absolute advantageThe ability of one country to
produce a commodity more cheaply than another country.
adaptive expectationsA situation where people
change their forecasts of the variable in question to
conform to its current level.
accommodative monetary policyA central bank policy
designed to stimulate economic growth by lowering short-term interest rates, making money less expensive to
aggregate demandThe sum of expenditures on
consumer goods and services, investment, and non-exports,
i.e., all of demand within an economy.
aggregate demand curveA curve, sloping downward to
the right, that shows the level of real national output
that will be demanded at various economy-wide price
aggregate production functionThe relationship between the
amount used of each of the inputs available in the economy
and the resulting amount of potential output; that is, the
most output that existing technology permits the economy
to produce from various quantities of all available
aggregate supply curveA curve, sloping upward to
the right, that shows the level of real national output
that will be supplied at various economy-wide price
allocation of resourcesApportionment of productive
assets among different uses.
alternative costThe value of what certain
resources could have produced had they been used in the
best alternative way—also called “opportunity
American Federation of Labor-Congress of Industrial Organizations (AFL-CIO)A federation of national
labor unions formed in 1955 by the merger between the
American Federation of Labor (originally a federation of
unions organized along craft lines) and the Congress of
Industrial Organizations (originally a federation of
unions organized along industrial lines).
antitrust lawsLegislation (such as the
Sherman Act, the Clayton Act, and the Federal Trade
Commission Act) intended to promote competition and
anti-usury lawsLaws that regulate the
maximum interest rates that can be set for loans, in order
to protect borrowers.
appreciation of currencyAn increase in the value of
one currency relative to another.
asset bubblesForm when the prices of
assets are over-inflated due to excess demand.
assetAny item of economic value
owned by an individual or corporation, especially that
which could be converted to cash.
automatic stabilizersStructural features of the
economy that tend by themselves to stabilize national
output, without the help of legislation or government
average fixed costThe firm’s total fixed cost
divided by its output.
average product of an inputTotal output divided by the
amount of input used to produce this amount of
average product of laborTotal output per unit of labor.
average propensity to consumeThe fraction of disposable
income that is spent on consumption—equal to
personal consumption expenditure divided by disposable
average total costThe firm’s total cost
divided by its output—equal to average fixed cost
plus average variable cost.
average variable costThe firm’s total variable
cost divided by its output.
backward-bending supply curve for laborA supply curve for labor
inputs showing that, beyond some point, increases in price
may result in the supply of smaller amounts of labor.
balance-of-payments deficitThe difference between the
quantity supplied and the quantity demanded of a currency
when the currency is overvalued (that is, priced above its
balance-of-payments surplusThe difference between the
quantity demanded and the quantity supplied of a currency
when the currency is undervalued (that is, priced below
its equilibrium price).
balanced budgetA budget in which tax
revenues equal government expenditures.
balance sheetA quantitative summary of a
company’s financial condition at a specific point in
time, including assets, liabilities, and net worth.
bank runTakes place when the
customers of a bank fear that the bank will become
insolvent, and so rush to the bank to take out their money
as quickly as possible to avoid losing it.
barometric firmIn an oligopolistic industry,
any single firm that is the first to make changes in
prices, which are then generally accepted by other firms.
barriers to entryObstacles that make it more
difficult for new competitors to enter an area of business,
e.g., high start-up costs.
base yearA year chosen as a reference
point for comparison with some later or earlier year.
benefits of innovative activityThe natural consequences of
purposeful changes that improve economic performance such
as growth and the external benefits that derive from
growth human capital.
benefits vs. costs of pollution abatementAn organization’s
attempt at reconciling the price of removing the negative
externality of pollution with the immediate profit seen by
that organization when nothing is done about pollution.
bilateral monopolyWhen a market consists
of only one manufacturer and one consumer of the products that
manufacturer puts out.
budgetA statement of the
government’s expenditures and tax revenues for a
budget deficitThe amount by which tax revenues
fall short of government expenditures.
budget surplusThe amount by which tax revenues
exceed government expenditures.
business cycleThe cyclical fluctuations in
national output over time.
C + I + G + (X – M I) lineA curve showing total
intended spending (the sum of intended consumption
expenditure, investment expenditure, government
expenditure, and net exports) at various levels of gross
capitalResources (such as factory
buildings, equipment, raw materials, and inventories) that
are created within the economic system for the purpose of
producing other goods.
capital consumption allowanceThe value of the capital
(that is, the plant, equipment, and structures) that is
worn out in a year—also called depreciation.
capital formationInvestment in plant and equipment.
capital goodsOutput consisting of plant and
equipment that are used to make other goods.
capital investmentMoney invested in a business
venture with an expectation of income, and recovered
through earnings generated by the business over several
capital-output ratioThe ratio of the total capital
stock to annual national output.
capitalismAn economic system
characterized by private ownership of the tools of
production, freedom of choice and enterprise whereby
consumers and firms can pursue their own self-interest,
competition for sales among producers and resource owners,
and reliance on the free market.
capitalization of assetsA method of computing the
value of an asset by calculating the present value of the
expected future income this asset will produce.
cash vs. in-kind transfersReconciling the utility of
providing either a) money; or b) goods, commodities, or
cartelAn open formal collusive
arrangement among firms.
central bankA government-established
agency that controls the supply of money and supervises
the country’s commercial banks—the central
bank of the United States is the Federal Reserve.
checkoffA system whereby an employer
deducts union dues from each worker’s pay and hands
them over to the union.
choicesOpportunities presented via
Rational Choice Theory, given the pre-existing notion that
resources are scarce.
circular flowCyclical representation
describing how households give money to firms, which then
provide goods and services for households.
classical economicsRefers to work done by a
group of economists in the eighteenth and nineteenth
centuries, emphasizing economic freedom and promoting such
ideas as “laissez-faire” and “free
closed shopA situation where firms can only hire
workers who are already union members.
