Economic Terms
foreign exchange market
a market in which the money (currency) of one nation can be used to purchase (can be exchanged for) the money of another nation; currency market
bilateral monopoly
a market in which there is a single seller (monopoly) and a single buyer (monopsony)
oligopoly
a market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition
monopolistic competition
a market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price, and in which there is considerable nonprice competition
monopsony
a market structure in which there is only a single buyer of a good, service, or resource
monopoly
a market structure in which there is only a single seller of a good, service, or resource (in antitrust law, a dominant firm that accounts for a very high percentage of total sales within a particular market)
game theory
a means of analyzing the business behavior of oligopolists that uses the theory of strategy associated with games such as chess and bridge
Herfindahl index
a measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry
market economy
an economy in which the private decisions of consumers, resource suppliers, and firms determine how resources are allocated; the market system
open economy
an economy that exports and imports goods and services
closed economy
an economy that neither exports nor imports goods and services
opportunity-cost ratio
an equivalency showing the number of units of two products that can be produced with the same resources; the cost 1 corn = 3 olives shows that the resources required to produce 3 units of olives must be shifted to corn production to produce 1 unit of corn
consumption of fixed capital
an estimate of the amount of capital worn out used up (consumed) in producing the gross domestic product; also called depreciation
insurable risk
an event that would result in a loss but whose frequency of occurrence can be estimated with considerable accuracy (insurance companies are willing to sell insurance against such losses)
managed floating exchange rate
an exchange rate that is allowed to change (float) as a result of changes in currency supply and demand but at times is altered (managed) by governments via their buying and selling of particular currencies
patent
an exclusive right given to inventors to produce and sell a new product or machine for 20 years from the time of patent application
paper money
pieces of paper used as a medium of exchange; in the United States, Federal Reserve notes
excess capacity
plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost
efficiency factors (in growth)
the capacity of an economy to combine resources effectively to achieve growth of real output that the supply factors (of growth) make possible
infrastructure
the capital goods usually provided by the public sector for use by citizens and first (for example, highways, bridges, transit systems, wastewater treatment facilities, municipal water systems, and airports)
marginal revenue product/productivity (MRP)
the change in a firm's total revenue when it employs 1 additional unit of a resource (the quantity of all other resources employed remaining constant); equal to the change in total revenue divided by the change in the quantity of the resource employed
marginal revenue
the change in total revenue that results from the sale of 1 additional unit of a firm's product; equal to the change in total revenue divided by the change in the quantity of the product sold
excludability
the characteristic of a private good, for which the seller can keep nonbuyers from obtaining the good
balance on current account
the exports of goods and services of a nation less its imports of goods and services plus its net investment income and net transfers in a year
income mobility
the extend to which income receivers move from one part of the income distribution to another over some period of time
marginal benefit
the extra (additional) benefit of consuming 1 more unit of some good or service; the change in total benefit when 1 more unit is consumed
percentage rate of return
the percentage gain or loss, relative to the buying price, of an economic investment or financial investment over some period of time
copayment
the percentage of (say, health care) costs that an insured individual pays while the insurer pays the remainder
employment rate
the percentage of the labor force employed at any time
poverty rate
the percentage of the population with incomes below the official poverty income levels that are established by the Federal government
concentration ratio
the percentage of the total sales of an industry made by the four (or some other number) largest sellers in the industry
labor-force participation rate
the percentage of the working-age population that is actually in the labor force
mortgage debt crisis
the period beginning in late 2007 when thousands of homeowners defaulted on mortgage loans when they experience a combination of higher mortgage interest rates and falling home prices
net transfers
the personal and government transfer payments made by one nation to residents of foreign nations less the personal and government transfer payments received from residents of foreign nations
personal saving
the personal income of households less personal taxes and personal consumption expenditures; disposable income not spent for consumer goods
peak
the point in a business cycle at which business activity has reached a temporary maximum; the economy is near or at full employment and the level of real output is at or very close to the economy's capacity
exit mechanism
the process of leaving a job and searching for another one as means of improving one's working conditions
nonproduction transaction
the purchase and sale of any item that is not a currently produced good or service
financial investment
the purchase of a financial asset (such as a stock, bond, or mutual fund) or real asset (such as a house, land, or factories) or the building of such assets in the expectation of financial gain
import transaction
the purchase of a good or service that decreases the amount of foreign money held by citizens, firms, and governments of a nation
least-cost combination of resources
the quantity of each resource a firm must employ in order to produce a particular output at the lowest total cost; the combination at which the ratio of the marginal product of a resource to its marginal resource cost (to its price if the resource is employed in a competitive market) is the same for the last dollar spent on each of the resources employed
marginal rate of substitution (MRS)
the rate at which a consumer is willing to substitute one good for another (from a given combination of goods) and remain equally satisfied (have the same total utility); equal to the slope of a consumer's indifference curve at each point on the curve
exchange rate
the rate of exchange of one nation's currency for another nation's currency
multiplier
the ratio of a change in equilibrium GDP to the change in investment of in any other component of aggregate expenditures or aggregate demand; the number by which of a change in any such component must be multiplied to find the resulting change in equilibrium GDP
price elasticity of demand
the ratio of the percentage change in quantity demanded of a product or resource to the percentage change in its price; a measure of the responsiveness of buyers to a change in the price of a product or resource
cross elasticity of demand
the ratio of the percentage change in quantity demanded of one good to the percentage change in the price of some other good (a positive coefficient indicates the two products are substitute goods; a negative coefficient indicates they are complementary goods)
national income accounting
the techniques used to measure the overall production of the economy and other related variables for the nation as a whole
interest-rate effect
the tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases)
"invisible hand"
the tendency of firms and resource suppliers that seek to further their own self-interests in competitive markets to also promote the interests of society
mental accounting
the tendency people have to create separate "mental boxes" (or "accounts") in which they deal with particular financial transactions in isolation rather than dealing with them as part of their overall decision-making process that considers how to best allocate their limited budgets using the utility-maximizing rule
endowment effect
the tendency people have to place higher valuations on items they own than on identical items that they do not own (perhaps caused by people being loss averse)
anchoring
the tendency people have to unconsciously base, or "anchor," the valuation of an item they are currently thinking about on previously considered but logically irrelevant information
median-voter model
the theory that under majority rule the median (middle) voter will be in the dominant position to determine the outcome of an election
multiple counting
wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once
leakage
(1) a withdrawal of potential spending from the income-expenditures stream via saving, tax payment, or imports; (2) a withdrawal that reduces the lending potential of the banking system
economic growth
(1) an outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capital
long run
(1) in microeconomics, a period of time long enough to enable producers of a product to change the quantities of all the resources they employ; period in which all resources and costs are variable and no resources or costs are fixed (2) in macroeconomics, a period sufficiently long for nominal wages and other input prices to change in response to change in a nation's price level
equilibrium quantity
(1) the quantity at which the intentions of buyers and sellers in a particular market match at a particular price such that the quantity demanded and the quantity supplied are equal; (2) the profit-maximizing output of a firm
full employment
(1) the use of all available resources to produce want-satisfying goods and services; (2) the situation in which the unemployment rate is equal to the full-employment rate of unemployment and where frictional and structural unemployment occur but no cyclical unemployment (and the real GDP of the economy equals potential output)
expansionary monetary policy
Federal Reserve System actions to increase the money supply, lower interest rates, and expand real GDP; an easy money policy
nominal gross domestic product (GDP)
GDP measured in terms of the price level at the time of measurement, GDP not adjusted for inflation
per capita GDP
GDP per person; the average GDP of a population
equation of exchange
MV = PQ, in which M is the supply of the money, V is the velocity of money, P is the price level, and Q is the physical volume of final goods and services produced
labor force
persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work
independent unions
U.S. unions that are not affiliated with the AFL-CIO
incentive pay plan
a compensation structure that ties worker pay directly to performance (includes piece rates, bonuses, stock options, commissions, and profit sharing)
Alcoa case
a 1945 case in which the courts ruled that the possession of monopoly power, no matter how reasonably that power had been used, was a violation of the antitrust laws; temporarily overturned by the rule of reason applied in the U.S. Steel case
North American Free Trade Agreement (NAFTA)
a 1993 agreement establishing, over a 15-year period ,a free-trade zone composed of Canada, Mexico, and the United States
Microsoft case
a 2002 antitrust case in which Microsoft was found guilty of violating the Sherman Act by engaging in a series of unlawful activities designed to maintain its monopoly in operating systems for personal computers; as a remedy the company was prohibited from engaging in a set of specific anticompetitive business practices
cyclical deficit
a Federal budget deficit that is caused by a recession and the consequent decline in tax revenues
marketing loan program
a Federal farm subsidy under which certain farmers can receive a loan (on a per-unit-of-output basis) from a government lender and then, depending on the price of the crop, either pay back the loan with interest or keep the loan proceeds while forfeiting their harvested crop to the lender
Medicaid
a Federal program that helps finance the medical expenses of individuals covered by the Supplemental Security Income (SSI) and Temporary Assistance for Needy Families (TANF) programs
Medicare
a Federal program that is financed by payroll taxes and provides for (1) compulsory hospital insurance for senior citizens, (2) low-cost voluntary insurance to help older Americans pay physicians' fees, and (3) subsidized insurance to buy prescription drugs
bankers' bank
a bank that accepts the deposits of and makes loans to depository institutions; in the United States, a Federal Reserve Bank
central bank
a bank whose chief function is the control of the nation's money supply; in the United States, the Federal Reserve System
positive externality
a benefit of chain without compensation by third parties from the production or consumption of sellers or buyers (example: a beekeeper benefits when a neighboring farmer plants clover); an external benefit or spillover benefit
Organization of Petroleum Exporting Countries (OPEC)
a cartel of 12 oil-producing countries (Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, Venezuela, and the United Arab Emirates) that attempts to control the quantity and price of crude oil exported by its members and that accounts for a large percentage of the world's export of oil
occupation
a category of activities or tasks performed by a set of workers for pay, independent of employer or industry (examples: managers, nurses, farmers, and cooks)
monetary policy
a central bank's changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth
change in quantity demanded
a change in the quantity demanded along a fixed demand curve (or within a fixed demand schedule) as a result of a change in the price of the product
income effect
a change in the quantity demanded of a product that results form the change in real income (purchasing power) caused by a change in the product's price
