Economics Terms

Average Revenue

Total revenue divided by quantity sold.

Shutdown Point

The point at which average revenue is equal to the firm's average variable cost.

Breakeven Point

Represents the price of the underlying in a derivative contract in which the profit to both counterparties would be zero.

Short-Run Average Total Cost (SATC)

The curve describing average total cost when some costs are considered fixed.

Long-Run Average Total Cost (LRAC)

The curve describing average total cost when no costs are considered fixed.

Economies of Scale

A decline in costs per unit as output grows, generally resulting from having fixed costs in the cost structure that are spread out over more units of output.

Diseconomies of Scale

Increase in cost per unit resulting from increased production.

Increasing Returns to Scale

When a production process leads to increases in output that are proportionately larger than the increase in inputs.

Decreasing Returns to Scale

When a production process leads to increases in output that are proportionately smaller than the increase in inputs.

Minimum Efficient Scale

The smallest output that a firm can produce such that its long-run average total cost is minimized.

Perfect Competition

A market structure in which the individual firm has virtually no impact on market price, because it is assumed to be a very small seller among a very large number of firms selling essentially identical products.

Monopolistic Competition

Highly competitive form of imperfect competition; the competitive characteristic is a notably large number of firms, while the monopoly aspect is the result of product differentiation.

Oligopoly

Market structure with a relatively small number of firms supplying the market.

Monopoly

Market structure with no substitutes for the given product or service; there is a single seller, which exercises considerable power over pricing and output decisions.

Price Takers

Producers that must accept whatever price the market dictates.

Cournot Assumption

Assumption in which each firm determines its profit-maximizing production level assuming that other firms' output will not change.

Game Theory

The set of tools decision makers use to incorporate responses by rival decision makers into their strategies.

Nash Equilibrium

When two or more participants in a non-cooperative game have no incentive to deviate from their respective equilibrium strategies given their opponent's strategies.

Cartel

Participants in collusive agreements that are made openly and formally.

Stackelberg Model

A prominent model of strategic decision making in which firms are assumed to make their decisions sequentially.

Business Cycles

Recurrent expansions and contractions in economic activity affecting broad segments of the economy.

Classical Cycle

Refers to fluctuations in the level of economic activity when measured by GDP in volume terms.

Growth Cycle

Refers to fluctuations in economic activity around the long-term potential growth level, focusing on how much actual economic activity is below or above trend growth in economic activity.

Growth Rate Cycle

Refers to fluctuations in the growth rate of economic activity.

Expansion

The period of a business cycle after its lowest point and before its highest point.

Slowdown

peak

Contraction

The period of a business cycle after the peak and before the trough; often called a recession or if, exceptionally sever, called a depression.

Boom

An expansionary phase characterized by economic growth "testing the limits" of the economy.

Economic Indicators

Economic statistics provided by government and established private organizations that contain information on an economy's recent past activity or its current or future position in the business cycle.

Leading Economic Indicators

Turning points that usually precede those of the overall economy; they are believed to have value for predicting the economy's future state, usually near-term.

Coincident Economic Indicators

Turning points that are usually close to those of the overall economy; they are believed to have value for identifying the economy's present state.

Lagging Economic Indicators

Turning points that take place later than those of the overall economy; they are believed to have value in identifying the economy's past condition.

Diffusion Index

Reflects the proportion of the index's components that are moving in a pattern consistent with the overall index.

Fiscal Policy

The use of taxes and government spending to affect the level of aggregate expenditures.

Monetary Policy

Actions taken by a nation's central bank to affect aggregate output and prices through changes in bank reserves, reserve requirements, or its target interest rates.

Structural Budget Deficit

The deficit that would exist if the economy was at full employment (or full potential output).

Fiscal Policy

The use of taxes and government spending to affect the level of aggregate expenditures.

Monetary Policy

Actions taken by a nation's central bank to affect aggregate output and prices through changes in bank reserves, reserve requirements, or its target interest rates.

Structural Budget Deficit

The deficit that would exist if the economy was at full employment (or full potential output).

Expansionary

Tending to cause the real economy to grow.

Keynesians

Economists who believe that fiscal policy can have powerful effects on aggregate demand, output, and employment when there is substantial spare capacity in an economy.

Monetarists

Economists who believe that the rate of growth of the money supply is the primary determinant of the rate of inflation.