collective bargainingA process of negotiation
between union and management over wages and working
collusionA covert arrangement whereby
firms agree on price and output levels in order to
decrease competition and increase profits.
commercial banksFinancial institutions that
hold demand and other checkable deposits and permit checks
to be written on them, and lend money to firms and
comparative advantageThe law that states that a
country should produce and export goods which it can
produce at relatively lower costs than other
compensation of employeesThe wages and salaries paid
by firms and government agencies to the suppliers of
labor, including supplementary payments for employee
benefits (such as payments into public and private pension
and welfare funds).
complementsCommodities that tend to be
consumed together; that is, commodities with a negative
cross-elasticity of demand such that a decrease in the
price of one will result in an increase in the quantity
demanded of the other.
competitive price systemAn arrangement of
manufacturers in constant contest with one another to make
their prices for their products the most attractive,
either simply by lowering them or by adding incentives,
e.g., payment plans, etc.
concentration ratioThe percentage of a market
taken up by a certain number of firms; used to determine
competitiveness of the market.
constant dollar amountsAmounts measured in base-year
dollars (that is, according to the purchasing power of the
dollar in some earlier year), in order to express value in
a way that corrects for changes in the price level.
constant growth rate ruleA policy that targets a
constant growth rate for a specific economic variable.
Monetarists argue for a constant money supply growth rate
to facilitate a certain nominal GDP growth rate.
constant pricesRefers to valuation of
transactions, wherein the influence of price changes from
the base year to the current year has been removed.
constant returns to scaleA long-run situation where,
if the firm increases the amount of all inputs by the same
proportion, output increases by the same proportion as
each of the inputs.
consumerAn individual or household
that purchases the goods and services produced by the
consumer durablesMajor consumer purchases that
generally have a useful life of greater than three years.
consumer goodsOutput consisting of items
that consumers purchase, such as clothing, food, and
Consumer Price IndexA measure of U.S. inflation,
calculated by the Bureau of Labor Statistics, originally
intended to measure changes in the prices of goods and
services purchased by urban wage earners and clerical
workers. Expanded in 1978 to cover all urban
consumptionThe using-up of goods and
services by consumer purchasing or in the production of
consumption functionThe relationship between
consumption spending and disposable income; that is, the
amount of consumption expenditure that will occur at
various levels of disposable income.
corporate profitsThe net income of
corporations (corporate profits before income taxes),
including dividends received by the stockholders, retained
earnings, and the amount paid by corporations as income
corporationA fictitious legal “person”
separate and distinct from the stockholders who own it,
governed by a board of directors elected by the
cost-benefit analysisIn governmental planning and
budgeting, the attempt to measure whether alleged outputs
will outweigh the known inputs.
cost functionThe relationship between cost
and a firm’s level of output; that is, what a
firm’s costs will be at various levels of
cost minimizationPursuit of incurring the fewest
expenses during the manufacturing process.
cost of living adjustmentsCOLA. An annual
adjustment in wages to offset a change (usually a loss) in
purchasing power, as measured by the Consumer Price
cost-push inflationPersistently rising general
price levels brought about by rising input costs, usually
brought about by rising wages, increases in corporate
taxes, and imported inflation.
Council of Economic AdvisersA group established by the
Employment Act of 1946, whose function is to help the
president formulate and assess the economic policies of
craft unionA labor union that includes
workers in a particular craft (such as machinists or
credibility of government policiesA concept dealing with the
likelihood that a policy authority will stick to an
announced policy. The less flexibility a policymaker has
in deviating from the announced policy, the more credible
that policy becomes.
creeping inflationAn increase in the general
price level of a few percent per year that gradually
erodes the value of money.
cross-elasticity of demandThe percentage change in the
quantity demanded of one commodity resulting from a one-percent change in the price of another commodity. May be
either positive or negative.
crowding-out effectThe tendency for an increase
in public-sector expenditure to result in a cut in
crude quantity theory of money and pricesThe theory that if the
velocity of circulation of money remains constant and real
gross domestic product remains fixed at its
full-employment level, it follows from the equation of
exchange (MV = PQ) that the price level
will be proportional to the money supply.
current pricesThe value based on prices during
the reference year; nominal year.
cyclical unemploymentJoblessness that occurs because
of business fluctuations.
cyclically balanced budgetRefers to running a surplus
in boom years and a deficit in lean years; in theory the
two offset each other over time.
debt-to-GDP ratioA measure of a
country’s federal debt relative to its gross
domestic product (GDP); one measure of a country’s
ability to pay back its debt.
decreasing returns to scaleA long-run situation where,
if the firm increases the amount of all inputs by the same
proportion, output increases by a smaller proportion than
each of the inputs.
deficitWhen government spending is
greater than government revenue.
deflatingThe conversion of values
expressed in current dollars into values expressed in
constant dollars, in order to correct for changes in the
demand curve for loanable fundsA curve showing the quantity
of loanable funds that will be demanded at each interest
demand curve for moneyA curve representing the
quantity of money that will be demanded at various
interest rates (holding constant real GDP and the price
demand depositsChecking accounts. Bank deposits
subject to payment on demand.
demand elasticityResponsiveness of consumer
preferences to a change in price, with all other factors
demand-side inflationAn increase in the general
price level that occurs because of rightward shifts of the
aggregate demand curve. There is too much aggregate
spending, too much money chasing, too few goods.
deposit contractionReduction in the quantity of
money following the drain of currency from banks to reduce
deposit insuranceProtection provided by a
government agency to depositors against risk of loss
arising from failure of a bank or other depository
depreciationThe value of the capital
(that is, plant, equipment, and structures) that is worn
out in a year. Also called capital consumption
depreciation of currencyA decrease in the value of one
currency relative to another.
depressionA period when national output
is well below its potential (full-employment) level. A
derived demandDemand for labor and other
inputs not as ends in themselves but as means to produce
devaluation of currencyUnder the gold standard, a
decrease in the value of a currency as a consequence of an
increase In the price of gold.