change in quantity supplied
a change in the quantity supplied along a fixed supply curve (or within a fixed supply schedule) as a result of a change in the product's price
checking account
a checkable deposit in a commercial bank or thrift institution
aggregate
a collection of specific economic units treated as if they were one (example: all prices of individual goods and services are combined into a price level, or all units of output are aggregated into gross domestic products)
national bank
a commercial bank authorized to operate by the U.S. government
cyclically adjusted budget
a comparison of the government expenditures and tax collections that would occur if the economy operated at full employment throughout the year; the full-employment budget
cost-benefit analysis
a comparison of the marginal costs of a government project or program with the marginal benefits to decide whether or not to employ resources in that project of program and to what extent
nondurable good
a consumer good with an expected life (use) of less than three years
durable good
a consumer good with an expected life (use) of three or more years
negative externality
a cost imposed without compensation on third parties by the production or consumption of sellers or buyers (example: a manufacturer dumps toxic chemicals into a river, killing fish price by sports fishers); an external cost or spillover costs
externality
a cost or benefit from product or consumption, accruing without compensation to someone other than the buyers and sellers of the product (see negative externality and positive externality)
economic policy
a course of action intended to correct or avoid a problem
injunction
a court order directing a person or organization not to perform a certain act because the act would do irreparable damage to some other person or persons; a restraining order
microfinance
a credit system through which groups of people pool their money and make small loans to budding entrepreneurs and owners of small businesses in developing countries
demand curve
a curve illustrating demand
investment schedule
a curve or schedule that shows the amounts firms plan to invest at various possible values of real gross domestic product
Laffer Curve
a curve relating government tax rates and tax revenues and on which a particular tax rate (between 0 and 100 percent) maximizes tax revenues
indifference curve
a curve showing the different combinations of two products that yield the same satisfaction or utility to a consumer
Lorenz curve
a curve showing the distribution of income in an economy (the cumulated percentage of families/ income receivers is measured along the horizontal axis and the cumulated percentage of income is measured along the vertical axis)
Phillips Curve
a curve showing the relationship between the unemployment rate (on the horizontal axis) and the annual rate of increase in the price level (on the vertical axis)
investment demand curve
a curve that shows the amounts of investment demanded by an economy at a series of real interest rates
liability
a debt with a monetary value; an amount owed by a firm or an individual
deflation
a decline in the economy's price level
contractionary fiscal policy
a decrease in government purchases of goods and services, an increase in net taxes, or some combination of the two, for the purpose of decreasing aggregate demand and thus controlling inflation
exchange-rate depreciation
a decrease in the value of a nation's currency in foreign exchange markets; a decrease in the rate of exchange with foreign currencies
depreciation (of the dollar)
a decrease in the value of the dollar relative to another currency, so a dollar buys a smaller amount of the foreign currency and therefore of foreign goods
economic concentration
a description or measure of the degree to which an industry is dominated by one or a handful of firms or is characterized by many firms (See concentration ratio)
import demand curve
a downsloping curve showing the amount of a product that an economy will import at each world price below the domestic price
bond
a financial device through which a borrower (a firm or government) is obligated to pay the principal and interest on a loan at a specific date in the future
Ponzi scheme
a financial fraud in which the returns paid to earlier investors come from contributions made by later investors (rather than from the financial investment that the perpetrator of the fraud claims to be making); named after notorious fraudster Charles Ponzi
commercial bank
a firm that engages in the business of banking (accepts deposits, offers checking accounts, and makes loans)
average total cost (ATC)
a firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost
average fixed cost (AFC)
a firm's total fixed cost divided by output (the quantity of product produced)
average variable cost (AVC)
a firm's total variable cost divided by output (the quantity of product produced)
income
a flow of dollars (or purchasing power) per unit of time derived from the use of human or property resources
cartel
a formal agreement among firms (or countries) in an industry to set the price of a product and establish the outputs of the individual firms (or counties) or to divide the market for the product geographically
inferior good
a good or service whose consumption declines as income rises, prices held constant
normal good
a good or service whose consumption increases when income increases and falls when income decreases, price remaining constant
export subsidy
a government payment to a domestic producer to enable the firm to reduce the price of a good or service to foreign buyers
cap-and-trade program
a government strategy for reducing harmful emissions or discharges by placing a limit on their total amounts and then allowing firms to buy and sell the rights to emit or discharge specific amounts within the total limits
noncash transfer
a government transfer payment in the form of goods and services rather than money, for example, food stamps, housing assistance, and job training; also called in-kind transfers
currency intervention
a government's buying and selling of its own currency or foreign currencies to alter international exchange rates
industry
a group of (one or more) firms that produce identical or similar products
G8 nations
a group of eight major nations (Canada, France, Germany, Italy, Japan, Russia, United Kingdom, and United States) whose leaders meet regularly to discuss common economic problems and try to coordinate economic policies
income-maintenance system
a group of government programs designed to eliminate poverty and reduce inequality in the distribution of income
Council of Economic Advisers (CEA)
a group of three persons that advises and assists the president of the United States on economic matters (including the preparation of the annual Economic Report of the President)
labor union
a group of workers organized to advance the interests of a group (to increase wages, shorten hours worked, improve working conditions, and so on)
gold standard
a historical system of fixed exchange rates in which nations defined their currencies in terms of gold, maintained a fixed relationship between their stocks of gold and their money supplies, and allowed gold to be freely exported and imported
industrial union
a labor union that accepts as members all workers employed in a particular industry (or by a particular firm)
craft union
a labor union that limits its membership to workers with a particular skill (craft)
Freedom to Farm Act
a law passed in 1996 that revamped 60 years of U.S. farm policy by ending price supports and acreage allotments for wheat, corn, barley, oats, sorghum, rye, cotton, and rice
corporations
a legal entity ("person") chartered by a state or the Federal government that is distinct and separate from the individuals who own it
copyright
a legal protection provided to developers and publishers of books, computer software, videos, and musical compositions against the copying of their works by others
bankrupt
a legal situation in which an individual or firm finds that it cannot make timely interest payments on money it has borrowed (in such cases, a bankruptcy judge can order the individual or firm to liquidate (turn to cash) its assets in order to pay lenders at least some portion of the amount they owed)
price floor
a legally determined minimum price above the equilibrium price
price ceiling
a legally established maximum price for a good or service
import quota
a limit imposed by a nation on the quantity (or total value) of a good that may be imported during some period of time
45° (degree) line
a line along which the value of GDP (measured horizontally) is equal to the value of aggregate expenditures (measured vertically)
budget line
a line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices
Change to Win
a loose federation of American unions that includes the Service Workers and Teamsters and has a total membership of 6 million members
Patient Protection and Affordable Care Act (PPACA)
a major health care law passed by the Federal government in 2010 (major provisions include an individual health insurance mandate, a ban on insurers refusing to accept patients with preexisting conditions, and Federal (rather than state) regulation of health insurance policies
market for externality rights
a market in which firms can buy rights to discharge pollutants (the price of such rights is determined by the demand for the right to discharge pollutants and a perfectly inelastic supply of such rights (the latter determined by the quantity of discharge that the environment can assimilate))
discrimination coefficient
a measure of the cost or disutility of prejudice; the monetary amount an employer is willing to pay to hire a preferred worker rather than a nonpreferred worker
elasticity of resource demand
a measure of the responsiveness of firms to a change in the price of a particular resource they employ or use; the percentage change in the quantity of the resource demanded divided by the percentage change in its price
built-in stabilizer
a mechanism that increases government's budget deficit (or reduces its surplus) during a recession and increases government's budget surplus (or reduces its deficit) during an expansion without any action by policymakers (the tax system is one such mechanism)
midpoint formula
a method for calculating price elasticity of demand or price elasticity of supply that averages the two prices and two quantities as the reference points for computing percentages
marginal-revenue-marginal-cost approach
a method of determining the total output where economic profit is a maximum (or losses are a minimum) by comparing the marginal revenue and the marginal cost of each additional unit of output
command system
a method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; command economy; communism
crowding model of occupational discrimination
a model of labor markets suggesting that occupational discrimination has kept many women and minorities out of high-paying occupations and forced them into a limited number of low-paying occupations
M2
a more broadly defined money supply, equal to M1 plus noncheckable savings accounts (including money market deposit accounts), small time deposits (deposits of less than $100,000),and individual money market mutual fund balances
changes in demand
a movement of an entire demand curve or schedule such that the quantity demanded changes at every particular price; caused by a change in one or more of the determinants of demand
change in supply
a movement of an entire supply curve or schedule such that the quantity supplied changes at every particular price; caused by a change in one or more of the determinants of supply
legal tender
a nation's official currency (bills and coins) (payments of debts must be accepted in this monetary unit, but creditors can specify the form of payment, for example, "cash only" or "check or credit card only")
per capita income
a nation's total income per person; the average income of a population
capital and financial account deficit
a negative balance on its capital and financial account in a country's international balance of payments
Gini ratio
a numerical measure of the overall dispersion of income among households, families, or individuals; found graphically be dividing the area between the diagonal line and the Lorenz curve by the entire area below the diagonal line
economic system
a particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem, a method of organizing the economy, of which the market system and the command system are the two general types
economic cost
a payment that must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products that cannot be produced when resources are instead used to make a particular product
market period
a period in which producers of a product are unable to change the quantity produced in response to a change in its price and in which there is a perfectly inelastic supply
legal immigrant
a person who lawfully enters a country for the purpose of residing there
expansion
a phase the business cycle in which real GDP, income, and employment rise
plant
a physical establishment that performs one or more functions in the production, fabrication, and distribution of goods and services
open shop
a place of employment in which the employer may hire nonunion workers and in which the workers need not become members of a labor union
closed shop
a place of employment where only workers who are already members of a labor union may be hired
agency shop
a place of employment where the employer may hire either labor union members or nonmembers but where those who do not join the union must either pay union dues or donate an equivalent amount of money to a charity
capital and financial account surplus
a positive balance on its capital and financial account in a country's international balance of payments
acreage allotments
a pre-1996 government program that determined the total number of acres to be used in producing (reduced amounts of) various food and fiber products and allocated these acres among individual farmers; these farmers had to limit their plantings to the allotted number of acres to obtain price supports for their crops
