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| A | B | C | D | E | F | G | H | I | J | K |
| L | M | N | O | P | Q | R | S | T | U | W |
A
Absolute advantage
The ability to produce something in greater quantity than someone else.
Accounting profit
Total revenue minus explicit costs.
Administered rates
Interest rates that the Fed sets by direct policy action.
Aggregate demand–aggregate supply (AD–AS) model
A model of the entire economy, using an aggregate demand curve and short- and long run aggregate supply curves.
Aggregate demand
Demand for the sum total of all goods and services produced and purchased in an economy.
Aggregate supply
The total supply of goods and services in an economy.
Ample reserves
A banking environment in which, because of the size of the money supply, banks routinely hold excess reserves, above the required minimum.
Autarky
An economy that is entirely self-sufficient and therefore imports nothing.
Automatic stabilizers
Policies and programs that dampen swings in the GDP growth rate automatically, without policymakers’ involvement.
Average fixed cost (AFC)
Total fixed costs (TFC) divided by quantity made and sold.
Average revenue (AR)
Total revenue divided by quantity sold. In a competitive market, AR equals price.
Average total cost (AVC)
Total cost (TC) divided by quantity made and sold.
Average variable cost (AVC)
Total variable costs (TVC) divided by quantity made and sold.
B
Balanced budget
A budget in which revenue is at least equal to expenses.
Bank run
An event in which a cascade of panicked withdrawal requests causes the bank to run out of money.
Barter
The direct exchange of goods in a negotiated ratio.
Binding
A price floor above the equilibrium price, or a price ceiling below the equilibrium price. A binding price floor causes a surplus; a binding price ceiling causes a shortage.
Bond
A security that represents a loan to the bond issuer by the bond buyer.
Budget deficit
Government spending that exceeds government revenue.
Budget surplus
Government revenue that exceeds government spending.
Budget
A limit on the combinations of goods that can be purchased given a fixed amount of money to work with.
Business cycle
The ups and downs of the GDP growth rate.
C
Cap-and-trade
An arrangement in which firms can buy and sell permits that grant the right to emit a certain amount of pollution.
Capital investment
Any spending on future productive capacity.
Capital investment
Expenditures on all things that will be used to produce goods and services for sale in the future. It includes spending on everything from land, buildings, and machinery to inventory, to worker education.
Capital investment
Spending on anything that will enable or increase future production of goods or services.
Cash assistance
Cash provided to households with very low incomes.
Ceteris paribus
A Latin expression meaning “All else being equal.”
Circular flow model
A model of the economy in which firms and households meet in product and labor markets, with labor and products flowing in one direction while the funds that pay for them circulate in the opposite direction.
Coase theorem
A theorem according to which when certain conditions apply, bargaining between private parties is an efficient solution to the problem of negative externalities.
Collective bargaining
Bargaining with a firm in which workers act together instead of as individuals.
Commodity money
A good that has intrinsic value, used as money.
Commodity-backed money
Inherently worthless money that serves as a convenient stand-in for a commodity.
Common good
A good that is rival and nonexcludable.
Comparative advantage
The ability to produce something at a lower opportunity cost than someone else.
Compensating differential
Extra wages earned to compensate dangerous or unpleasant working conditions.
Competitive market
A market with many small buyers and sellers, similar products, and easy entry and exit.
Complements
Goods that by nature tend to be used together: nuts and bolts, for example.
Consumer price index (CPI)
A cost-of-living indicator that measures the total cost of goods and services purchased by a typical consumer within a country.
Consumer surplus
The total benefit consumers in a market gain through trade, measured as the total difference between the prices paid and the prices consumers would have been willing to pay.
Consumer
An individual or household that buys products from firms.
Contractionary fiscal policy
The use of fiscal policy to decrease the amount of money available to the populace.
Cost-benefit analysis
A careful weighing of the costs and payoffs of different choice options.
Countercyclical fiscal policy
The use of fiscal policy to moderate the economy’s downturns and growth surges.
Crowding out
The tendency of government spending to reduce private investment. because government spending tends to replace, or crowd out, private investment.
Cyclical unemployment
Unemployment attributable to changes in output due to the cycles of the economy.
D
Deadweight loss
A reduction in total surplus caused by an external intervention in the market (such as taxation).
Demand curve
A curve that describes demand by indicating the quantity demanded at every price.
Demand
The buying behavior of one or more households.
Depression
A severe and prolonged recession.
Direct finance
An arrangement in which savers supply money to borrowers directly, without a financial intermediary.
