ECON 1101 Definitions

Incentives

Rewards or penalties for engaging in a particular activity.

Economics

The study of how people allocate their limited resources in an attempt to satisfy their unlimited wants

Resources

Things used to produce goods and services to satisfy people’s wants

Wants

What people would buy if their incomes were unlimited

Microeconomics

The study of decision making undertaken by individuals (or households) and by firms

Macroeconomics

The study of the behaviour of the economy as a whole, including such economy-wide phenomena as changes in unemployment, the general price level, and national income

Aggregates

Total amounts or quantities. Aggregate demand, for example, is total planned expenditures throughout a nation

Economic System

A society’s institutional mechanism for determining the way scarce resources are used to satisfy human desires

Rationality Assumption

The assumption that people do not intentionally make decisions that would leave them worse off

Models and Theories

Simplified representations of the real world used as the basis for predictions or explanations

Variables

Choices that people make or other human outcomes that are subject to change

Ceteris paribus assumption

The assumption that nothing changes except the factor or factors being studied

Ceteris paribus conditions

Determinants of the relationship between price and quantity that are unchanged along a curve. Changes in these factors cause the curve to shift

Empirical

Relying on real-world data in evaluating the usefulness of a model

Behavioural Economics

An approach to the study of consumer behaviour that emphasizes psychological limitations and complications that potentially interfere with rational decision making

Bounded Rationality

The hypothesis that people are nearly, but not fully, rational, so that they cannot examine every possible choice available to them but instead use simple rules of thumb to sort among the alternatives that happen to occur to them.

Normative Economics

Analysis involving value judgments about economic policies; relates to whether outcomes are good or bad. A statement of what ought to be

Positive Economics

Analysis that is strictly limited to making either purely descriptive statements or scientific predictions. For example, “If A, then B.” A statement of what is.

Scarcity

A situation in which the ingredients for producing the things that people desire are insufficient to satisfy all wants at a zero price

Physical Capital

All manufactured resources, including buildings, equipment, machines, and improvements to land that are used for production.

Entrepreneurship

he component of human resources that performs the functions of raising capital; organizing, managing, and assembling other factors of production; making basic business policy decisions; and taking risks

Opportunity cost

The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want.

Product Possibilities Curve

A curve representing all possible combinations of maximum outputs that could be produced, assuming a fixed amount of productive resources of a given quality

Inefficient Point

Any point below the production possibilities curve, at which the use of resources is not generating the maximum possible output

law of increasing additional cost

The fact that the opportunity cost of additional units of a good generally increases as people attempt to produce more of that good. This accounts for the bowed-out shape of the production possibilities curve

Specialization

organization of economic activity so that what each person (or region) consumes is not identical to what that person (or region) produces

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost compared to other producers

Absolute Advantage

The ability to produce more (or less) units of a good or service using a given quantity of labour or resource inputs.

Division of labour

The segregation of resources into different specific tasks. For instance, one digital-device assembler inserts touchscreen connectors, another attaches the screen, and so on

Market

All of the arrangements that individuals have for exchanging with one another. Thus, for example, we can speak of the labour market, the automobile market, and the credit market.

Demand

A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant.

Law of demand

The observation that there is a negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant.

Relative Price

The money price of one commodity divided by the money price of another commodity; the number of units of one commodity that must be sacrificed to purchase one unit of another commodity.

Inferior goods

Goods for which demand falls as income rises.

Demand curve

A graphical representation of the demand schedule. It is a negatively sloped line showing the inverse relationship between the price and the quantity demanded (other things being equal)

Market demand

The demand of all consumers in the marketplace for a particular good or service. The summation at each price of the quantity demanded by each individual.

Substitutes

Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change

Compliments

Two goods are complements when a change in the price of one causes an opposite shift in the demand for the other.

Law of supply

The observation that the higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal.

Supply curve

The graphical representation of the supply schedule; a line (curve) showing the supply schedule, which generally slopes upward (has a positive slope), other things being equal.

Subsidy

A negative tax; a payment to a producer from the government, usually in the form of a cash grant per unit.

Market clearing

The price that clears the market, at which quantity demanded equals quantity supplied; the price where the demand curve intersects the supply curve.