GDP price index
a price index for all the goods and services that make up the gross domestic product; the price index used to adjust nominal gross domestic product to real gross domestic product
adverse selection problem
a problem arising when information known to one party to a contract or agreement is not known to the other party, causing the latter to incur major costs (example: individuals who have the poorest health are most likely to buy health insurance)
collusion
a situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition
differentiated product
a product that differs physically or in some other way from the similar products produced by other firms; a product such that buyers are no indifferent to the seller when the price charged by all sellers is the same
national health insurance
a program in which a nation's government provides a basic package of health care to all citizens at no direct charge or at a low cost-sharing level (financing is out of general tax revenues)
H1-B provision
a provision of the U.S. immigration law that allows the annual entry of 65,000 high-skilled workers in "specialty occupations" such as science, R&D, and computer programming to work legally and continuously in the United States for six years
fishery collapse
a rapid decline in fishery's population because its fish are being harvested faster than they can reproduce
flexible (or floating) exchange rate
a rate of exchange determined by the international demand for and supply of a nation's money; a rate free to rise or fall (to float)
fixed exchange rate
a rate of exchange that is set in some way and therefore prevented form rising or falling with changes in currency supply and demand
disinflation
a reduction in the rate of inflation
earned-income tax credit (EITC)
a refundable Federal tax credit for low-income working people designed to reduce poverty and encourage labor-force participation
causation
a relationship in which the occurrence of one or more events brings about another event
beta
a relative measure of nondiversifiable risk that measures how the nondiversifiable risk of a given asset or portfolio compares with that of the market portfolio (the portfolio that contains every asset available in the financial markets)
competitive labor market
a resource market in which a large number of (noncolluding) employers demand a particular type of labor supplied by a large number of nonunion workers
crowding-out effect
a rise in interest rates and a resulting decrease in planned investment caused by the Federal government's increased borrowing to finance budget deficits and refinance debt
inflation
a rise in the general level of prices in an economy
export transaction
a sale of a good or service that increases that amount of foreign currency flowing to a nation's citizens, firms, and government
aggregate expenditures schedule
a schedule or curve showing the total amount spent for final goods and services at different levels of real GDP
aggregate supply
a schedule or curve showing the total quantity of goods and services supplied (produced) at different price levels
aggregate demand
a schedule or curve that shows the total quantity of goods and services demanded (purchased) at different price levels
consumption schedule
a schedule showing the amounts households plan to spend for consumer goods at different levels of disposable income
demand
a schedule showing the amounts of a good or service that buyers (or a buyer) wish to purchase at various prices during some time period
advertising
a seller's activities in communicating its message about its product to potential buyers
indifference map
a set of indifference curves, each representing a different level of utility, that together show the preferences of a consumer
land reform
a set of policies designed to create more efficient distribution of land ownership in developing countries; policies vary country to country and can involve everything from government purchasing large land estates and dividing the land into smaller farms to consolidating tiny plots of land into larger, more efficient private farms
economic model
a simplified picture of economic reality; an abstract generalization
liquidity trap
a situation in a severe recession in which the Fed's injection of additional reserves into the banking system has little or no additional positive impact on lending, borrowing, investment, or aggregate demand
mutual interdependence
a situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms) (any firm that makes such a change can expect the other rivals to react to the change)
comparative advantage
a situation in which a person or country can produce a specific product at a lower opportunity cost than some other person or country; the basis for specialization and trade
absolute advantage
a situation in which a person or country can produce more of a particular product from a specific quantity of resources than some other person or country
positive GDP gap
a situation in which actual gross domestic product exceeds potential output; also known as an inflationary output gap
negative GDP gap
a situation in which actual gross domestic product is less than potential output (also known as a recessionary output gap)
coordination failure
a situation in which people do not reach a mutually beneficial outcome because they lack some way to jointly coordinate their actions; a possible cause of macroeconomic instability
poverty
a situation in which the basic needs of an individual or family exceed the means to satisfy them
coincidence of wants
a situation in which the good or service that one trader desires to obtain is the same as that which another trader desires to give up and an item that the second trader wishes to acquire is the same as that which the first trader desires to surrender
interlocking directorate
a situation where one or more members of the board of directors of a corporation are also on the board of directors of a competing corporation; illegal under the Clayton Act
asymmetric information
a situation where one party to a market transaction has much more information about a product or service than the other; the result may be an under or over allocation of resources
paradox of voting
a situation where paired-choice voting by majority rule fails to provide a consistent ranking of societies preferences for public goods or services
portfolio
a specific collection of stocks, bonds ,or other financial investments held by an individual or a mutual fund
economic theory
a statement of a cause-effect relationship; when accepted by all or nearly all economists, an economic principle
balance sheet
a statement of the assets, liabilities, and net worth of a firm or individual at some given time
price-level stability
a steadiness of the price level from one period to the next; zero or low annual inflation
fishery
a stock of fish or other marine animal that is composed of a distinct group, for example New England cod, Pacific tuna, or Alaskan crab
international balance of payments
a summary of all the transactions that took place between the individuals, firms, and government units of one nation and those of all other nations during a year
fractional reserve banking system
a system in which commercial banks and thrift institutions hold less than 100 percent of their checkable-deposit liabilities as required reserves
correlation
a systematic and dependable association between two sets of data (two kinds of events); does not necessarily indicate causation
payroll tax
a tax levied on employers of label equal to a percentage of all or part of the wages and salaries paid by them and on employees equal to a percentage of all or part of the wages and salaries received by them
corporate income tax
a tax levied on the net income (accounting profit) of corporations
excise tax
a tax levied on the production of a specific product or on the quantity of the product purchased
personal income tax
a tax levied on the taxable income of individuals, households, and unincorporated firms
lump-sum tax
a tax that collects a constant amount (the tax revenue of government is the same) at all levels of GDP
hypothesis
a tentative explanation of cause and effect that requires testing
cyclical unemployment
a type of unemployment caused by insufficient total spending (or by insufficient aggregate demand)
frictional unemployment
a type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs
dependent variable
a variable that changes as a consequence of a change in some other (independent) variable; the "effect" or outcome
hyperinflation
a very rapid rise in the price level; an extremely high rate of inflation
economic perspective
a viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions
efficiency wage
a wage that minimizes wage costs per unit of output by encouraging greater effort or reducing turnover
economic principle
a widely-accepted generalization about the economic costs (which include both explicit costs and implicit costs); also called "pure profit" and "above-normal profit"
health savings accounts (HSAs)
accounts into which people with high-deductible health insurance plans can place tax-free funds each year and then draw on these funds to pay out-of-pocket medical expenses such as deductibles and copayments (unused funds accumulate from year to year and later can be used to supplement Medicare)
learning by doing
achieving greater productivity and lower average total cost through gains in knowledge and skill that accompany repetition of a task; a source of economies of scale
National Labor Relations Act (NLRA)
act first passed as the Wagner Act of 1935; as amended, the basic labor-relations law in the United States; defines the legal rights of unions and management and identifies unfair union and management labor practices; established the NLRB
GDP gap
actual gross domestic product minus potential output; may be either a positive amount (positive _____) or a negative amount (negative _____)
efficiency gains from migration
additions to output from immigration in the destination nation that exceed the loss of output from emigration from the origin nation
farm commodities
agricultural products such as gains, milk, cattle, fruits, and vegetables that are usually sold to processors, who use the products as inputs in creating food products
nontariff barriers (NTBs)
all barriers other than protective tariffs that nations erect to impede international trade, including import quotas, licensing requirements, unreasonable product quality standards, unnecessary bureaucratic detail in customs procedures, and so on
commercial banking system
all commercial banks and thrift institutions as a group
extraction cost
all costs associated with extracting a natural resource and readying it for sale
nonincome determinants of consumption and saving
all influences on consumption and saving other than the level of GDP
noninterest determinants of investment
all influences on the level of investment spending other than the interest rate
imperfect competition
all market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly
market system
all the product and resource markets of a market economy and the relationships among them; a method that allows the prices determined in those markets to allocate the economy's scarce resources and to communicate and coordinate the decisions made by consumers, firms, and resource suppliers
debit
an accounting item that decreases the value of an asset (such as the foreign money owned by the residents of a nation)
credit
an accounting item that increases the value of an asset (such as foreign money owned by the residents of a nation)
lockout
an action by a firm that forbids workers to return to work until a new collective bargaining contract is signed; a means of imposing costs (lost wages) on union workers in a collective bargaining dispute
injection
an addition of spending to the income-expenditure stream: investment, government purchases, and net exports
Bureau of Economic Analysis (BEA)
an agency of the U.S. Department of Commerce that compiles the national income and product accounts
immediate short-run aggregate supply curve
an aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curves shifts; a horizontal aggregate supply curve that implies an inflexible price level
fast-second strategy
an approach by a dominant firm in which it allows other firms in its industry to bear the risk of innovation and the quickly becomes the second firm to offer any successful new product or adopt any improved production process
preferred provider organization (PPO)
an arrangement in which doctors and hospitals agreed to provide health care to insured individuals at rates negotiated with an insurer
European Union (EU)
an association of 27 European nations (as of mid-2010) that has eliminated tariffs and quotas among them, established common tariffs for imported goods from outside the member nations, eliminated barriers to the free movement of capital, and created other common economic policies
credit union
an association of persons who have a common tie (such as being employees of the same firm or members of the same labor union) that sells shares to (accepts deposits from) its members and makes loans to them
cost-of-living adjustment (COLA)
an automatic increase in the incomes (wages) of workers when inflation occurs; guaranteed by a collective bargaining contract between firms and workers
economic law
an economic principle that has been tested and retested and has stood the test of time
capitalism
an economic system in which property resources are privately owned and markets and prices are used to direct and coordinate economic activities
homogeneous oligopoly
an oligopoly in which the firms produce a standardized product
exhaustive expenditure
an expenditure by government resulting directly in the employment of economic resources and in the absorption by government of the goods and services those resources produce; a government purchase
nonexhaustive expenditure
an expenditure by government that does not result directly in the use of economic resources or the production of good and services; see government transfer payment
noninvestment transaction