differentiated oligopolyA market structure (such as
those for automobiles and machinery) where there are only
a few sellers of somewhat-different products.
diffusion processThe process by which the use
of an innovation spreads from firm to firm and from use to
diminishing returnsThe decrease in the yield of
a production process as one input of that production
process increases, when all other variables of that
production remain constant.
diminishing returns to laborWhen each additional unit of
labor added to other resources used in the production of
goods and services adds a smaller additional output than
the previous unit.
direct regulationGovernment issue of
enforceable rules concerning the conduct of firms.
discount rateThe interest rate the Federal
Reserve charges for loans to commercial banks.
discretionary policyPolicy that is formulated at
the discretion of the policymakers (in contrast to rigid
policy rules or feedback policy rules).
discriminationMaking an economic distinction in a market.
disincentives to workAny factors discouraging the making or saving of money.
disposable incomeThe total amount of income people receive after taxes.
dominant firmIn an oligopolistic industry,
a single large firm that sets the price for the industry
but lets the small firms sell all they want at that
double-countingIncluding the value of
intermediate goods more than once in the value of gross
domestic product (GDP).
easy monetary policyA monetary policy that
increases the money supply and reduces interest
economic activityThe production, distribution,
purchase, and consumption of goods and services.
economic efficiencyGenerating the greatest results
from the fewest resources.
economic growthA positive change in the
level of production of goods and services by a country
over a certain period of time.
economic profitsThe excess of a firm’s
profits over what it could make in other
economic resourcesResources that are scarce and
thus command a nonzero price.
economicsThe study of how resources
are allocated among alternative uses to satisfy human
economies of scaleEfficiencies that result from
carrying out a process (such as production or sales) on a
effluent feeA fee that a polluter must
pay to the government for discharging waste.
elastic supply and demandConsumers’ and/or producers’ willingness and ability to
produce or consume goods and services, subject to changes in
prices or incomes.
emerging markets (economies)Economies that are either in
the early stages of development or in a state of economic
transition (the former Communist bloc countries). Also
known as developing economies.
equation of exchangeA way of restating the
definition of the velocity of circulation of money, such
that the amount received for the final goods and services
during a period equals the amount spent on those final
goods and services during the same period (that is,
MV = PQ).
equilibriumA situation in which there is no
tendency for change.
equilibrium level of gross domestic productThe value of national output
at which the flow of income generated by this level of
output results in a level of spending precisely sufficient
to buy this level of output.
equilibrium priceA price that shows no
tendency for change, because it is the price at which the
quantity demanded equals the quantity supplied. The price
toward which the actual price of a good always tends to
excessive risk taking and leverageThe overemphasis on
practicing behaviors that have the potential to be harmful
or dangerous, yet at the same time provide the opportunity
for some kind of outcome that can be perceived as positive.
exchange rateThe number of units of one
currency that can purchase a unit of another currency.
excise taxA tax imposed on each unit
sold of a particular product, such as cigarettes or
expansionThe phase in the business
cycle after the trough during which national output
explicit costThe cost of resources for
which there is an explicit payment.
exportsThe goods and services that a
country sells to other countries.
external debtPart of the total debt in a
country that is owed to creditors outside the country.
external diseconomyA situation that occurs when
consumption or production by one person or firm results in
uncompensated costs to another person or firm.
external economyA situation that occurs when
consumption or production by one person or firm results in
uncompensated benefits to another person or firm.
externalitiesExternal economies and diseconomies.
farm price supportsMaintenance of costs for a raw material or
commodity, usually through public subsidy or government
FDIC – The Federal Deposit Insurance CorporationA federal agency that insures
deposits in member banks and thrifts up to $250,000 per
featherbeddingA practice whereby a union
restricts output per worker in order to increase the
amount of labor required to do a certain job.
Federal Open Market Committee (FOMC)A group, composed of the
seven members of the Federal Reserve Board plus five
presidents of Federal Reserve Banks, which makes decisions
concerning the purchase and sale of government securities,
in order to control bank reserves and the money supply.
Federal Reserve BoardThe Board of Governors of the
Federal Reserve System, composed of seven members
appointed by the president for fourteen-year terms, whose
function is to promote the nation’s economic welfare
by supervising the operations of the U.S. money and banking
Federal Reserve SystemA system established by
Congress in 1913 that includes commercial banks, the twelve
Federal Reserve Banks, and the Board of Governors of the
Federal Reserve System.
feedback policy ruleA rule allowing the behavior
of the variable governed by the policy rule to change,
depending on future circumstances.
final goods and servicesGoods and services that are
destined for the ultimate user (such as flour purchased
for family consumption).
firmAn organization that produces
a good or service for sale in an attempt to make a
firm’s demand curve for laborA curve showing the
relationship between the price of labor and the amount of
labor demanded by a firm; that is, the amount of labor
that will be demanded by a firm at various wage
firm’s supply curveA curve, usually sloping
upward to the right, showing the quantity of output a firm
will produce at each price.
fiscal dividendThe increase in federal
revenues that accompanies economic growth; sometimes
argued to follow as a benefit from reduced taxation and
increased government expenditures.
fiscal dragActs as a damper on the
economy when, during inflation, rising incomes draw people
into higher tax brackets, so that the purchasing power of
their disposable incomes falls.
fiscal policyThe policy of the government
regarding taxes and government expenditures to stabilize
fixed exchange rateSystem in which the value of
a country’s currency, in relation to the value of
other currencies, is maintained at a fixed conversion rate
through government intervention.
fixed inputA resource used in the
production process (such as plant and equipment) whose
quantity cannot be changed during the particular period
flexible exchange rateSystem in which the value of
the currency is determined by the free market.
food programsFederal antipoverty programs
that distribute food to the poor, either directly from
surpluses produced by farm programs or indirectly via
stamps that can be exchanged for food.
forgone consumptionSaving, as opposed to
45-degree lineA line that contains all
points where the amount on the horizontal axis equals the
amount on the vertical axis.