Discount rate
The administered rate the Federal Reserve offers banks as a lender of last resort.
Discretionary spending
Government spending that can be adjusted, year by year, based on policy priorities and on how much money is available.
Dividend payments
Periodic payments sometimes made to the holder of a stock, as a share of corporate profits.
Dominant strategy
A strategy that is optimal no matter what other players choose to do.
Dual mandate
The Federal Reserve’s mission of fighting both unemployment and inflation.
Duopoly
An oligopoly with just two sellers.
E
Economic profit
Total revenue minus total costs.
Economics
The study of how societies cope with everyday scarcity.
Economies of scale
A decline in average total cost as production volume increases.
Elastic
Demand or supply that is highly responsive to changes in price (or income, or another parameter). A highly elastic curve is nearly horizontal at the point where elasticity is being evaluated.
Elasticity
The degree of responsiveness of the quantity demanded or supplied to changes in price (or income, or another parameter). The formula for elasticity is percent change in quantity divided by percent change in price.
Equilibrium price
The price of a good or service at which quantity supplied is equal to quantity demanded, with no surplus or shortage. Also called the market-clearing price.
Equilibrium quantity
The volume of goods or services traded in market equilibrium.
Equilibrium
A stable point at which a person stops changing their mind or a market settles into a steady price and quantity.
Equity
The fairness of an economic outcome.
Exchange rate
The rate at which one currency can be exchanged for another.
Expansion
A period of economic (GDP) growth.
Expansionary fiscal policy
The use of fiscal policy to increase the amount of money available to the populace.
Expenditure approach
The calculation of GDP by adding up amounts of money spent in various categories.
Explicit costs
Out-of-pocket costs that would be recorded by a bookkeeper.
Externality
The effect of economic activity on who is not involved in the activity.
F
Face value
What a loan is worth on the maturity date, because that is the loan amount that will be repaid to the bond holder.
Factors of production
Land, labor and capital used to produce goods or services.
Federal funds rate
The interest rate at which banks in the United States borrow money from each other and from certain other entities for short periods.
Federal Reserve System
The central bank of the United States, an arm of the government.
Fiat money
Inherently worthless money with no legal link to a commodity.
Final goods and services
Goods and services purchased by consumers, rather than being used in the production of something else.
Financial intermediary
A go-between connecting savers and borrowers.
Firm
A corporation that hires labor and produces goods and services.
Fiscal policy
The use of tax and spending practices to influence the macroeconomy.
Fisher equation
The equation real interest rate = nominal interest rate – inflation rate.
Foreign investment
The purchase by foreign entities either of domestic capital or of debt issued either by the government or by domestic firms.
Free-rider problem
The problem of how to fund a public good when people can avoid paying to use it.
Frictional unemployment
Unemployment due to people being in a brief transition between jobs.
Full employment
The state of the economy when unemployment is as low as it sustainably can be.
G
GDP deflator
A measure of the price level, an alternative to the CPI.
GDP per capita
GDP divided by the size of the population.
Gini coefficient
A numerical representation of income inequality, derived from the Lorenz curve.
Government spending multiplier
If MPC is the marginal propensity to consume, the government spending multiplier is \(1 / (1-MPC)\). It indicates the effect of a change in government spending on consumer spending.
Gross Domestic Product (GDP)
The sum of the market values of all final goods and services produced in an economy in a stated period of time (normally a year).
Gross National Product (GNP)
The sum value of all goods and services produced by citizens of a country, regardless of their location.
H
Horizontal addition
The process of adding together all quantities demanded (or supplied) at each price to find market demand (or supply).
Household
A small group of individuals that can be treated as a single economic unit. Households supply labor and consume goods and services.
Housing subsidies
Money given to the poor for obtaining adequate housing.
Human capital
Workers, considered as a production input.
I
Implicit costs
Another name for opportunity costs.
In collusion
Quietly agreeing among themselves to keep prices high. Such behavior is generally a violation of antitrust laws and can cause firms to be subject to legal prosecution.
In-kind transfers
Essential goods (or coupons for essential goods) provided to the poor.
Incentive
A cost or benefit created by an institution to influence the choices people and firms make
Income approach
The calculation of GDP by adding up amounts of money received by households and other kinds of income-earners.
Income distribution
The way income is dealt out among members of a society.
Income effect
The impact of a price change on one’s overall purchasing power.
Indifference curve
A curve representing all the different combinations of two goods that generate the same level of utility.
Indirect finance
An arrangement in which savers supply money to borrowers via a financial intermediary.