an expenditure for stocks, bonds, or secondhand capital goods
circular flow diagram
an illustration showing the flow of resources form households to firms and of products from firms of households; these flows are accompanied by reverse flows of money from firms to households and from households to firms
capital-saving technology
an improvement in technology that permits a great quantity of a product to be produced with a specific amount of capital (or permits the same amount of the product to be produced with a smaller amount of capital)
capital-using technology
an improvement in technology that requires the use of a greater amount of capital to produce a specific quantity of a product
increasing returns
an increase in a firm's output by a larger percentage than the percentage increase in its inputs
expansionary fiscal policy
an increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output
increase in demand
an increase in the quantity demanded of a good or service at every price; a shift of the demand curve to the right
increase in supply
an increase in the quantity supplied of a good or service at every price; a shift of the supply curve to the right
exchange-rate appreciation
an increase in the value of a nation's currency in foreign exchange markets; an increase in the rate of exchange with foreign currencies
appreciation (of the dollar)
an increase in the value of the dollar relative to the currency of another nation, so a dollar buys a larger amount of the foreign currency and thus of foreign goods
increasing marginal returns
an increases in the marginal product of a resource as successive units of the resource are employed
price index
an index number that shows how the weighted-average price of a "market basket" of goods changes over time
Consumer Price Index (CPI)
an index that measures the prices of a fixed "market base" of some 300 goods and services bought by a "typical" consumer
declining industry
an industry in which economic profits are negative (losses are incurred) and that will, therefore, decrease its output as firms leave it
natural monopoly
an industry in which economies of scale are so great that a single firm can product the product at a lower average total cost than would be possible if more than one firm produced the product
constant-cost industry
an industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs
decreasing-cost industry
an industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs
increasing-cost industry
an industry in which expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs
expanding industry
an industry whose firms earn economic profits and for which an increase in output occurs as new firms enter the industry
price leadership
an informal method that firms in an oligopoly may employ to set the price of their product: one firm (the leader) is the first to announce a change in price, and the other firms (the followers) soon announce identical or similar changes
differentiated oligopoly
an oligopoly in which firms produce a differentiated product
noncollusive oligopoly
an oligopoly in which the firms do not act together and in agreement to determine the price of the product and the output that each firm will produce
constant opportunity cost
an opportunity cost that remains the same for each additional unit as a consumer (or society) shifts purchases (production) from one product to another along a straight-line budget line (production possibilities curve)
cease-and-desist order
an order from a court or government agency to a corporation or individual to stop engaging in a specified practice
firm
an organization that employs resources to produce a good or service for profit and owns and operates one or more plants
break-even point
an output at which a firm makes a normal profit (total revenue = total cost) but not an economic profit
partnership
an unincorporated firm owned and operated by two or more persons
export supply curve
an upward-sloping curve that shows the amount of a product that domestic firms will export at each world price that is above the domestic price
fixed cost
any cost that in total does not change when the firm changes its output; the cost of fixed resources
checkable deposit
any deposits in a commercial bank or thrift institution against which a check may be written
human capital investment
any expenditure undertaken to improve the education, skills, health, or mobility of workers, with an expectation of greater productivity and thus a positive return on investment
exchange-rate determinant
any factor other than the rate of exchange that determines a currency's demand and supply in the foreign exchange market
market
any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service
medium of exchange
any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter
money
any item that is generally acceptable to sellers in exchange for goods and services
break-even output
any output at which a (competitive) firm's total cost and total revenue are equal; an output at which a firm has neither an economic profit nor an economic loss, at which it earns only a normal profit
fixed resource
any resource whose quantity cannot be changed by a firm in the short run
asset
anything of monetary value owned by a firm or individual
barrier to entry
anything that artificially prevents the entry of firms into an industry
fiat money
anything that is money because government has decreed it to be money
marginal cost-marginal benefit rule
as it applies to cost-benefit analysis, the tenet that a government project or program should be expanded to the point where the marginal cost and marginal benefit of additional expenditures are equal
long-run supply curve
as it applies to macroeconomics, a supply curve for which price, but not real output, changes when the demand curves shifts; a vertical supply curve that implies fully flexible prices
follower countries
as it relates to economic growth, countries that adopt advanced technologies that previously were developed and used by leader countries
leader countries
as it relates to economic growth, countries that develop and use advanced technologies, which then become available to follower countries
negative self-selection
as it relates to international migration, the idea that those who choose to move to another country have poorer wage opportunities in the origin country than those with similar skills who choose not to emigrate
expected-rate-of-return curve
as it relates to research and development (R&D), a curve showing the anticipated gain in profit, as a percentage of R&D expenditure, form an additional dollar spent on R&D
interest-rate-cost-of-funds curve
as it relates to research and development, a curve showing the interest rate the firm must pay to obtain any particular amount of funds to finance R&D
money market deposit accounts (MMDAs)
bank- and thrift-provided interest-bearing accounts that contain a variety of short-term securities; such accounts have minimum balance requirements and limits on the frequency of withdrawals
mortgage-backed securities
bonds that represent claims to all or part of the monthly mortgage payments from the pools of mortgage loans made by leaders to borrowers to help them purchase residential property
direct payments
cash subsidies paid to farmers based on past production levels; unaffected by current crop prices and current production
countercyclical payments (CCPs)
cash subsidies paid to farmers when market prices for certain crops drop below targeted prices; payments are based on previous production and are received regardless of the current crop grown
fiscal policy
changes in government spending and tax collections designed to achieve a full-employment and noninflationary domestic output; also called discretionary fiscal policy
intertemporal choice
choices between benefits obtainable in one time period and benefits achievable in a later time period; comparisons that individuals and society must make between the reductions in current consumption that are necessary to fund current investments and the higher levels of future consumption that those current investments can produce
currency
coins and paper money
noncompeting groups
collections of workers who do not compete with each other for employment because the skill and training of the workers in one group are substantially different from those of the workers and the other groups
per se violations
collusive actions, such as attempts by firms to fix prices or divide a market, that are violations of the antitrust laws, even if the actions themselves are unsuccessful
Joint Economic Committee (JEC)
committee of senators and representatives that investigates economic problems of national interest
nonprice competition
competition based on distinguishing one's product by means of product differentiation and then advertising the distinguished product to consumers
foreign exchange controls
controls that a government may exercise over the quantity of foreign currency demanded by its citizens and firms and over the rates of exchange as a way to limit the nation's quantity of out payments relative to its quantity of in payments (to eliminate a payments deficit)
discretionary fiscal policy
deliberate changes in taxes (tax rates) and government spending by Congress to promote full employment, price stability, and economic growth
consumer sovereignty
determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy; consumers' direction of production through their dollar votes
aggregate expenditures-domestic output approach
determination of the equilibrium gross domestic product by finding the real GDP at which aggregate expenditures equal domestic output
inflating
determining real gross domestic product by increasing the dollar value of the nominal gross domestic product produced in a year in which prices are lower than those in a base year
conflict diamonds
diamonds that are mined and sold by combatants in war zones in Africa as a way to provide the currency needed to finance their military activities
compensating differences
differences in the wages received by workers in difference jobs to compensate for the nonmonetary differences between the jobs
businesses
economic entities (firms) that purchase resources and provide goods and services to the economy
households
economic entities (of one or more persons occupying a housing unit) that provide resources to the economy and use the income received to purchase goods and services that satisfy economic wants
factors of production
economic resources: land, capital, labor, and entrepreneurial ability
discouraged workers
employees who have left the labor force because they have not been able to find employment
government purchases (G)
expenditures by government for goods and services that government consumes in providing public goods and for public capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and services
gross private investment (lg)
expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories
net exports (Xn)
exports minus imports
determinants of demand
factors other than price that determine the quantities demanded of a good or service
determinants of supply
factors other than price that determine the quantities supplied of a good or service
determinants of aggregate demand
factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve
determinants of aggregate supply
factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve
Food, Conservation, and Energy Act of 2008
farm legislation that continued and extended previous agricultural subsidies of three basic kinds: direct payments, countercyclical payments, and marketing loans
near-money
financial assets, the most important of which are non checkable savings accounts, time deposits, and US short-term securities and saving bonds, which are not a medium of exchange but can be readily converted into money
foreign direct investment
financial investments made to obtain a lasting ownership interest in firms operating outside the economy of the investor; may involve purchasing existing assets or building new production facilities
deflating
finding the real gross domestic product by decreasing the dollar value of the GDP for a year in which prices were higher than in the base year
depository institutions
firms that accept deposits of money from the public (businesses and persons); commercial banks, savings and loan associations, mutual savings banks, and credit unions
investment banks
firms that help corporations and government raise money by selling stocks and bonds; they offer advisory services for corporate mergers and acquisitions in addition to providing brokerage services and advice
multinational corporations
firms that own production facilities in two or more countries and produce and sell their products globally
conglomerates
firms that produce goods and services in two or more separate industries
political business cycle
fluctuations in the economy caused by the alleged tendency of Congress to destabilize the economy by reducing taxes and increasing government expenditures before elections and to raise taxes and lower expenditures after elections
official reserves
foreign currencies owned by the central bank of a nation
average propensity to consume (APC)
fraction (or percentage) of disposable income that households plan to spend for consumer goods and services; consumption divided by disposable income
average propensity to save (APS)
fraction (or percentage) of disposable income that households save; saving divided by disposable income
exports
goods and services produced in a nation and sold to buyers in other nations
inventories
goods that have been produced but remain unsold
final goods
goods that have been purchased for final use and not for resale or further processing or manufacturing
central economic planning
government determination of the objectives of the economy and how resources will be directed to attain those goals
entitlement programs
government programs such as social insurance, Medicare, and Medicaid that guarantee particular levels of transfer payments or noncash benefits to all who fit the programs' criteria
insurance exchanges
