Economics

absolute advantage

the ability to produce a good using fewer inputs than another producer

accounting profit

total revenue minus total explicit cost

aggregate-demand curve

a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level

aggregate-supply curve

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action

average fixed cost

fixed cost divided by the quantity of output

average revenue

total revenue divided by the quantity sold

average total cost

total cost divided by the quantity of output

average variable cost

variable cost divided by the quantity of output

bank capital

the resources a bank's owners have put into the institution

bond

a certificate of indebtedness

budget surplus

an excess of tax revenue over government spending

business cycle

fluctuations in economic activity, such as employment and production

capital requirement

a government regulation specifying a minimum amount of bank capital

catch-up effect

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy

circular-flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

classical dichotomy

the theoretical separation of nominal and real variables

club goods

goods that are excludable but not rival in consumption

Coase theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

collective bargaining

the process by which unions and firms agree on the terms of employment

commodity money

money that takes the form of a commodity with intrinsic value

common resources

goods that are rival in consumption but not excludable

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

competitive market

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker negligible impact on the market price

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

compounding

the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future

constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output changes

consumer price index CPI

a measure of the overall cost of the goods and services bought by a typical customer. Compares it to the cost of the same basket of goods and services in a fixed year (base year). CPI = cost of base - year basket of good and services in current year / cost of base - year basket of goods and services in base year

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

consumption

spending by households on goods and services, with the exception of purchases of new housing

corrective tax

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

cost

the value of everything a seller must give up to produce a good

cost-benefit analysis

a study that compares the costs and benefits to society of providing a public good

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

crowding out

a decrease in investment that results from government borrowing

crowding-out effect

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

currency

the paper bills and coins in the hands of the public

cyclical unemployment

the deviation of unemployment from its natural rate. Extra unemployment that occurs during periods of recession

deadweight loss

the fall in total surplus that results from a market distortion, such as a tax

demand curve

a graph of the relationship between the price of a good and the quantity demanded

demand deposits

balances in bank accounts that depositors can access on demand by writing a check

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

depression

a severe recession

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases

diminishing returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

discount rate

the interest rate on the loans that the Fed makes to banks

discouraged workers

individuals who would like to work but have given up looking for a job

diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

diversification

the reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks

economic profit

total revenue minus total cost, including both explicit and implicit costs

economics

the study of how society manages its scarce resources

economies of scale

the property whereby long-run average total cost falls as the quantity of output increases

efficency

the property of society getting the most it can from its scarce resources

efficiency wages

above-equilibrium wages paid by firms to increase worker productivity

efficient markets hypothesis

the theory that asset prices reflect all publicly available information about the value of an asset

efficient scale

the quantity of output that minimises average total cost

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

equality

the property of distributing economic prosperity uniformly among the members of society

equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

equilibrium price

the price that balances quantity supplied and quantity demanded

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

excludability

the property of a good whereby a person can be prevented from using it

explicit costs

input costs that require an outlay of money by the firm

exports

goods produced domestically and sold abroad

externality

the impact on one person's actions on the well-being of a bystander

federal funds rate

the interest rate at which banks make overnight loans to one another

federal reserve FED

the central bank of the United States

fiat money

money without intrinsic value that is used as money because of government decree

finance

the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk

financial intermediaries

financial institutions through which savers can indirectly provide funds to borrowers

financial markets

financial institutions through which savers can directly provide funds to borrowers

financial system

the group of institutions in the economy that help to match one person's saving with another person's investment

firm-specific risk

risk that affects only a single company

fiscal policy

the setting of the level of government spending and taxation by government policymakers

Fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate. Real interest Rate (r) = nominal interest (i) - the inflation rate (pie)

fixed costs

costs that do not vary with the quantity of output produced

fractional-reserve banking

a banking system in which banks hold only a fraction of deposits as reserves

free rider

a person who receives the benefit of a good but avoids paying for it

frictional unemployment

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills. short-term

fundamental analysis

the study of a company's accounting statements and future prospects to determine its value

future value

the amount of money in the future that an amount of money today will yield, given prevailing interest rates

GDP deflator

a measure of the price level calculated as nominal GDP / real GDP x100.

government purchases

spending on goods and services by local, state, and federal governments

gross domestic product GDP

the market value of all final goods and services produced within a country in a given period of time

human capital

the knowledge and skills that workers acquire through education, training, and experience

implicit costs

input costs that do not require an outlay of money by the firm

imports

goods produced abroad and sold domestically

incentive

something that induces a person to act

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income

indexation

the automatic correction by law or contract of a dollar amount for the effects of inflation

inferior good

a good for which, other things being equal, an increase in income leads to a decrease in demand

inflation

an increase in the overall level of prices in the economy. To counteract inflation, the government must use monetary and fiscal policy

inflation rate

the percentage change in the price index from the preceding period - inflation rate in year 2 = (CPI in Year 2 - CPI in Year 1) / CPI in Year 1 x100

inflation tax

the revenue the government raises by creating money

informational efficiency

the description of asset prices that rationally reflect all available information

internalizing the externality

altering incentives so that people take account of the external effects of their actions

investment

spending on capital equipment, inventories, and structures, including household purchases of new housing

job search

the process by which workers find appropriate jobs given their tastes and skills

labour force

the total number of workers, including both the employed and the unemployed