Economics Terms

Scarcity

condition where resources are limited but wants are unlimited

Opportunity Cost

value of the next best alternative given up

Trade-Off

choice between competing alternatives

Incentive

something that encourages a person to act

Utility

satisfaction gained from consuming a good or service

Marginal Utility

extra satisfaction from one more unit consumed

Diminishing Marginal Utility

principle that extra satisfaction falls with each additional unit

Supply

amount sellers are willing and able to offer

Demand

amount buyers are willing and able to purchase

Law of Demand

as price rises, quantity demanded usually falls

Law of Supply

as price rises, quantity supplied usually rises

Equilibrium

point where quantity supplied equals quantity demanded

Surplus

situation where supply exceeds demand

Shortage

situation where demand exceeds supply

Price Ceiling

legal maximum price

Price Floor

legal minimum price

Elasticity

responsiveness of one variable to another

Price Elasticity of Demand

responsiveness of quantity demanded to price changes

Income Elasticity of Demand

responsiveness of demand to changes in income

Cross-Price Elasticity

responsiveness of demand for one good to the price of another

Normal Good

good for which demand rises as income rises

Inferior Good

good for which demand falls as income rises

Substitute Goods

goods that can replace one another

Complementary Goods

goods often used together

Consumer Surplus

difference between what consumers will pay and what they do pay

Producer Surplus

difference between market price and minimum acceptable price

Market Failure

situation where markets allocate resources inefficiently

Externality

cost or benefit affecting third parties

Negative Externality

outside cost imposed on others

Positive Externality

outside benefit received by others

Public Good

good that is non-rival and non-excludable

Free Rider Problem

people benefit without paying for the good

Common Resource

shared resource that can be overused

Private Good

good that is rival and excludable

Monopoly

market with one seller

Oligopoly

market dominated by a small number of firms

Perfect Competition

market with many firms and no pricing power

Monopolistic Competition

market with many firms selling differentiated products

Barriers to Entry

obstacles that make it hard for new firms to enter a market

Economies of Scale

falling average costs as output rises

Diseconomies of Scale

rising average costs as a firm becomes too large

Marginal Cost

cost of producing one more unit

Marginal Revenue

revenue gained from selling one more unit

Fixed Cost

cost that does not change with output

Variable Cost

cost that changes with output

Average Cost

total cost divided by total output

Productivity

output produced per unit of input

Specialization

focusing on a narrow task to improve efficiency

Division of Labor

splitting production into separate tasks

Comparative Advantage

ability to produce at lower opportunity cost

Absolute Advantage

ability to produce more with the same resources

Trade

exchange of goods and services

Tariff

tax on imports

Quota

limit on quantity of imports or exports

Protectionism

policy of shielding domestic industries from foreign competition

Globalization

growing integration of world economies

GDP

total value of final goods and services produced in a country

Real GDP

GDP adjusted for inflation

Nominal GDP

GDP measured using current prices

GDP Per Capita

GDP divided by population

Economic Growth

increase in real output over time

Business Cycle

recurring fluctuations in economic activity

Expansion

period of rising output and employment

Peak

highest point before the economy declines

Recession

broad decline in economic activity

Trough

lowest point before recovery begins

Recovery

period when economic activity begins rising again

Inflation

sustained increase in the general price level

Deflation

sustained decrease in the general price level

Disinflation

slowing rate of inflation

CPI

index measuring average consumer prices

PPI

index measuring average producer prices

Unemployment

condition of people wanting work but unable to find it

Unemployment Rate

percentage of the labor force without jobs

Labor Force Participation Rate

share of working-age people employed or seeking work

Natural Rate of Unemployment

normal level of unemployment in a healthy economy

Frictional Unemployment

short-term unemployment during job transitions

Structural Unemployment

unemployment caused by skill or industry mismatch

Cyclical Unemployment

unemployment caused by downturns in the economy

Fiscal Policy

government spending and taxation to influence the economy

Monetary Policy

central bank actions affecting money and interest rates

Central Bank

institution that manages a country’s monetary policy

Interest Rate

price of borrowing money

Money Supply

total amount of money in the economy

Quantitative Easing

central bank asset purchases to lower rates and support liquidity

Open Market Operations

central bank buying or selling securities to affect reserves

Reserve Requirement

minimum reserves banks must hold

Federal Funds Rate

overnight rate banks charge each other for reserves

Aggregate Demand

total demand for goods and services in the economy

Aggregate Supply

total output firms are willing to produce

Multiplier Effect

initial spending causing a larger total increase in output

Crowding Out

government borrowing reducing private investment

Budget Deficit

government spending exceeding tax revenue

Budget Surplus

government revenue exceeding spending

National Debt

total accumulated government borrowing

Exchange Rate

price of one currency in terms of another

Current Account

measure of trade, income, and transfer flows with other countries

Trade Deficit

imports exceeding exports

Trade Surplus

exports exceeding imports

Political Economy

study of how politics and economics interact