government-regulated markets for health insurance in which individuals seeking to purchase health insurance to comply with the personal mandate of the Patient Protection and Affordable Care Act (PPACA) of 2010 will be able to comparison shop among insurance policies approved by regulator; each state will have its own exchange
domestic output
gross (or net) domestic product; the total output of final goods and services produced in the economy
net domestic product (NDP)
gross domestic product less the part of the year's output that is needed to replace the capital goods worn out and producing the output; the nation's total output available for conception or additions to capital stock
net private domestic investment
gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year
health maintenance organizations (HMOs)
health care providers that contract with employers, insurance companies, labor unions, or government units to provide health care for their workers or others who are insured
industrially advanced countries
high-income countries such as the United States, Canada, Japan, and the nations of western Europe that have highly developed market economies based on large stocks of technologically advanced capital goods and skilled labor forces
capital (goods)
human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants
investment
in economics, spending for the production and accumulation of capital and additions to inventories
positive sum game
in game theory, a game in which the gains (+) and losses (-) add up to more than zero; one party's gains exceeds the other party's losses
negative-sum game
in game theory, a game in which the gains (+) and losses (-) add up to some amount less than zero; one party's losses exceed the other party's gains
one-time game
in game theory, a game in which the parties select their optimal strategies in a single time period without regard to possible interaction in subsequent time periods
credible threat
in game theory, a statement of harmful intent by one party that the other party views as believable; often issued in conditional terms of "if you do this; we will do that"
empty threat
in game theory, a statement of harmful intent that is easily dismissed by the recipient because the threat is not viewed as being believable; compare to credible threat
dominant strategy
in game theory, an option that is better than any other alternative option regardless of what the other firm does
Nash equilibrium
in game theory, an outcome from which neither firm wants to deviate; the outcome that once achieved is stable and therefore lasting
first-move advantage
in game theory, the benefit obtained by the party that moves first in a sequential game
consumer equilibrium
in marginal utility theory, the combination of goods purchased based on marginal utility (MU) and price (P) that maximizes total utility; the combination for goods X and Y at with MUx/Px = MUy/Py. In indifference curve analysis, the combination of goods purchased that maximize total utility by enabling the consumer to reach the highest indifference curve, given the consumer's budget line (or budget constraint)
long-run supply
in microeconomics, a schedule or curve showing the prices at which a purely competitive industry will make various quantities of the product available in the long run
framing effects
in prospect theory, changes in people's decision-making caused by new information that alters the context, or "frame of reference," that they use to judge whether options are viewed as gains or losses
loss averse
in prospect theory, the property of people's preferences that the pain generated by losses feels substantially more intense than the pleasure generated by gains
fee for service
in the health care industry, payment to physicians for each visit made or procedure performed rather than payment as an annual salary
equilibrium position
in the indifference curve model, the combination of two goods at which a consumer maximizes his or her utility (reaches the highest attainable indifference curve), given a limited amount to spend (a budget constraint)
diseconomies of scale
increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run
demand-pull inflation
increases in the price level (inflation) resulting form an excess of demand over output at the existing price level, caused by an increase in aggregate demand
cost-push inflation
increases in the price level (inflation) resulting form an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply
anticipated inflation
increases in the price level (inflation) that occur at the expected rate
network effects
increases in the value of a product to each user, including existing users, as the total of users rises
government failure
inefficiencies in resource allocation caused by problems in the operation of the public sector (government), specifically, rent-seeking pressure by special-interest groups, shortsighted political behavior, limited and bundled choices, and bureaucratic inefficiencies
money market mutual funds (MMMFs)
interest-bearing accounts offered by investment companies, which pool depositors' fund for the purchase of short-term securities (depositors can write checks in minimum amounts or more against their accounts)
economic immigrants
international migrants who have moved to a country from another to obtain economic gains such as better employment opportunities
nondiversifiable risk
investment risk that investors are unable to reduce via diversification; also known as systemic risk
diversifiable risk
investment risk that investors can reduce via diversification; also called idiosyncratic risk
antitrust laws
legislation (including the Sherman Act and Clayton Act) that prohibits anticompetitive business activities such as price fixing, bid rigging, monopolization, and typing contracts
individual transferable quotas (ITQs)
limits set by government or fisheries commission on the total number or total weight of a species that an individual fisher can harvest during some particular time period; fishers holding the quotas can sell all or part of the rights to other fisheries
developing countries
many countries of Africa, Asia, and Latin America that are characterized by lack of capital goods, use of nonadvanced technologies, low literacy rates, high unemployment, rapid population growth, and labor forces heavily committed to agriculture
beaten paths
migration routs taken previously by family, relatives, friends, and other migrants
loanable funds
money available for lending and borrowing
actively managed funds
mutual funds that have portfolio managers who constantly buy and sell assets in an attempt to generate higher returns than some benchmark rate of return for similar portfolios
index funds
mutual funds that select stock or bond portfolios to exactly match a stock or bond index (a collection of stocks or bonds meant to capture the overall behavior of a particular category of investments such as the Standard & Poor's 500 Index or the Russell 3000 Index
passively managed funds
mutual funds whose portfolios are not regularly updated by a fund manager attempting to generate high returns; rather, once an initial portfolio is selected, it is left unchanged so that investors receive whatever return that unchanging portfolio subsequently generates (example: index funds)
earmarks
narrow, specially designated spending authorizations placed in broad legislation by Senators and representatives for the purpose of providing benefits to firms and organizations within their constituencies without undergoing the usual evaluation process or competitive bidding
money supply
narrowly defined, M1; more broadly defined, M2
land
natural resources ("free gifts of nature") used to produce goods and services
information technology
new and more efficient methods of delivering the receiving information through the use of computers, fax machines, wireless phones, and the Internet
Federal Reserve Note
paper money issued by the Federal Reserve Banks
dividends
payments by a corporation of all or part of its profit to its stockholders (the corporate owners)
interest income
payments of income to those who supply the economy with capital
diagnosis-related group (DRG) system
payments to doctors and hospitals under Medicare based on which of hundreds of carefully detailed diagnostic categories best characterized the patient's condition and needs
illegal immigrants
people who have entered a country unlawfully to reside there
labor
people's physical and mental talents and efforts that are used to help produce goods and services
four-firm concentration ratio
percentage of total industry sales accounted for by the top four firms in the industry
disposable income (DI)
personal income less personal taxes; income available for personal consumption expenditures and personal saving
mutual funds
portfolios of stocks and bonds selected and purchased by mutual fund companies, which finance the purchases by pooling money from thousands of individual fund investors; includes both index funds as well as actively managed funds (fund returns (profits or losses) pass through to the individual fund investors who invest in the funds)
external debt
private or public debt owed to foreign citizens, firms, and institutions
food products
processed agricultural commodities sold through grocery stores and restaurants (examples: bread, meat, fish, chicken, pork, lettuce, peanut butter, and breakfast cereal)
inelastic demand
product or resource demand for which the elasticity coefficient for price is less than 1 (this means that resulting percentage change in quantity demanded is less than the percentage change in price)
perfectly inelastic demand
product or resource demand in which price can be of any amount at a particular quantity of the product or resource demanded; quantity demanded does not respond to a change in price; graphs as a vertical demand curve
perfectly elastic demand
product or resource demand in which quantity demanded can be of any amount at a particular product price; graphs as a horizontal demand curve
elastic demand
product or resource demand whose price elasticity is greater than 1 (the resulting change in quantity demanded is greater than the percentage change in price)
inelastic supply
product or resource supply for which the price elasticity coefficient is less than 1 (the percentage change in quantity supplied is less than the percentage change in price)
perfectly inelastic supply
product or resource supply in which price can be of any amount at a particular quantity of the product or resource demanded; quantity supplied does not respond to a change in price; graphs as a vertical supply curve
perfectly elastic supply
product or resource supply in which quantity supplied can be of any amount at a particular product or resource price; graphs as a horizontal supply curve
elastic supply
product or resource supply whose price elasticity is great than 1 (the resulting change in quantity supplied is greater than the percentage change in price)
flexible prices
product prices that freely move upward or downward when product demand or supply changes
inflexible prices
product prices that remain in place (at least for a while) even though supply or demand has changed; stuck prices or sticky prices
complementary resources
productive inputs that are used jointly with other inputs in the production process; resources for which a decrease in the price of one leads to an increase in the demand for the other
complementary goods
products and services that are used together (when the price of one falls, the demand for the other increases (and conversely))
consumer goods
products and services that satisfy human wants directly
independent goods
products or services for which there is little or no relationship between the price of one and the demand for the other (when the price of one rises or falls, the demand for the other tends to remain constant)
labor-intensive good
products requiring relatively large amounts of labor to produce
land-intensive goods
products requiring relatively large amounts of land to produce
intermediate goods
products that are purchased for resale or further processing or manufacturing
capital-intensive goods
products that require relatively large amounts of capital to produce
internally held public debt
public debt owed to citizens, firms, and institutions of the same nation that issued the debt
electronic payments
purchases made by transferring funds electronically (examples: Fedwire transfer, automated clearing-house transactions (ACHs), payments via the PayPal system, and payments made through stored0value cards)
net foreign factor income
receipts of resource income from the rest of the world minus payments of resource income to the rest of the world
business cycle
recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases
efficiency loss
reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production and consumption of a taxed good below the level of allocative efficiency (also called the deadweight loss of tax)
economies of scale
reductions in the average total of producing a product as the firm expands the size of plant (its output) in the long run; the economies of mass production
open-market operations
the buying and selling of U.S. government securities by the Federal Reserve Banks for purposes of carrying out monetary policy
limited liability rule
rule limiting the risks involved in investing in corporations and encouraging investors to invest in stocks by capping their potential losses at the amount that they paid for their shares
investment goods
same as capital or capital goods
cardinal utility
satisfaction (utility) that can be measured via cardinal numbers (1, 2, 3...), with all the mathematical properties of those numbers such as addition, subtraction, multiplication, and division being applicable
ordinal utility
satisfaction that is measured by having consumers compare and rank products (or combinations of products) as to preference, without asking them to specify the absolute amounts of satisfaction provided by the products
demographers
scientists who study the characteristics of human populations
defaults
situations in which borrowers stop making loan payments or do not pay back loans that they took out and are now due
imports
spending by individuals, firms, and governments for goods and services produced in foreign nations