Inelastic
Demand or supply that is minimally responsive to changes in price (or income, or another parameter. A highly inelastic curve is nearly vertical at the point where elasticity is evaluated.
Inferior good
A good that is purchased in lesser quantity when the buyer’s income goes up and in greater quantity when the buyer’s income goes down, because is a cheaper, less desirable substitute for another good.
Inflation rate
The annual change in the price level, expresses as a percent
Inflation
A change in the cost of living due to a rise in the prices of common goods and services.
Infrastructure
Network-like physical capital, such as such as transportation networks (highways, rail networks, canals) and communication networks (fiber optic cabling, cellular towers).
Institution
Any cultural practices, or formal or informal organization, that determines the conditions under which people interact.
Interest on debt
The interest the government pays on the bonds that constitute its outstanding debt.
Interest on Reserve Balances (IORB) rate
The rate of interest the Federal Reserve pays banks for reserves on deposit with the Fed.
Interest rate
The percent interest charged on a loan per year.
Interest
The price paid for a loan, on top of the repayment of the loan amount.
Intermediate goods and services
Goods and services purchased by producers, in order to produce something else.
Internalize
To turn a former externality into a cost or benefit experienced by one of the acting parties. An example would be taxing pollution emissions.
J
Joint production possibilities frontier
A production possibilities frontier for two or more people working together and taking advantage of specialization.
K
Keynesian economics
A pro-interventionist approach to keeping the economy on a steady course.
L
Labor force
Persons who are of working age and either working or are actively seeking work.
Labor union
A collective of workers who rally together to argue for better compensation and working conditions.
Laissez-faire economics
An anti-interventionist approach to keeping the economy on a steady course.
Law of diminishing returns
The principle that the marginal revenue product (MRP) of labor goes down as the amount of labor (hours or workers) goes up.
Law of increasing opportunity cost
The rule that production possibilities frontiers curve, in such a way that the opportunity cost of producing something increases as the quantity produced goes up.
Limited reserves
A banking environment in which the size of the money supply enables banks to maintain necessary reserves, but only through careful monitoring of their reserves and frequent borrowing from other institutions.
Liquid
Money that is ready accessible. Physical cash in one’s possession is the most liquid form of money.
Loanable funds market
The market for money where borrowers and lenders come together.
Lorenz curve
A graphical representation of income distribution.
M
M2 money supply
A measure of the money supply that includes all notes (bills) and coins in the physical possession of firms or households, all savings and checking account balances, and certain other highly liquid holdings.
Macroeconomics
The study of the functioning of an entire regional or national economy as a whole.
Mandatory spending
Government spending that is fixed by law and not easily adjusted, because it goes to people who are legally entitled to the money.
Marginal benefit
The benefit of a small change.
Marginal cost (MC)
The extra cost generated by making and selling one additional unit.
Marginal cost
The cost of a small change.
Marginal product (MP)
The increase in production output quantity that would be achieved by adding one more unit of an input resource. In the case of the marginal product of labor, this is the production increase by adding one more hour, or one more worker, depending on context.
Marginal propensity to consume
The amount of an additional dollar of income that a consumer will spend on goods and services. It can have a value between 0 and 1.
Marginal revenue (MR)
The additional revenue generated by selling one more unit. In a competitive market, MR equals price.
Marginal revenue product (MRP)
The increase in revenue that would be achieved by adding one more unit of an input resource. In a competitive market, MRP equals MP times the price of the output.
Marginal tax rate
The rate paid on the last dollar earned.
Marginally attached workers
People who would like to work but after weeks of unsuccessful job-hunting have stopped actively seeking employment. Formerly known as discouraged workers.
Market demand
The combined demand of all buyers in a market.
Market equilibrium
A stable market condition in which quantity supplied equals quantity demanded.
Market power
The ability to act as a price maker.
Market supply
The combined supply of all sellers in a market.
Market
An environment in which trade takes place.
Maturity date
The date on which a bond is repayable.
Medium of exchange
Something whose acceptance as payment for goods and services is standardized.
Menu costs
A cost imposed on businesses by inflation, in the form of more-frequent adjustments to published prices.
Microeconomics
The study of the economic behavior of individuals and firms, and of the functioning of markets for a small number of goods.
Model
A simplified, well-understood representation of a complicated and poorly understood reality.
Monetary base
All bills and coins in circulation.
Monetary policy
Policy action that influences the macroeconomy by increasing or decreasing the freedom with which money flows through the economy.