fractional-reserve bankingThe practice whereby banks
hold less cash than the amount they owe their depositors.
free resourcesResources (such as air) that
are so abundant that they can be obtained without charge.
free ridersThose that enjoy the benefits
of a collective effort, while having contributed nothing
to that collective effort.
frictional unemploymentTemporary joblessness, such
as that occurring among people who have quit jobs, people
looking for their first job, and seasonal workers.
full employmentThe minimum level of
joblessness that the economy could achieve without
undesirably high inflation, recognizing that there will
always be some frictional and structural unemployment.
gameA competitive situation where
two or more players pursue their own interests, no player
can dictate the outcome, and all players are mutually
globalizationPertaining to deeper
integration and more rapid interaction of economies
through production, trade, and financial
gold-exchange standardAn exchange-rate system
developed after World War II, under which the dollar was
directly convertible into gold at a fixed price, and other
currencies, since they could be converted into dollars at
fixed exchange rates, were thus indirectly convertible
into gold at a fixed price.
gold standardA method of exchange-rate
determination prevailing until the 1930s, under which
currencies were convertible into a certain amount of
government intervention in currency marketsA contentious debate
involving the role of government in determining exchange
rates. A government that intervenes and keeps its
exchange rate below the free-market level effectively
provides an export subsidy, or an import tariff, for its
domestic industries giving them an advantage over
producers in other countries.
government purchasesFederal, state, and local
government spending on final goods and services, excluding
government transfersGovernment revenue paid to
individuals or businesses not in exchange for goods or
services; e.g., welfare, financial aid, Social Security,
gross domestic product (GDP)The value of the total amount
of final goods and services produced by the economy during
a period of time. Measured either by the expenditure on
the final goods and services or by the income generated by
gross national product (GNP)The value of all the goods
and services produced in an economy, plus the value of the
goods and services imported, less the goods and services
gross private domestic investmentAll additions to a
country’s stock of private investment goods; that
is, all investment spending, including purchases of tools,
equipment, and machinery, all construction expenditures,
and the change in total inventories.
historical cost of assetsWhat a firm actually paid for its
holding companiesBusiness organizations that
allow firms (called “parents”) and their
directors to control or influence other firms (called
housingA long-lasting form of
investment that drives a lot of economic growth, but that
historically has not been used primarily to produce other
goods and services for sale in the economy.
human capitalThe education, training, and
experience of a person that are productive in an
immigration and foreign direct investmentThe notion that immigration
creates an incentive for a company from one country to
make a physical investment into building a factory in
implicit contractsAgreements between workers
and firms that are not found in any formal, written
implicit costThe cost (for which there is
no explicit payment) of the resources that are provided by
the owners of a firm, measured by what these resources
could bring if they were used in their best alternative
importsThe goods and services that a
country buys from other countries.
income elasticity of demandThe percentage change in the
quantity demanded of a commodity resulting from a one-percent increase in total money income (all prices being
income taxA federal, state, or local
tax imposed on personal income and corporate profits.
incomes policyA policy to control inflation
that sets some targets for wages and prices in the economy
as a whole, gives particular firms and industries detailed
guides for making wage and price decisions, and provides
some inducements for firms and unions to follow these
increasing returns to scaleA long-run situation where if
a firm increases the amount of all inputs by the same
proportion, output increases by a larger proportion than
each of the inputs.
indirect business taxesTaxes—such as general sales
taxes, excise taxes, and customs duties—that are imposed
not directly on the business itself but on its products or
services, and hence are treated by firms as costs of
individual demand curveA curve showing the
relationship between individual consumer demand for a
good and its price; that is, how much of a good an
individual consumer will demand at various
industrial unionA labor union that includes
all the workers in a particular plant or industry (such as
autos or steel).
Inefficient allocation of resourcesOccurs when government ineffectively
intervenes in market decisions (a.k.a. “government
inelastic supply and demandChanges in price have very small
effects on consumer and producer preferences.
inflationAn increase in the general level
of prices economy-wide.
inflation targetingA monetary policy strategy in which a central bank (in the U.S., the Federal Reserve) estimates and makes public a projected, or “target,” inflation rate and then attempts to steer actual inflation toward the target through the use of interest rate changes and other monetary tools.
inflation expectationsRate of inflation that workers,
businesses, and investors think will prevail in the future,
and that they will therefore factor into their
inflationary gapA positive gap between actual and
injectionsNonconsumption expenditures on
gross domestic product, including investment expenditures,
government purchases, and exports.
innovationThe first commercial application
of a new technology.
innovatorA firm that is first to apply a
inputAny resource used in the
inside policy lagThe amount of time it takes for a
government or a central bank to respond to a shock in the
interestThe payment of money by borrowers
to suppliers of money capital.
interest sensitivity of investmentDegree of change in amount of
capital stock put in place in response to a change in the
market interest rates on money borrowed to finance such
interest rateThe annual amount that a borrower
must pay for the use of a dollar for a year.
interest rate targetAn interest rate that the central
bank determines to be appropriate for increasing,
decreasing, or holding constant the level of economic
interest rate vs. monetary aggregates targetsRate which is charged or paid for
the use of money within the money supply.
internal debtThat part of a country’s
total debt that is owed to lenders within that country.
intermediate goodA good that is not sold to the
ultimate user but is used as an input in producing final
goods and services (such as flour to be used in
investment in human capitalAllocating resources based on the
skills of employees.
invisible handThe self-regulating nature of a
free-market system, as coined by economist Adam Smith.
KeynesiansEconomists who share many of the
beliefs of John Maynard Keynes. His principal tenet was
that a capitalist system does not automatically tend
toward a full-employment equilibrium (due in part to the
rigidity of wages). Keynesians tend to believe that a
free-enterprise economy has weak self-regulating
mechanisms that should be supplemented by activist fiscal
(and other) policies.
