a given good or service |
| market economy | economy in which the decisions of households and firms interacting in markets allocate economic resources |
| market equilibrium | quantity demanded equals quantity supplied |
| market failure | market fails to produce the efficient level of output |
| market for loanable funds | interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged |
| market power | ability of a firm to charge a price greater than the marginal cost |
| marketing | activities necessary for a firm to sell a product to a customer |
| menu costs | costs to firms of changing prices |
| microeconomics | study of how households and firms make choices and how the government attempts to influence their choices |
| minimum efficient scale | level of output at which all economies of scale are exhausted |
| mixed economy | economy in which most economic decisions result from the interactions of buyers and sellers in markets but in which the goverhments plays a significant fole in the allocation of resources |
| monetary policy | actions the Fed takes to manage the money supply and interest rates to pursue macroeconomic policy objectives |
| money | assets that people are generally willing to accept in exchange for goods and services or for payment of debts |
| monopolistic competition | market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products |
| monopoly | a firm that is the only seller of a good or service that does not have a close substitute |
| monopsony | a situation in which a firm is the sole buyer of a factor of production |
| moral hazard | actions people take after they have entered into a transaction that make the other party to the transaction worse off |
| multiplier effect | process by which an increase in autonomous spending leads to a larger increase in real GDP |
| Nash equilibrium | a situation in which each firm chooses the best strategy, given the strategies chosen by the other firms |
| natural monopoly | economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms |
| natural rate of unemployment | normal rate of unemployment, consisting of frictional and structural unemployment |
| net exports | exports minus imports |
| network externalities | usefulness of a product increases with the number of consumers who use it |
| nominal GDP | value of final goods and services evaluated at current-year prices |
| nominal interest rate | stated interest rate on a loan |
| normal good | good for which the demand increases as income rises and decreases as income falls |
| normative analysis | analysis concerned with what ought to be |
| oligopoly | market structure in which a small number of interdependent firms compete |
| open economy | economy that has interactions in trade or finance with other countries |
| open market operations | buying and selling of treasury securities by the Fed in order to control the money supply |
| opportunity cost | highest-valued alternative that must be given up to engage in an activity |
| partnership | a firm owned jointly by two or more persons and not organized as a corporation |
| patent | exclusive right to a product for a period of 20 years from the date the patent is filed with the government |
| perfectly competitive market | a market that has (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market |
| perfectly elastic demand | quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity |
| perfectly inelastic demand | quantity demanded is completely unresponsive to price and the price elasticity of demand is zero |
| per-worker production function | relationship between real GDP per hour worked and capital per hour worked |
| Phillips curve | graph showing short-run relationship between unemployment rate and inflation rate |
| Pigovian taxes | government taxes intended to bring about an efficient level of output in the presence of externalities |
| positive analysis | analysis concerned with what is |
| potential GDP | level of real GDP attained when all firms are producing at capacity |
| poverty line | level of annual income equal to three times the amount of money necessary to purchase the minimum quantity of food required for adequate nutrition |
| poverty rate | percentage of the population that is poor according to the federal government's definition |
| price ceiling | legally determined maximum price that sellers may charge |
| price discrimination | charging different prices to different customers for the same product when the price differences are not due to differences in the cost |
| price elasticity of demand | responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in price |
| price elasticity of supply | responsiveness of the quantity supplied to a change in price |
| price floor | legally determined minimum price that sellers may receive |
| price leadership | a form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the price change |
| price level | a measure of the average prices of goods and services in the economy |
| price taker | a buyer or seller that is unable to affect the market price |
| principal-agent problem | a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them |
| prisoner's dilemma | a game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off |
| private benefit | benefit received by the customer of a good or service |
| private cost | cost borne by the producer of a good or service |
| private good | a good that is both rival and excludable |
| producer surplus | difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives |
| product market | market for goods or services |
| production function | relationship between inputs employed by a firm and the maximum output it can produce with those inputs |
| production possibilities frontier (PPF) | maximum attainable combinations of two products that may be produced with available resources and current technology |
| productive efficiency | a good or service is produced at the lowest possible cost |
| profit | total revenue minus total cost |
| progressive tax | tax for which people with lower incomes pay a lower percentage of their income in tax than do people with higher incomes |
| property rights | rights individuals or firms have to the exclusive use of their property |
| protectionism | use of trade barriers to shield domestic firms from foreign competition |
| public good | a good that is nonrival and nonexcludable |
| quantity demanded | amount of a good or service that a consumer is willing and able to purchase at a given price |
| quantity supplied | amount of a good or service that a producer is willing and able to supply at a given price |
| quota | numerical limit a government imposes on the quantity of a good that can be imported into a country |
| rational expectations | expectations formed by using all available information about an economic variable |
| real GDP | the value of final goods and services evaluated at base-year prices |
| real interest rate | nominal interest rate minus the inflation rate |
| recession | period of a business cycle during which total production and total employment are decreasing |
| regressive tax | tax for which people with lower incomes pay a higher percentage of their income in tax than do people with higher incomes |
| required reserves | reserves that a bank is legally required to hold, based on its checking account deposits |
| reserves | deposits that a bank keeps as cash in its vault or on deposit with the Fed |
| rivalry | situation that occurs when one person consuming a good means no one else can consume it |
| scarcity | unlimited wants exceed the limited resources available to fulfill those wants |
| security | a financial asset (stock or bond) |
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