Money multiplier
If the reserve ratio is rr, the money multiplier is 1/rr. This is the number that, multiplied by the monetary base, gives the size of the money supply after the banks are done lending and re-lending.
Money supply
The amount of money in circulation.
Monopolist
The sole seller in a monopoly market.
Monopolistic competition
A market structure with many sellers and fairly easy market entry and exit, but with limited substitutability of products.
Monopoly
A market with one seller, no close substitutes to the output good, and no threat of competition.
Monopsony
A market where there are many sellers but just one buyer. A labor market is a monopsony if there are many workers and just one employer.
N
Natural rate of unemployment
The rate of unemployment that corresponds to full employment, likely in the range of 4 to 6 percent.
Negative externality
A harmful externality.
Network externality
A benefit enjoyed by users of a shared technology, a benefit that increases as other users adopt the same technology.
Nominal GDP per capita
GDP per capita at current prices.
Nominal GDP
The sum value of all produced goods and services at current prices.
Nominal interest rate
The stated interest rate of a loan.
Nonbinding
A price floor or ceiling that does not affect the market. A nonbinding floor is below the equilibrium price; a nonbinding ceiling is above it.
Nonexcludable good
A good with no mechanism in place to restrict people’s use of it.
Nonmarket activity
Economic activity where no money changes hands.
Nonrival
A good that does not becomes degraded or depleted through overuse.
Normal good
A good that is purchased in greater quantity when the buyer’s income goes up and in lesser quantity when the buyer’s income goes down.
Normative analysis
The effort to arrive at evaluation or prescriptive assessment, judging that something should or should not happen, or should or should not have happened.
O
Oligopoly
A market with just a few sellers, and fairly difficult market entry and exit.
Open market operations
The Fed’s buying or selling of Treasury bonds in order to add money to the money supply or to draw money out of it.
Opportunity cost
The payoff that is not obtained when an opportunity is passed up.
Overnight Reserve Repurchase (ON RRP) rate
The rate of interest the Federal Reserve pays certain non-bank institutions for reserves on deposit with the Fed. This rate is slightly lower than the IORB rate.
P
Par value
Another term for face value.
Payoff
The benefit obtained from an economic decision.
Phillips curve
A curve showing the inverse relationship between unemployment and inflation.
Physical capital
Physical assets used in production, such as production facilities and production equipment, transportation equipment, and infrastructure.
Pigouvian subsidy
Money paid to someone in proportion to the positive externality associated with their behavior, in order to encourage the behavior.
Pigouvian tax
Money paid to someone in proportion to the negative externality associated with their behavior, in order to discourage the behavior.
Positive analysis
The effort to describe, in a factual, non-judgmental way, how things are, or were, or will be.
Positive externality
A beneficial externality.
Price ceiling
A legally mandated upper limit on the price of a good or service.
Price discrimination
Arranging to sell the same product to different buyers at different prices. This requires at least some degree of market power.
Price floor
A legally mandated lower limit on the price of a good or service. A minimum wage is a price floor on wages.
Price level
The price of things in general, as measured by the CPI or some other cost-of-living indicator.
Price maker
A seller that exerts control over the market price.
Price taker
A seller that has to accept the market price as a given.
Principal
During the life of a loan, the portion still owed of the original amount borrowed.
Prisoner’s dilemma
A game structure in which each player maximizing their own payoff leads to an outcome in which everyone is worse off.
Producer surplus
The total benefit producers in a market gain through trade, measured as the total difference between the prices received and the prices producers would have been willing to accept.
Producer
A firm that makes and sells goods or services.
Product differentiation
The practice by which one seller makes its product different enough from another product so that the two are not easy substitutes.
Production inputs
Another term for factors of production.
Production possibilities frontier (PPF)
A boundary representing different combinations of goods that could be produced with optimal use of all available resources.
Progressive taxation
A taxation scheme that taxes high-income earners at higher percentage rates than low-income earners.
Protectionism
Government intervention in international trade, on behalf of domestic industries.
Public good
A good that is nonrival and nonexcludable.
Purchasing power parity (PPP)
The principle that a currency should not should not gain or lose purchasing power through conversion into another currency.
Purchasing power
One’s general ability to buy things. It is determined by one’s income and how much things cost.
Q
Quantity demanded
The number of units demanded at a given price.
Quantity supplied
The number of units supplied at a given price.
Quota
A government-imposed limit on how much of a particular good may be imported.
R
Real GDP per capita
GDP per capita adjusted for inflation.