dissaving
spending for consumer goods and services in excess of disposable income; the amount by which personal consumption expenditures exceed disposable income
generalization
statement of the nature of the relationship between two or more sets of facts
aggregate supply shocks
sudden, large changes in resource costs that shift an economy's aggregate supply curve
demand shocks
sudden, unexpected changes in demand
efficient allocation of resources
that allocation of an economy's resources among the production of different products that leads to the maximum satisfaction of consumers' wants, thus producing the socially optimal mix of output with society's scarce resources
horizontal axis
the "left-right" or "west-east" measurement line on graph or grid
dollar votes
the "votes" that consumers and entrepreneurs cast for the production of consumer and capital goods, respectively, when they purchase those goods in product and resource markets
Federal Reserve Banks
the 12 banks chartered by the U.S. government to control the money supply and perform other functions (See central bank, quasi-public bank, and bankers; bank)
Federal Open Market Committee (FOMC)
the 12-member group that determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. government securities
Euro Zone
the 16 nations (as of 2010) of the 25-member (as of 2010) European Union that use the euro as their common currency (Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain)
Clayton Act
the Federal antitrust law of 1914 that strengthened the Sherman Act by making it illegal for firms to engage in certain specified practices
Federal Trade Commission Act
the Federal law of 1914 that established the Federal Trade Commission
Celler-Kefauver Act
the Federal law of 1950 that amended the Clayton Act by prohibiting the acquisition of the assets of one firm by another firm when the effect would be less competition
equilibrium real domestic output
the GDP at which the total quantity of final goods and services purchased (aggregate expenditures) is equal to the total quantity of final goods and services produced (the real domestic output); the real domestic output at which the aggregate demand curve intersects the aggregate supply curve
long-run vertical Phillips Curve
the Phillips Curve after all nominal wages have adjusted changes in the rate of inflation; a line emanating straight upward at the economy's natural rate of unemployment
Federal Reserve System
the U.S. central bank, consisting of the Board of Governors of the Federal Reserve and the 12 Federal Reserve Banks, which controls the lending activity of the nation's banks and thrifts and thus the money supply; commonly referred to as the "Fed"
guiding functions of prices
the ability of price changes to bring about changes in the quantities of products and resources demanded supplied
free trade
the absence of artificial (government-imposed) barriers to trade among individuals and firms in different nations
compound interest
the accumulation of money that builds over time in an investment or interest-bearing account as new interest is earned on previous interest that is not withdrawn
arbitrage
the activity of selling one asset and buying an identical or nearly identical asset to benefit from temporary differences in prices or rates of return; the practice that equalizes prices or returns on similar financial instruments and thus eliminates further opportunities for riskless financial gains
marginal product (MP)
the additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed
long-run aggregate supply curve
the aggregate supply curve associated with a time period in which input prices (especially nominal wages) are fully responsive to changes in the price level
excess reserves
the amount by which a bank's or thrift's actual reserves exceed its required reserves; actual reserves minus required reserves
lending potential of an individual commercial bank
the amount by which a single bank can increase the money supply by making new loans to (or buying securities from) the public; equal to the bank's excess reserves
inflationary expenditure gap
the amount by which the aggregate expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary level
lending potential of the banking system
the amount by which the banking system can increase the money supply by making new loans to (or buying securities from) the public; equal to the excess reserves of the banking system multiplied by the monetary multiplier
budget deficit
the amount by which the expenditures of the Federal government exceed its revenues in any year
budget surplus
the amount by which the revenues of the Federal government exceed its expenditures in any year
British thermal unit (BTU)
the amount of energy required to raise the temperature of 1 pound of water by 1 degree Fahrenheit
price
the amount of money needed to buy a particular good, service, or resource
asset demand for money
the amount of money people want to hold as a store of value; this amount varies inversely with the interest rate
nominal wage
the amount of money received by a worker per unit of time (hour, day, etc.); money wage
opportunity cost
the amount of other products that must be forgone or sacrificed to produce a unit of a product
actual investment
the amount that firms invest; equal to planned investment plus unplanned investment
planned investment
the amount that firms plan or intend to invest
marginal resource cost (MRC)
the amount the total cost of employing a resource increases when a firm employs 1 additional unit of the resource (the quantity of all other resources employed remaining constant); equal to the change in the total cost of the resource divided by the change in the quantity of the resource employed
future value
the amount to which some current amount of money will grow if the interest earned on the amount is left to compound over time (See compound interest)
positive economics
the analysis of facts or data to establish scientific generalizations about economic behavior
interest rate
the annual rate at which interest is paid; a percentage of the borrowed amount
inflation targeting
the annual statement by a central bank of a goal for a specific range of inflation in a future year, coupled with monetary policy designed to achieve the goal
expectations
the anticipations of consumers, firms, and others about future economic conditions
DuPont cellophane case
the antitrust case brought against DuPont in which the U.S. Supreme Court ruled (in 1956) that while DuPont had a monopoly in the narrowly defined market for cellophane, it did not monopolize the more broadly defined market for flexible packaging materials so was not guilty of violated the Sherman Act
allocative efficiency
the apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized
other-things-equal assumption
the assumption that factors other than those being considered are held constant; ceteris paribus assumption
per unit production cost
the average production cost of a particular level of output; total input cost divided by units of output
inflationary expectations
the belief of workers, firms, and consumers about future rates of inflation
National Labor Relations Board (NLRB)
the board established by the NLRA of 1935 to investigate unfair labor practices, issue cease-and-desist orders, and conduct elections among employees to determine if they wish to be represented by a labor union
growth accounting
the bookkeeping of the supply-side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period
behavioral economics
the branch of economics that combines insights from economics, psychology, and neuroscience to give a better explanation of choice behavior than previous theories that incorrectly concluded that consumers were always rational, deliberate, and unemotional (explains faming effects, anchoring, mental accounting, the endowment effect, and how people are loss averse)
financial services industry
the broad category of firms that provide financial products and services to help households and businesses earn interest, receive dividends, obtain capital gains, insure against losses, and plan for retirement (includes commercial banks, thrifts, insurance companies, mutual fund companies, pension funds, investment banks, and securities firms)
interest
the payment made for the use of money (of borrowed funds)
economizing problem
the choices necessitated because society's economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce)
merger
the combination of two (or more) firms into a single firm
Federal Trade Commission (FTC)
the commission of five members established by the Federal Trade Commission Act of 1914 to investigate unfair competitive practices of firms to hold hearings on the complaints of such practices, and to issue cease-and-desist orders when firms are found to engage in such practices
euro
the common currency unit used by 16 European nations (as of mid-2010) in the Euro Zone, which consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain
marginal analysis
the comparison of marginal ("extra" or "additional") benefits and marginal costs, usually for decision making
interindustry competition
the competition for sales between the products of one industry and the products of another industry
import competition
the competition that domestic firms encounter from the products and services of foreign producers
inflation premium
the component of the nominal interest rate that reflects anticipated inflation
loanable funds theory of interest
the concept that the supply of and demand for loanable funds determine the equilibrium rate of interest
price fixing
the conspiring by two or more firms to set the price of their products; an illegal practice under the Sherman Act
marginal productivity theory of income distribution
the contention that the distribution of income is equitable when each unit of each resource receives a money payment equal to its marginal contribution to the firm's revenue (its marginal revenue product)
occupational segregation
the crowding of women or minorities into less desirable, lower-paying occupations
managerial prerogatives
the decisions that a firm's management has the sole right to make; often enumerated in the labor contract (work agreement) between a labor union and a firm
equality-efficiency trade-off
the decrease in economic efficiency that may accompany a decrease in income inequality; the presumption that some income inequality is required to achieve economic efficiency
kinked-demand curve
the demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will match a price decrease and will ignore a price increase
derived demand
the demand for a resource that depends on the demand for the products it helps to produce
individual demand
the demand schedule or demand curve of a single buyer
bank reserves
the deposits of commercial banks and thrifts at Federal Reserve Banks plus bank and thrift vault cash
bank deposits
the deposits that individuals or firms have at banks (or thrifts) or that banks have at the Federal Reserve Banks
consumer surplus
the difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of product and its market price; the triangular area below the demand curve and above the market price
government transfer payment
the disbursement of money (or goods and services) by government for which government receives no currently produced good and service in return
in-kind transfer
the distribution by government of goods and services to individuals for which the government receives no currently produced good or service in return; a government transfer payment made in goods and services rather than in money; also called a noncash transfer
face value
the dollar or cents value placed on a U.S. coin or piece of paper money
deductible
the dollar sum of (for example, health care) costs that an insured individual must pay before the insurer beings to pay
personal income (PI)
the earned and unearned income available to resource suppliers and others before the payment of personal taxes
liquidity
the ease with which an asset can be converted quickly into cash with little or no loss of purchasing power (money is said to have perfect __________, whereas other assets have a lesser degree of __________)
multiplier effect
the effect on equilibrium GDP of a change in aggregate expenditures or aggregate demand (caused by a change in the consumption schedule, investment, government expenditures, or net exports)
barter
the exchange of one good or service for another good or service
emigration
the exit (outflow) of residents from a country to reside in foreign countries
brain drains
the exit or emigration of highly educated, highly skilled workers from a country
outpayments
the expenditures of domestic or foreign currency that the individuals, firms, and governments of one nation make to purchase goods and services, for remittances, to pay investment income, and for purchases of foreign assets
personal consumption expenditures (C)
the expenditures of households for durable and nondurable consumer goods and services
balance on good and services
the exports of good and services of a nation less its imports of goods and services in a year
marginal cost (MC)
the extra (additional) cost of producing 1 more unit of output; equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output)
gains from trade
the extra output that trading partners obtain through specialization of production and exchange of goods and services
marginal utility
the extra utility a consumer obtains form the consumption of 1 additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed
post hoc, ergo propter hoc fallacy
the false belief that when one event precedes another, the first event must have caused the second event
fallacy of composition
the false notion that what is true for the individual (or part) is necessarily true for the group (or whole)
National Credit Union Administration (NCUA)
the federally chartered agency that insures deposit liabilities (up to $250,000 per account) in credit unions
Federal Deposit Insurance Corporation (FDIC)
the federally chartered corporation that insures deposit liabilities (up to $250,000 per account) of commercial banks and thrift institutions (excluding credit unions, whose deposits are insured by the National Credit Union Administration)