Keynesian crossThe standard diagram used in
Keynesian economics to identify the equilibrium level of
aggregate output (that is, gross domestic product), with
aggregate expenditures measured on the vertical axis and
aggregate output measured on the horizontal axis.
laborHuman effort, both physical and
mental, used to produce goods and services.
labor forceThe number of people employed
plus the number of those unemployed (actively looking for
work and willing to take a job if one were offered).
labor productivityThe amount of output divided by
the number of units of labor employed.
labor-saving technologyTechnological devices used
purely for the purpose of diminishing the amount of labor
necessary to accomplish goals.
Laffer curveA curve representing the
relationship between the amount of income tax revenue
collected by the government and the marginal tax rate;
that is, how much revenue will be collected at various
marginal tax rates.
landNatural resources, including
minerals as well as plots of ground, used to produce goods
loansAn arrangement in which a lender
gives money or property to a borrower, and the borrower
agrees to return the property or repay the money, usually
along with interest, at some future point(s) in
law of diminishing marginal returnsThe principle that if equal
increments of a given input are added (the quantities of
other inputs being held constant), the resulting
increments of product obtained from the extra unit of
input (the marginal product) will begin to decrease beyond
law of diminishing marginal utilityThe principle that if a person
consumes additional units of a given commodity (the
consumption of other commodities being held constant), the
resulting increments of utility derived from the extra
unit of the commodity (the marginal utility) will begin to
decrease beyond some point.
law of increasing costsThe principle that as more and
more of a good is produced, the production of each
additional unit of the good is likely to entail a larger
and larger opportunity cost.
leakagesNonconsumption uses of income,
including saving, taxes, and imports.
legal reserve requirementsRegulations imposed by the
Federal Reserve System in order to control the money
supply, requiring banks (and other institutions) to hold a
certain fraction of deposits as cash reserves.
lender of last resortLender who acts as the ultimate
source of credit to the banking system. In the United
States, this role is carried out by the twelve Federal Reserve
Banks, which supply credit through the Federal Reserve
liabilitiesThe debts of a firm.
loanable fundsFunds—including those supplied
by households and firms that find the rate of interest
high enough to get them to save—that are available for
borrowing by consumers, businesses, and government.
long runThe period of time during which
all of a firm’s inputs are variable; that is, during
which the firm could completely change the resources used
in the production process.
long-run average cost functionThe minimum average cost of
producing various output levels when any desired type or
scale of plant can be built.
lump-sum taxA fixed
amount that has to be paid by everyone regardless of the
level of his or her income.
MlNarrowly defined money supply,
which includes coins, currency, demand deposits, and other
M2Broadly defined money supply,
which includes savings deposits, small time deposits,
money market mutual fund balances, and money market
deposit accounts, as well as the components of the
narrowly defined money supply, Ml (coins, currency, demand
deposits, and other checkable deposits).
marginal costThe addition to total cost
resulting from the addition of the last unit of
marginal private vs. marginal social costsMarginal private costs are the
incremental costs incurred by a consumer in consuming a
good or service. Marginal social costs are the
incremental costs of an activity as viewed by the society,
and expressed as the sum of marginal external cost and
marginal private cost.
marginal product of an inputThe addition to total output that
results from the addition of an extra unit of input (the
quantities of all other inputs being held
marginal product of laborThe additional output resulting
from the addition of an extra unit of labor.
marginal propensity to consumeThe fraction of an extra dollar
of disposable income that is spent on consumption.
marginal propensity to savethe fraction of an extra dollar
of disposable income that is saved.
marginal revenueThe addition to total revenue
that results from the addition of one unit to the quantity
marginal tax rateThe proportion of an extra dollar
of income that must be paid in taxes.
marginal utilityThe additional satisfaction
derived from consuming an additional unit of a
marginal value product of capitalMeasure of a firm’s revenue
contributed by the last unit of a productive factor
marginalismHow much extra use is gained from
incremental increases in the quantity of goods created,
sold, etc., and how those measures relate to consumer
choice and demand.
marketA group of firms and individuals
that are in touch with each other in order to buy or sell
some good or service.
market demand curveA curve, usually sloping downward
to the right, showing the relationship between a
product’s price and the quantity demanded of the
market demand curve for laborA curve showing the relationship
between the price of labor and the total amount of labor
demanded in the market.
market failureInefficient allocation of goods
and services by the market. Efficient allocation of goods
and services means there is no other outcome under which a
market participant can be made better off, without making
someone else worse off. Market failures are often used as
a justification for government intervention in an
market inefficiencyA condition that occurs when
current prices don’t reflect the available
information regarding securities.
market structureThe type or organization of a
market, determined by the number and size of buyers and
sellers in the market, the ease with which new firms can
enter, the extent of product differentiation, and other
market supply curveA curve, usually sloping upward
to the right, showing the relationship between a
product’s price and the quantity supplied of the
market supply curve for laborA curve showing the relationship
between the price of labor and the total amount of labor
supplied in the market.
means testMeasures need based on income and assets.
MedicaidA federal program that pays for
the health care of the poor.
MedicareA compulsory hospitalization
program plus a voluntary insurance plan for doctors’
fees for people over 65, included in the Social Security
menu costA cost incurred when a firm
changes its price.
mergerThe combining of two or more
companies, generally by offering the stockholders of one
company securities in the acquiring company in exchange
for the surrender of their stock.
merit goodsGoods or services provided for
free by a government based on need, rather than ability to
methods of productionProcesses and techniques used to
manufacture a product.
modelA theory composed of assumptions
that simplify and abstract from reality, from which
conclusions or predictions about the real world are
monetaristsEconomists generally sharing the
belief that business-cycle fluctuations are due largely to
changes in the money supply. Many monetarists think that a
free-enterprise economy has effective self-regulating
mechanisms that activist fiscal and monetary policies tend
to disrupt. Some monetarists, like Milton Friedman,
advocate a rule for stable growth in the money supply of three
to five percent per year.
monetary aggregate targetA specific level of a money-supply measure deemed appropriate for a desired level of
GDP; often implemented in theory by targeting a specific
growth rate of a money-supply measure thought to be
appropriate for a desired level of GDP growth.
monetary baseThe reserves of commercial banks
plus currency outside the banks.
monetary policyThe exercise of the central
bank’s control over the quantity of money and the
level of interest rates in order to promote the objectives
of national economic policy.
moneyAnything that serves as a medium
of exchange and a standard and store of value. The unit in
which the prices of goods and services are
money incomeIncome measured in current
dollars (actual money amounts).
money supplyThe total amount of money that is
available to be spent in an economy at a given time.