Economic Stabilization

Reduction in the magnitude of economic fluctuations.

Expansionary Fiscal Policy

Fiscal policy aimed at achieving real economic growth.

Contractionary Fiscal Policy

A fiscal policy that has the objective to make the real economy contract.

Automatic Stabilizer

A countercyclical factor that automatically comes into play as an economy slows and unemployment rises.

Balanced

With respect to a government budget, one in which spending and revenue (taxes) are equal.

Transfer Payments

Welfare payments made through the social security system that exist to provide basic minimum level of income for low-income households.

Current Government Spending

With respect to government expenditures, spending on goods and services that are provided on a regular, recurring basis including health, education, and defense.

Capital Expenditures

Expenditure on physical capital (fixed assets).

Direct Taxes

Taxes levied on income, wealth, and corporate profits.

Indirect Taxes

Taxes such as taxes on spending, as opposed to direct taxes.

Net Tax Rate

The tax rate net of transfer payments.

Fiscal Multiplier

The ratio of a change in national income to a change in government spending.

Marginal Propensity to Consume (MPC)

The proportion of an additional unit of disposable income that is consumed or spent; the change in consumption for a small change in income.

Marginal Propensity to Save (MPS)

The proportion of an additional unit of disposable income that is saved (not spent).

Households

A person or a group of people living in the same residence, taken as a basic unit in economic analysis.

Ricardian Equivalence

An economic theory that implies that it makes no difference whether a government finances a deficit by increasing taxes or issuing debt.

Recognition Lag

The lag in government response to an economic problem resulting from the delay in confirming a change in the state of the economy.

Action Lag

Delay from policy decisions to implementation.

Impact Lag

The lag associated with the result of actions affecting the economy with delay.

Interest Rate

The rate of return that reflects the relationship between differently dated cash flows; a discount rate.

Gold Standard

With respect to a currency, if a currency is on the gold standard a given amount can be converted into a prespecified amount of gold.

Legal Tender

Something that must be accepted when offered in exchange for goods and services.

Fiat Money

Money that is not convertible into any other commodity.

Lender of Last Resort

An entity willing to lend money when no other entity is ready to do so.

Payments System

The system for the transfer of money.

Foreign Currency Reserves

Holding by the central bank of non-domestic currency deposits and non-domestic bonds.

Price Stability

In economics, refers to an inflation rate that is low on average and not subject to wide fluctuation.

Open Market Operations

The purchase or sale of bonds by the national central bank to implement monetary policy. The bonds traded are usually sovereign bonds issued by the national government.

Policy Rate

An interest rate that a central bank sets and announces publicly

Repurchase Agreement

A form of collateralized loan involving the sale of a security with a simultaneous agreement by the seller to buy back the same security from the purchaser at an agreed-on price and future date.

Base Rates

The reference rate on which a bank bases lending rates to all other customers.

Two-Week Repo Rate

The interest rate on a two-week repurchase agreement; may be used as a policy rate by a central bank.

Refinancing Rate

A type of central bank policy rate.

Federal Funds Rate

The US interbank lending rate on overnight borrowings of reserves.

Reserve Requirement

The requirement for banks to hold reserves in proportion to the size of deposits.

Monetary Transmission Mechanism

The process whereby a central bank's interest rate gets transmitted through the economy and ultimately affects the rate of increase of prices.

Operational Independence

A bank's ability to execute monetary policy and set interest rates in the way it thought would best meet the inflation target.

Target Independent

A bank's ability to determine the definition of inflation that they target, the rate of inflation that they target, and the horizon over which the target is to be achieved.

Inflation Reports

A type of economic publication put out by many central banks.

Deflation

Negative inflation.

Contractionary

Tending to cause the real economy to contract.

Neutral Rate of Interest

The rate of interest that neither spurs on nor slows down the underlying economy.

Demand Shock

A typically unexpected disturbance to demand, such as an unexpected interruption in trade or transportation.

Supply Shock

A typically unexpected disturbance to supply.

Bond Market Vigilantes

Bond market participants who might reduce their demand for long-term bonds, thus pushing up their yields.

Liquidity Trap

A condition in which the demand for money becomes infinitely elastic (horizontal demand curve) so that injections of money into the economy will not lower interest rates or affect real activity.

Quantitative Easing

An expansionary monetary policy based on aggressive open market purchase operations.

Gilts

Bonds issued by the UK government.