Real GDP
The sum value of all produced goods and services, adjusted for inflation.
Real interest rate
The true cost of a loan, after the nominal rate is adjusted for inflation.
Recession
A period of economic (GDP) decline.
Reserve ratio
The fraction of deposits that banks keep on reserve and do not lend out.
Reserve requirement
The legally required minimum reserve ratio. In the United States, the reserve requirement was eliminated in 2020.
Return
The profit a stock- or bond owner earns by holding the security and then selling it (or by holding the bond to maturity).
Ricardian view
The view that government budget deficits are not a serious problem, because the public makes appropriate adjustment in its saving habits.
Rival good
A good that becomes degraded or depleted if too many people use it.
S
Saving
Keeping money on reserve (and lending it out for investment) rather than spending it on consumption.
Savings rate
In a country, the fraction of household income that is saved, not spent on consumption.
Scarcity
The condition of being in short supply, relative to people’s needs and wants.
Secondary market
The market in bonds, where bonds already purchased once can be sold again.
Securities
Tradeable financial assets such as stocks and bonds.
Shoe leather costs
A cost imposed on households by inflation, in the form of everyday inconveniences, such as extra trips to the bank.
Shortage
A market condition in which quantity demanded is greater than quantity supplied.
Specialization
Focusing on one production task out of several one could do, instead of trying to do them all.
Stagflation
The combination of high inflation and high unemployment.
Stocks
An ownership share in the firm that issues the stock.
Store of value
Any means of preserving economic value over time, to use in future consumption instead of present consumption.
Strike
A deliberate work stoppage intended to put pressure on a firm to meet a union’s demands.
Structural unemployment
Unemployment caused by structural changes in the economy, as a result of which certain skills are less in demand.
Subsidies
Grants given to domestic producers to help them develop and compete with foreign producers.
Substitutes
Goods that by nature are interchangeable. Different brands of peanut butter, for example.
Substitution bias
The failure of the CPI to account for consumers’ tendency to substitute away from products whose prices have risen more, toward products whose prices have risen less.
Substitution effect
The impact of a change in the price of one good on one’s demand for other goods.
Supply curve
A curve that describes supply by indicating the quantity supplied at every price.
Supply shocks
Sudden shifts in supply that knock the economy out of long run equilibrium.
Supply
The selling behavior of one or more firms.
Surplus
A market condition in which quantity demanded is less than quantity supplied.
T
Target range
A narrow range of rates. The Federal Reserve conducts monetary policy by setting a target range for the Federal Funds rate.
Tariffs
Taxes paid on imported goods by the importers.
Tax bracket
An income range that corresponds to a tax rate.
Tax multiplier
If MPC is the marginal propensity to consume, the tax multiplier is −MPC/(1 − MPC). It indicates the effect of a change in taxes on consumer spending.
Technological advances
New technology.
Technology.
Knowledge that can be used to improve manufacturing techniques.
Total costs (TC)
Explicit costs plus implicit costs. Also, total variable costs (TVC) plus total fixed costs (TFC).
Total fixed costs (TVC)
The sum of all costs that do not depend on how much or how little a firm produces.
Total revenue (TR)
The total amount of money a firm takes in. In a competitive market where price is unaffected by the quantity a firm sells, TR equals price times quantity sold.
Total surplus
The sum of consumer surplus and producer surplus. Also known as the social welfare achieved through trade.
Total variable costs (TVC)
The sum of all costs that vary with the amount of output a firm makes and sells.
Trade deficit
Exports that exceed imports.
Trade surplus
Exports that exceed imports.
Trade-off
Another term for opportunity cost.
Trade
A voluntary exchange of products. Trade normally benefits both parties.
Tragedy of the commons
The ruin of a common pasture through overgrazing, because there is no mechanism to restrain use.
Treasury bond
A bond issued by the U.S. government.
U
Underemployed
Persons who want full-time work but have only found part-time work.
Underground economy
Economic activity where money changes hands, but for various reasons the activity is not reported.
Unemployment benefits
Cash given to workers who are unable to find jobs.
Unemployment rate
The percentage of the labor force that are not employed.
Unintended consequence
An untended incentive that may encourage behavior which is very different from the desired behavior.
Unit of account
The common base of comparison that people use to present prices and record debts.
Utility
The level of happiness or satisfaction someone experiences from consuming goods and services. More utility equals greater satisfaction.
W
Wage discrimination
A difference in pay based on an irrelevant group characteristic such as gender or race.
Wage
The unit price of labor. It may be an hourly wage or an annual salary.