Currency is only one component of the money supply.
monopolistic competitionA market structure in which there
are many sellers of somewhat-differentiated products,
entry is easy, and there is no collusion among sellers.
Retailing seems to have many of the characteristics of
monopolyA market structure (such as those
for public utilities) in which there is only one seller of
monopoly powerA firm’s degree of control
over a price for a good.
monopoly profitsEconomic gain for a firm that
comes as a result of that firm’s control over the
monopsonyA market state in which there is only
one producer of a good or service.
multiple expansion of bank depositsWhen banks lend and create
deposits, thereby losing their reserves to other banks,
which in turn increase their loans and thus create new
multiplierNumber which indicates the
magnitude of a particular macroeconomics policy
national debtThe amount owed by the
government. To cover the difference between expenditures
and tax revenues, the government sells bonds, notes, and
other forms of IOUs.
natural monopolyAn industry in which the average
costs of producing the product reach a minimum at an
output rate large enough to satisfy the entire market, so
that competition among firms cannot be sustained and one
firm becomes a monopolist.
near-moneyAssets (such as government bonds)
that can be converted into cash, though not quite as
easily as time and savings accounts.
negative income taxA system whereby families with
incomes below a certain break-even level would receive,
rather than make, a government income tax payment.
net exportsThe amount spent by foreigners on
a country’s goods and services (exports) minus the
amount a country spends on foreign goods and services
network effects or externalitiesSituations where the value of a
product to one user increases with the number of other
new classical macroeconomistsA group, led by Robert Lucas,
that believes that the government cannot use monetary and
fiscal policies to close recessionary and inflationary
gaps because, if firms and individuals formulate their
expectations rationally, they will tend to frustrate the
government’s attempts to use activist stabilization
new KeynesiansA group that believes, like the
Keynesians, that prices and wages tend to be rigid in the
short run (but, in contrast to the Keynesians, has
developed theories to explain why such wage and price
stickiness can be expected).
nominalExpressed in current dollars
(actual money amounts).
nonprice competitionMarket contest between firms
involving ANYTHING but price, e.g., quality, convenience,
nonrival consumptionConsumption by one consumer does
not affect the ability of other consumers to consume the
same unit of the same good.
non-exclusionThe concept whereby it is not
possible to keep those who have not paid for a good from
having access to it and using it.
normative economicsEconomic propositions about what
ought to be, or about what a person, organization, or
country ought to do.
old-age insuranceBenefits paid under the Social
Security program to retired workers.
oligopolyA market structure (such as those
for autos and steel) in which there are only a few sellers
of products that can be either identical or
open market operationsThe purchase and sale of U.S.
government securities on the open market by the Federal
Reserve in order to control the quantity of bank
open shopA situation where a firm can hire
both union and nonunion workers, with no requirement that
nonunion workers ever join a union.
opportunity costThe value of what certain
resources could have produced had they been used in the
best alternative way. Also called alternative
outside policy lagThe time between corrective
government action responding to a shock to the economy and
the resulting effect on the economy.
overvaluation of currencyThe setting of a currency’s
price above the equilibrium price.
parityThe principle that farmers should
be able to exchange a given quantity of farm output for
the same quantity of nonfarm goods and services they would
have been able to purchase at some point in the past. In
effect, the principle that farm prices should increase at
the same rate as the prices of the goods and services that
partnershipA form of business organization
whereby two or more people agree to own and conduct a
business, with each party contributing some proportion of
the capital and/or labor and receiving some proportion of
the profit or loss.
peakThe point in the business cycle
where national output is highest relative to its potential
perfect competitionA market structure in which there
are many sellers of identical products, no one seller or
buyer has control over the price, entry is easy, and
resources can switch readily from one use to another. Many
agricultural markets have many of the characteristics of
personal consumption expendituresThe spending by households on
durable goods, nondurable goods, and services.
Phillips curveA curve representing the
relationship between the rate of increase in the price
level and the level of unemployment.
pollution tax vs. pollution controlThe comparison on the part of
government of whether it is more beneficial to an economy
to impose a revenue-based cost on pollution, or to attempt
to curb pollution by imposing strict laws against
poolsResources grouped together by
companies in an attempt to gain mutual market
positive economicsDescriptive statements,
propositions, and predictions about the economic world
that are generally testable by an appeal to the
potential gross domestic productThe total amount of goods and
services that could have been produced had the economy
been operating at full capacity or full employment.
precautionary demand for moneyThe demand for money because of
uncertainty about the timing and size of future
disbursements and receipts.
predatory pricingSetting products at a low price
with the intention of driving out competition and
preventing new competition.
present value of an investmentFuture value of resources minus
the value of those resources when initially put toward a
price collusionA secret agreement between rival
firms for the purpose of receiving large profits or
cornering the market through price fixing or supply
price controlsA maximum
or minimum cost established by a government for a
price discriminationThe practice whereby one buyer is
charged more than another buyer for the same
price elasticThe demand for a good if its
price elasticity of demand is greater than one.
price elasticity of demandThe percentage change in quantity
demanded resulting from a one-percent change in
price—by convention, always expressed as a positive
price elasticity of supplyThe percentage change in quantity
supplied resulting from a one-percent change in
price incentivesWhen the price of a product is
reduced to make that product more attractive to
price indexThe ratio of the value of a set
of goods and services in current dollars to the value of
the same set of goods and services in constant
price inelasticThe demand for a good if its
price elasticity of demand is less than one.