Equilibrium price

The situation in which quantity supplied equals quantity demanded at a particular price.

Shortage

A situation in which quantity demanded is greater than quantity supplied at a price below the market clearing price.

Surplus

A situation in which quantity supplied is greater than quantity demanded at a price above the market clearing price

Price System

An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities. The prices of those commodities are signals to everyone within the system as to what is relatively scarce and what is relatively abundant.

Voluntary exchange

An act of trading, done on a mutually agreed-upon basis, in which both parties to the trade expect to be better off after the exchange.

Transaction costs

All of the costs associated with exchange, including the informational costs of finding out the price and quality, service record, and durability of a product, plus the cost of contracting and enforcing that contract.

Platform firms

Companies whose services link people to other individuals who share their interests or who seek to buy firms’ products, often via networks that the companies operate.

Price ceiling

A legal maximum price that may be charged for a particular good or service.

Price Floor

A legal minimum price below which a good or service may not be sold. Legal minimum wages are an example.

Price controls

Government-mandated minimum or maximum prices that may be charged for goods and services.

Non-price rationing devices

All methods used to ration scarce goods that are price controlled. Whenever the price system is not allowed to work, nonprice rationing devices will evolve to ration the affected goods and services.

Hidden Market

A market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold.

Important quota

A physical supply restriction on imports of a particular good, such as cheese. Foreign exporters are unable to sell in Canada more than the quantity specified in the import quota.

Tariff rate quota

A supply restriction on the imports of a particular good, where the quota establishes a limit on the quantity of the good that may be imported at a lower rate of duty; any quantity over the quota is still permitted but will be imported at a higher rate of duty.

Market Failure

A situation in which the market economy leads to too few or too many resources going to a specific economic activity.

Externality

A consequence of an economic activity that spills over to affect third parties not involved in the transaction. Can be either negative or positive.

Effluent fee

A charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution; also called a pollution tax.

Monopoly

A firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service.

Private goods

Goods that can be consumed by only one individual at a time. Private goods are subject to the principle of rival consumption.

Public goods

Goods for which the principle of rival consumption does not apply and for which exclusion of nonpaying consumers is too costly to be feasible. They can be jointly consumed by many individuals at no additional cost and with no drop in quality or quantity. Furthermore, no one who fails to help pay for the good can be denied its benefits.

Principle of rival consumption

The recognition that individuals are rivals in consuming private goods because one person’s consumption reduces the amount available for others to consume.

Free rider problem

A problem that arises when individuals presume that others will pay for public goods so that, individually, they can escape paying for their portion without causing a reduction in production.

Government sponsored goods

A good that has been deemed socially desirable through the political process. Museums are an example.

Government inhibited goods

A good that has been deemed socially undesirable through the political process. Heroin is an example.

Transfer payments

Money payments made by governments to individuals for which no services or goods are rendered in return. Examples are Old Age Security, disability benefits, and employment insurance benefits.

Transfers in kind

Payments that are in the form of actual goods and services, such as education, health care services, subsidized public housing, and social protection, and for which no goods or services are rendered in return.

Government budget constraint

The limit on government spending and transfers imposed by the fact that every dollar the government spends, transfers, or uses to repay borrowed funds must ultimately be provided by the user charges and taxes it collects.

Tax base

The value of goods, services, wealth, or incomes subject to taxation.

Tax rate

The proportion of a tax base that must be paid to a government as taxes.

Marginal tax rate

The change in the tax payment divided by the change in income, or the percentage of additional dollars that must be paid in taxes. The marginal tax rate is applied to taxable income in the highest tax bracket reached.

Tax bracket

A specified interval of income to which a specific and unique marginal tax rate is applied.

Average tax rate

The total tax payment divided by total income. It is the proportion of total income paid in taxes.

Proportional Taxation

A tax system in which, regardless of an individual’s income, the tax bill comprises exactly the same proportion.

Progressive taxation

A tax system in which, as income increases, a higher percentage of the additional income is paid as taxes. The marginal tax rate exceeds the average tax rate as income rises.

Regressive Taxation

A tax system in which as more dollars are earned, the percentage of tax paid on them falls. The marginal tax rate is less than the average tax rate as income rises.