innovation
the first commercially successful introduction of a new product, the use of a new method of production, or the creation of a new form of business organization
invention
the first discovery of a product or process through the use of imagination, ingenious thinking, and experimentation and the first proof that it will work
international monetary reserves
the foreign currencies and other assets such as gold that a nation can use to settle balance-of-payments deficit
policy economics
the formulation of courses of action to bring about desired economic outcomes or to prevent undesired occurrences
marginal propensity to consume (MPC)
the fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income
marginal propensity to save (MPS)
the fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income
freedom of enterprise
the freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice
freedom of choice
the freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate
natural rate of unemployment
the full-employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation
collective voice
the function a labor union performs for its members as a group when it communicates their problems and grievances to management and presses management for a satisfactory resolution
actual reserves
the funds that a bank has on deposit at the Federal Reserve Bank of its district (plus its vault cash)
capital gain
the gain realized when securities or properties are sold for a price greater than the price paid for them
Okun's law
the generalization that any 1-percentage-point rise in the unemployment rate above the full-employment rate of unemployment is associated with a rise in the negative GDP gap by 2 percent of potential output (potential GDP)
Federal government
the government of the United States, as distinct from the state and local government
modern economic growth
the historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita
competitive industry's short-run supply curve
the horizontal summation of the short-run supply curves of the firms in a purely competitive industry (see pure competition); a curve that shows the total quantities offered for sale at various prices by the firms in an industry in the short run
entrepreneurial ability
the human resource that combines the other resources to produce a product, makes nonroutine decisions, innovates, and bears risks
insider-outsider theory
the hypothesis that nominal wages are inflexible downward because firms are aware that workers ("insiders") who retain employment during recession may refuse to work cooperatively with previously unemployed workers ("outsiders") who offer to work for less than the current wage
legal cartel theory of regulation
the hypothesis that some industries seek regulation or want to maintain regulation so that they may form or maintain a legal cartel
creative destruction
the hypothesis that the creation of new products and productions methods simultaneously destroys the market power of existing monopolies
collective action problem
the idea that getting a group to pursue a common, collective goal gets harder the larger the group's size; larger groups are more costly to organize and their members more difficult to motivate because the larger the group, the smaller each member's share of the benefits if the group succeeds
cyclical asymmetry
the idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy form severe recession
nonrivalry
the idea that one person's benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good
demographic transition
the idea that population growth slows once a developing country achieves higher standards of living because the perceived marginal cost of additional children begins to exceed the perceived marginal benefit
ability-to-pay principle
the idea that those who have greater income (or wealth) should pay a greater proportion of it as taxes than those who have less income
benefits-received principle
the idea that those who receive the benefits of goods and services provided by government should pay the taxes required to finance them
parity concept
the idea that year after year the sale of a specific output of a farm product should enable a farmer to purchase a constant amount of nonagricultural goods and services
inverted-U theory
the idea that, other things equal, R&D expenditures as a percentage of sales rise with industry concentration, reach a peak at a four-firm concentration ratio of about 50 percent, and then fall as the ratio further increases
Coase theorem
the idea, first stated by economist Ronal Coase, that some externalities can be resolved through private negotiations of the affected parties
market failure
the inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do no provide desired public goods
free-rider problem
the inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability
immobility
the inability or unwillingness of a worker to move from one geographic area or occupation to another or from a lower-paying job to a higher-paying job
nonexcludability
the inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a characteristic of a public good
expected rate of return
the increase in profit a firm anticipates it will obtain by purchase capital (or engaging in research and development); expressed as a percentage of the total cost of the investment (of R&D) activity
demand factor (in growth)
the increase in the level of aggregate demand that brings about the economic growth made possible by a increase in the production potential of the economy
incentive function
the inducement that an increase in the price of a commodity gives to sellers to make more of it available (and conversely for a decrease in price), and the inducement that an increase in price offers to buyers to purchase smaller quantities (and conversely for a decrease in price)
immigration
the inflow of people into a country from another county (may either be legal or illegal)
net investment income
the interest and dividend income received by the residents of a nation from residents of other nations less the interest and dividend payments made by the residents of that country to the residents of other nations
Federal funds rate
the interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves
nominal interest rate
the interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation
discount rate
the interest rate that the Federal Reserve Banks charge on the loans they make to commercial banks and thrift institutions
General Agreement on Tariffs and Trade (GATT)
the international agreement reached in 1947 in which 23 nations agreed to give equal and nondiscriminatory treatment to one another, to reduce tariff rates by multinational negotiations, and to eliminate import quotas (it now includes most nations and has become the World Trade Organization)
International Monetary Fund (IMF)
the international association of nations that was formed after the Second World War to make loans of foreign monies to nations with temporary payments deficits and, until the early 1970s, to administer the adjustable pegs (it now mainly makes loans to nations facing possible defaults on private and government loans)
foreign purchase effect
the inverse relationship between the net exports of an economy and its price level relative to foreign price levels
human capital
the knowledge and skills that make a person productive
economic resources
the land, labor, capital, and entrepreneurial ability that that are used in the production of goods and services; productive agents; factors of production
AFL-CIO/ American Federation of Labor-Congress of Industrial Organizations
the largest federation of labor unions in the United States
Doha Development Agenda
the latest, uncompleted (as of mid-2010) sequence of trade negotiations by members of the World Trade Organizations; named after Doha, Qatar, where the set of negotiations began (also called the Doha Round)
occupational licensing
the laws of state or local governments that require that a worker satisfy certain specified requirements and obtain a license from a licensing board before engaging in a particular occupation
optimal amount of R&D
the level of R&D at which the marginal benefit and marginal cost of R&D expenditures are equal
break-even income
the level of disposable income at which households plan to consume (spend) all their income and to save none of it
budget constraint
the limit that the size of a consumer's income (and the prices that must be paid for goods and services) imposes on the ability of that consumer to obtain goods and services
minimum efficient scale (MES)
the lowest level of output at which a firm can minimize long-run average total cost
minimum wage
the lowest wage that employers may legally pay for an hour of work
aggregate demand-aggregate supply (AD-AS) model
the macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output
monetarism
the macroeconomic view that the main cause of changes in aggregate output and price level is fluctuations in the money supply; espoused by advocates of a monetary rule
functional distribution of income
the manner in which national income is divided among the functions performed to earn it (or the kinds of resources provided to earn it); the division of national income into wages and salaries, proprietors' income, corporate profits, interest, and rent
personal distribution of income
the manner in which the economy's personal or disposable income is divided among different income classes or different households or families
money market
the market in which the demand for and the supply of money determine the interest rate (or the level of interest rates) in the economy
intrinsic value
the market value of the metal within a coin
horizontal merger
the merger into a single firm of two firms producing the same product and selling in the same geographic market
conglomerate merger
the merger of a firm in one industry with a firm in another industry (with a firm that is not a supplier, customer, or competitor)
expenditures approach
the method that adds all expenditures made for final goods and services to measure the gross domestic product
income approach
the method that adds all the income generated by the production of final goods and services to measure the gross domestic product
grievance procedure
the method used by a labor union and a firm to settle disputes that arise during that life of the collective bargaining agreement between them
corruption
the misuse of government power, with which one has been entrusted or assigned, to obtain private gain; includes payments from individuals or companies to secure advantages in obtaining government contracts, avoiding government regulations, or obtaining inside knowledge about forthcoming policy changes
implicit cost
the monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profits
explicit cost
the monetary payment a firm must make to an outsider to obtain a resource
earnings
the money income received by a worker; equal to the wage (rate) multiplied by the amount of time worked
M1
the most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions
monetary multiplier
the multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans (or buying securities); equal to 1 divided by the reserve requirement
collective bargaining
the negotiation of labor contracts between labor unions and firms or government entities
balance-of-payments surplus
the net amount of official reserves (mainly foreign currencies) that a nation's treasury or central bank must buy to achieve balance between that nation's capital and financial account and its current accounts (in its balance of payments)
balance-of-payments
the net amount of official reserves (mainly foreign currencies) that a nation's treasury or central bank must sell to achieve balance between that nation's capital and financial account and its current account
potential competition
the new competitors that may be induced to enter an industry if firms now in that industry are receiving large economic
elasticity coefficient
the number obtained when the percentage change in quantity demanded (or supplied) is divided by the percentage change in the price of the commodity
nominal income
the number of dollars received by an individual or group for its resources during some period of time
industrial regulation
the older and more traditional type of regulation in which government is concerned witht he prices charged and the services provided to the public in specific industries, in contrast to social regulation
microeconomics
the part of economics concerned with decision making by individual units such as a household, a firm, or an industry and with individual markets, specific goods and services, and product and resource prices
macroeconomics
the part of economics concerned with the economy as a whole; with such major aggregates as the household, business, and government sectors; and with measures of the total economy
normative economics
the part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics
normal profit
the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm
market portfolio
the portfolio consisting of every financial asset (including every stock and bond) traded in the financial markets; the _____________ is used to calculate beta (a measure of the degree of riskiness) for specific stocks, bonds, and mutual funds
Medicare Part D
the portion of Medicare that enables enrollees to shop among private health insurance companies to buy highly subsidized insurance to help reduce the out-of-pocket expense of prescription drugs
agribusiness
the portion of the agricultural and food product industries that is dominated by large corporations
external public debt
the portion of the public debt owed to foreign citizens, firms, and institutions
moral hazard problem
the possibility that individuals or institutions will change their behavior as the result of a contract or agreement (ex. a bank whose deposits are insured against losses may make riskier loans and investments)
imitation problem
the potential for a firm's rivals to produce a close variation of (imitate) a firm's new product or process, greatly reducing the originator's profit from R&D and innovation