price leaderIn an oligopolistic industry, a
firm that sets a price that other firms are willing to
price stability and elasticityPrices in an economy don’t
change over time, which should, in turn, have very little
effect on consumer preferences.
price supportsPrice floors imposed by the government on a certain good.
price systemA system under which every good
and service has a price and which in a purely capitalistic
economy carries out the basic functions of an economic
system (determining what goods and services will be
produced, how the output will be produced, how much of it
each person will receive, and what the country’s
growth of per capita income will be).
price=marginal cost efficiencyMeasuring the effect that a
change in total cost, arising when the quantity produced
changes by one unit, has on price.
private costThe price paid by the individual
user for the use of a resource.
product differentiationThe process by which producers
create real or apparent differences between products that
perform the same general function.
product groupA group of firms that produce
similar products that are fairly close substitutes for one
product life cycleThe period of time over which an
item is developed, brought to market, and eventually
removed from the market.
productive resourcesMaterials, labor, or money used to create goods and services.
productivityA measure of output from a production process, per unit of input.
product marketA market where products are bought and sold.
production functionThe relationship between the
quantities of various inputs used per period of time and
the maximum quantity of output that can be produced per
period of time; that is, the most output that existing
technology permits the firm to produce from various
quantities of inputs.
production possibilities curveA curve showing the combinations
of amounts of various goods that a society can produce
with given (fixed) amounts of resources.
profitThe difference between a
firm’s revenue and its costs.
progressive taxA tax whereby the rich pay a
larger proportion of their income for the tax than do the
prohibitive tariffA tariff so high that it prevents imports of a good.
property taxA tax imposed on real estate and/or other property.
proportional taxA system in which all levels of
income are taxed at the same rate; a.k.a. flat tax.
proprietors’ incomeThe net income of unincorporated
businesses (proprietorships and partnerships).
proprietorshipA firm owned by a single individual.
prosperityA period when national output is
close to its potential (full-employment) level.
protectionism and job securityThe argument that the losses in
consumer surplus created by imposing tariffs on foreign
goods are justifiable because they preserve employment in
certain occupations, usually those with significant
lobbying and political influence.
protectionism and national defenseThe argument that the losses in
consumer surplus created by imposing tariffs on goods
critical for national defense are justified so that a
country does not become dependent on potential enemies
during times of war.
public debtThe total financial obligations
incurred by all governmental bodies of a nation; the
national debt. At the federal level, part of the national
debt is held by members of the public and part by agencies
within the government.
public goodsGoods and services which can be
consumed by one person without diminishing the amount of
them that others can consume and which there is no way to
prevent citizens from consuming, whether they pay for them
public sectorThe government sector of the economy.
purchasing powerValue of money (currency)
measured by the quantity and quality of goods and services
it can buy.
pure oligopolyA market structure (like those
for steel, cement, tin cans, and petroleum) in which there
are only a few sellers of an identical product.
pure rate of interestThe interest rate on a riskless loan.
quotaA limit imposed on the amount of
a commodity that can be imported annually.
rate of returnThe annual profit per dollar
invested that businesses can obtain by building new
structures, adding new equipment, or increasing their
inventories. The interest rate earned on the investment in
a particular asset.
rational expectationsExpectations that are correct on
the average (forecasting errors are random). The
forecaster makes the best possible use of whatever
information is available.
realExpressed in constant dollars.
real business cycle modelsTheories asserting that business
fluctuations are due predominantly to shifts in the
aggregate supply curve resulting from new technology, good
or bad weather, and so on.
real incomeIncome measured in constant
dollars (that is, the amount of goods and services that
can be bought with the income).
recessionThe phase in the business cycle
after the peak, during which national output falls.
recessionary gapA negative gap between actual and potential output.
regressive taxA tax whereby the rich pay a
smaller proportion of their income for the tax than do the
regulationManagement of an economy by an
outside (usually governing) body or set of pre-existing
regulatory captureA theory associated with George
Stigler, a Nobel laureate economist, whereby an
agency—formed to set parameters on industry
movements for the sake of public interest—eventually
acts in ways that benefit the very industry they set out
rentIn the context of Chapter 23, the
return derived from an input that is fixed in
rent controlsA maximum price imposed by
government on how much someone may charge a tenant for a
reproduction cost of assetsWhat the firm would have to pay to replace its assets.
required reserve ratioAmount of money and liquid assets
that Federal Reserve System member banks must hold in cash
or on deposit with the Federal Reserve System, usually a
specified percentage of their demand deposits and time
reserve ratioThe portion (expressed as a
percentage) of depositors’ balances banks must have
on hand as cash.
resource marketA market where resources are bought and sold.
resourcesInputs used to produce goods and services.
retained earningsThe total amount of profit that
the stockholders of a corporation have reinvested in the
business, rather than withdrawing as dividends.
return on a fixed investmentWhen money put into capital goods
yields either a profit or a loss.
rigid policy ruleA rule specifying completely the
behavior of the variable governed by the policy rule (for
example, Milton Friedman’s suggestion that the money
supply be set so that it grows at a fixed, agreed-on
rule of reasonThe principle that not all trusts
but only unreasonable combinations in restraint of trade
require conviction under the antitrust laws.
runaway inflationA very rapid increase in the
general price level that wipes out practically all the
value of money.
sales taxA tax imposed on the goods
consumers buy (with the exception, in some states, of food
and medical care).
savingThe process by which people give
up a claim on present consumption goods in order to
receive consumption goods in the future.
saving functionThe relationship between total
saving and disposable income; that is, the total amount of
saving that will occur at various levels of disposable
Say’s lawThe principle that the production
of a certain amount of goods and services results in the
generation of an amount of income precisely sufficient to
buy that output.
scarcity of resourcesThe basic principle of limited
resources within an economy of unlimited wants.
shift in demandA change in the quantity of a
good or service consumers are willing and able to buy at
every price level.
shifts in the supply and demand curvesConsumer or producer willingness
and ability to produce or consume goods and services
shifts at every price level.
short-run and long-run elasticityMeasures in the response to price
movements; long-run measures total response, and short-run
measures immediate response.
short runIn the context of Chapters 15 to
20, the period during which at least one of a firm’s
inputs (generally its plant and equipment) is
size of the deficit vs size of the governmentA notion referring to the
tendency of some to assess the size of government with the
size of the deficit.
social insurance programGovernment-sponsored arrangement
whereby: a) the benefits, eligibility requirements, and
other aspects of the program are defined by statute; b)
explicit provision is made to account for the income and
expenses (often through a trust fund); c) it is funded by
taxes or premiums paid by (or on behalf of) participants
(although additional sources of funding may be provided as
well), and; d) the program serves a defined population,
and participation is either compulsory or the program is
heavily enough subsidized that most individuals choose to
Social SecurityA program that imposes taxes on
wage earners and employers and provides old-age,
survivors’, disability, and medical benefits to
workers covered under the Social Security Act.
specializationThe usage of economic resources
for specific tasks; “resources” can refer to
materials or labor.
specialization and tradeWhen individuals or countries
specialize in producing the goods and services for which
they have the lowest opportunity cost and trade with other
individuals or countries in order to consume more and
reach a higher standard of living than would be possible
in the absence of trade.
stagflationA simultaneous combination of
high unemployment and high inflation.
structural deficitThe difference between government
expenditures and tax revenues that would result if gross
domestic product were at its potential, not its actual,
structural unemploymentJoblessness that occurs when new
goods or new technologies call for new skills, and workers
with older skills cannot find jobs.
substitutesCommodities with a positive cross-elasticity of demand (a decrease in the price of one
commodity will result in a decrease in the quantity
demanded of the other commodity).
supply curveA curve, usually sloping upward
to the right, showing the relationship between a
product’s price and the quantity supplied of the
supply curve for loanable fundsA curve showing the relationship
between the quantity of loanable funds supplied and the
pure interest rate.
supply and demand for loanable fundsThe amount available for lending
in the general money market vs. the interest rates that
consumers are willing to pay to borrow money.
supply shockAn event that suddenly changes
the price of a commodity or service.
supply-side economicsA set of propositions concerned
with influencing the aggregate supply curve through the
use of financial incentives such as tax cuts.
supply-side inflationInflation resulting from
leftward shifts of the aggregate supply curve.
tariffA tax imposed by the government
on imported goods (designed to cut down on imports and
thus protect domestic industry and workers from foreign
tax avoidanceLegal steps taken by taxpayers to reduce their tax bills.
tax distortionsInefficiencies in the free
market, resulting from the imposition of taxes.
tax evasionMisreporting of income or other
illegal steps taken by taxpayers to reduce their tax
taxesFees charged by a government on a
product, income, or activity.
technological changeNew methods of producing existing
products, new designs that make it possible to produce new
products, and new techniques of organization, marketing,
technologySociety’s pool of knowledge
concerning how goods and services can be produced from a
given amount of resources.
terms of tradeThe ratio of an index of export
prices to an index of import prices.
theory of social choiceThe philosophical and
mathematical study of the type of conclusions that can be
determined through various aggregation methods to create a
social welfare function from individual
tight monetary policyA monetary policy that restrains
or reduces the money supply and raises interest
total costThe sum of a firm’s total
fixed cost and total variable cost.
total fixed costA firm’s total expenditure
on fixed inputs per period of time.
total revenueA firm’s total dollar sales volume.
total variable costA firm’s total expenditure
on variable input per period of time.
trade and efficiencyThe use of trade policy that
maximizes total surplus, both for consumers by importing
items produced at lower costs in other countries and for
producers by exporting items produced at lower costs
domestically than is possible in other countries.
trade-offRefers to losing one quality or
aspect of something in return for gaining another quality
transactions demand for moneyThe holding of money in cash or
in checking accounts in order to pay for final goods and
transferable emissions permitEach permit allows the holder of
the permit to generate a certain amount of pollution.
These permits, limited in number, are sold by the
government to the highest bidders at a price set by supply
transfer paymentsPayments made by the government
or private business to individuals who do not contribute
to the production of goods and services in exchange for
troughThe point in the business cycle
where national output is lowest relative to its potential
trustsA group of companies that
illegally work together to reduce competition and control
tying contractThe practice whereby buyers must
purchase other items in order to get the product they
uncertaintyA situation in which, given the best information
available, multiple outcomes are possible.
undervaluation of currencyThe setting of a currency’s
price below the equilibrium price.
unemploymentAccording to the definition of
the Bureau of Labor Statistics, joblessness among people
who are actively looking for work and would take a job if
one were offered.
unemployment rateThe number of people who are
unemployed divided by the number of people in the labor
union shopA situation where firms can hire
nonunion workers who must then become union members within
a certain length of time after being hired.
unitary elasticityA price elasticity of demand equal to one.
utilityA number representing the level
of satisfaction that a consumer derives from a particular
good or group of goods.
value-addedThe amount of value added by a
firm or industry to the total worth of a product.
value of the marginal product of laborThe marginal product of labor
(the additional output resulting from the addition of an
extra unit of labor) multiplied by the product’s
variable inputA resource used in the production
process (such as labor or raw material) whose quantity can
be changed during the particular period under
velocity of circulation of moneyRate at which the money supply is
used to make transactions for final goods and services;
that is, the average number of times per year that a
dollar is used to buy the final goods and services
produced. It equals nominal GDP divided by the money
wage and price controlsLimits imposed by the government
on the amount by which wages and prices can rise, in order
to reduce the inflation rate at a given unemployment
wage-price spiralA series of steps whereby higher
wage demands by workers prompt firms to raise their prices
to consumers. This in turn raises the general cost of
living and prompts workers to make yet-higher wage