inclusive unionism
the practice of a labor union of including as members all workers employed in an industry
exclusive unionism
the practice of a labor union of restricting the supply of skilled union labor to increase the wages received by union members; the policies typically employed by a craft union
discrimination
the practice of according individuals or groups inferior treatment in hiring, occupational access, education and training, promotion, wage rates, or working conditions even though they have the same abilities, education, skills, and work experience as other workers
offshoring
the practice of shifting work previously done by American workers to workers located abroad
competition
the presence in a market of independent buyers and sellers competing with one another along with the freedom of buyers and sellers to enter and leave the market
long-run competitive equilibrium
the price at which firms in pure competition neither obtain economic profit nor suffer economic losses in the long run and in which the total quantity demanded and supplied are equal; a price equal to the marginal cost and the minimum long-run average total cost of producing the product
equilibrium price
the price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor surplus, and there is no tendency for price to rise or fall
equilibrium price level
the price level at which the aggregate demand curve intersects the aggregate supply curve
domestic price
the price of a good or service within a country, determined by domestic demand and supply
fair-return price
the price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it
equilibrium world price
the price of an internationally traded product that equates the quantity of the product demanded by importers with the quantity of the product supplied by exporters; the price determined at the intersection of the export supply curve and the import demand curve
economic rent
the price paid for the use of land and other natural resources, the supply of which is fixed (perfectly inelastic)
international value of the dollar
the price that must be paid in foreign currency to obtain one U.S. dollar
MR = MC rule
the principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost
P = MC rule
the principle that a purely competitive firm will maximize its profit or minimize its loss by producing that output at which the price of the product is equal to marginal cost, provided that price is equal to or greater than average variable cost in the short run and equal to or greater than average total cost in the long run
law of diminishing marginal utility
the principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decrease
law of diminishing returns
the principle that as successive increments of a variable resource of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease
law of increasing opportunity costs
the principle that as the production of a good increases, the opportunity cost of producing an addition unit rises
MRP = MRC rule
the principle that to maximize profit (or minimize losses), a firm should employ the quantity of a resource at which its marginal revenue product (MRP) is equal to its marginal resource cost (MRC), the latter being the wage rate in a purely competitive labor market
law of demand
the principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price
law of supply
the principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease
average expected rate of return
the probability-weighted average of an investment's possible future returns
check clearing
the process by which funds are transferred from the checking accounts of the writers of checks to the checking accounts of the recipients of the checks
domestic capital formation
the process of adding to a nation's stock of capital by saving and investing part of its own domestic output
price elasticity of supply
the ratio of the percentage change in quantity supplied of a product or resource to the percentage change in its price; a measure of the responsiveness of producers to a change in the price of a product or resource
income elasticity of demand
the ratio of the percentage change in the quantity demanded of a good to a percentage change in consumer income ; measures the responsiveness of consumer purchases to income changes
parity ratio
the ratio of the price received by farmers from the sale of an agricultural commodity to the prices of other goods paid by them; usually expressed as a percentage; used as a rationale for price supports
potential output
the real output (GDP) an economy can produce when it fully employs its available resources
inpayments
the receipts of domestic or foreign money that individuals, firms, and governments of one nation obtain from the sale of goods and services abroad, as investment income and remittances, and from foreign purchases of domestic assets
defensive medicine
the recommendation by physicians of more tests and procedures than are warranted medically or economically as a way of protecting themselves against latter malpractice suits
optimal reduction of an externality
the reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal
inverse relationship
the relationship between two variables that change in opposite directions, for example, product price and quantity demanded; a negative relationship
direct relationship
the relationship between two variables that change in the same direction, for example, product price and quantity supplied; positive relationship
menu costs
the reluctance of firms to cut prices during recessions (that they think will be short-lived) because of the costs of altering and communicating their price reductions; named after the cost associated with printed new menus at restaurants
personal mandate
the requirement under the Patient Protection and Affordable Care Act (PPACA) of 2010 that all U.S. citizens and legal residents purchase health insurance unless they are already covered by employer-sponsored health insurance or government-sponsored health insurance (Medicaid or Medicare)
employer mandate
the requirement under the Patient Protection and Affordable Care Act (PPACA) of 2010 that firms with 50 or more employees pay for insurance policies for their employees or face a fine of $2000 per employee per year (firms with fewer than 50 employees are exempt)
backflows
the return of workers to the countries from which they originally emigrated
fringe benefits
the rewards other than wages that employees receive from their employers and that include pensions, medical and dental insurance, paid vacations, and sick leaves
monetary rule
the rule suggested by monetarism (as traditionally formulated, the rule says that the money supply should be expanded each year at the same annual rate as the potential rate of growth of the real gross domestic product; the supply of money should be increased steadily between 3 and 5 percent per year) (Also see Taylor rule)
dumping
the sale of a product in a foreign country at prices either below cost or below the prices commonly charged at home
current account
the section in a nation's international balance of payments that records its exports and imports of goods and services, its net investment income, and its net transfers
capital and financial account
the section of the nation's international balance of payments that records (1) debt forgiveness by and to foreigners and (2) foreign purchases of assets in the United States and U.S. purchases of assets abroad
paradox of thrift
the seemingly self-contradictory but nevertheless true statement that increased saving can be both good and bad for the economy (it is good in the long run when matched with increased investment spending, but bad during a recession because it reduces spending, which further reduces output and employment; in fact, attempts by households to save more during a recession may simply worsen the recession and result in less saving)
price discrimination
the selling of a product to different buyers at different prices when the price differences are not justified by differences in cost
division of labor
the separation of labor required to produce a product into a number of different tasks that are performed by difference workers; specialization of workers
Board of Governors
the seven-member group that supervises and controls the money and banking system of the United States; the ____________ of the Federal Reserve System; the Federal Reserve Board
output effect
the situation in which an increase in the price of one input will increase a firm's production costs and reduce its level of output, thus reducing the demand for other imputs; conversely for a decrease in the price of the input
economics
the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity
diffusion
the spread of innovation through its widespread imitation
diversification
the strategy of investing in a large number of investments in order to reduce the overall risk to an entire investment portfolio
balance on capital and financial account
the sum of the capital account balance and the financial account balance
individual supply
the supply schedule or supply curve of a single buyer
marginal tax rate
the tax rate paid on an additional dollar of income
net taxes
the taxes collected by government less government transfer payments
new classical economics
the theory that, although unanticipated price-level changes may create macroeconomic instability in the short run, the economy is stable at the full-employment level of domestic output in the long run because prices and wages adjust automatically to correct movement away from the full employment, noninflationary output
aggregate expenditures
the total amount spent for final goods and services in an economy
net worth
the total assets less the total liabilities of a firm or an individual; for a firm, the claims of the owners against the firm's total assets; for an individual, his or her wealth
capital stock
the total available capital in a nation
net benefits
the total benefits of some activity or policy less the total cost of that activity or policy
gross domestic product (GDP)
the total market value of all final goods and services produced annually within the boundaries of the United States, whether by U.S.- or foreign-supplied resour
average product (AP)
the total output produced per unit of a resource employed (total product divided by the quantity of that employed resource)
accounting profit
the total revenue of a firm less its explicit costs; the profit (or net income) that appears on accounting statements and that is reported to the government for tax purposes
dilemma of regulation
the tradeoff faced by a regulatory agency in setting the maximum legal price a monopolist may charge: the socially optimal price is below average total cost (and either bankrupts the firm or requires that it be subsidized), while the higher, fair-return price does not produce allocative efficiency
logrolling
the trading of votes by legislators to secure favorable outcomes on decisions concerning the provision of public goods and quasi-public goods
capital flight
the transfer of savings from developing countries to industrially advanced countries to avoid government expropriation, taxation, higher rates of inflation, or simply to realize greater returns on financial investments
core inflation
the underlying increases in the price level after volatile food and energy prices and removed
full-employment rate of unemployment
the unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 4 or 5 percent in the United States because some frictional and structural unemployment is unavoidable
income inequality
the unequal distribution of an economy's total income among households or families
political corruption
the unlawful misdirection of governmental resources or actions that occurs when government officials abuse their entrusted powers for personal gain
demand management
the use of fiscal policy and monetary policy to increase or decrease aggregate demand
antitrust policy
the use of the antitrust laws to promotes competition and economic efficiency
economic efficiency
the use of the minimum necessary resources to obtain the socially optimal amounts of goods and services; entails both productive efficiency and allocative efficiency
nonmarket transactions
the value of the goods and services that are not included in the GDP because they are not bought and sold
independent variable
the variable causing a change in some other (dependent) variable
capricious-universe view
the view held by some people that fate and outside events, rather than hard work and enterprise, will determine their economic destinies
price level
the weighted average of the prices of all the final goods and services produced in an economy
base year
the year with which other years are compared when an index is constructed; for example, the base year for a price index
nonrenewable natural resource
things such as oil, natural gas, and metals, which are either in actual fixed supply or which renews so slowly as to be in virtual fixed supply when viewed from a human time perspective
present value
today's value of some amount of money that is to be received sometime in the future
national income
total income earned by resource suppliers for their contributions to GDP plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors' income, and such taxes
labor productivity
total output divided by the quantity of labor employed to product it; the average product of labor or output per hour of work
average revenue
total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price
average tax rate
total tax paid divided by total taxable income or some other base (such as total income) against which to compare the amount of tax paid (expressed as a percentage)
constant returns to scale
unchanging average total cost of producing a product as the firm expands the size of its plant (its output) in the long run
demand-side market failures
underallocations of resources that occur when private demand curves understate consumers' full willingness to pay for a good or service
compensation to employees
wages and salaries plus wage and salary supplements paid by employers to workers