accounting profit

total revenues minus explicit costs, including depreciation


when one firm purchases another

actual rate of return

the total rate of return, including capital gains and interest paid on an investment at the end of a period of time

adjustable-rate mortgage

a loan a borrower uses to purchase a home in which the interest rate varies with market interest rates

adverse selection

when groups with inherently higher risks than the average person seek out insurance, thus straining the insurance system

adverse selection of wage cuts argument

if employers reduce wages for all workers, the best will leave

affirmative action

active efforts by government or businesses that give special rights to minorities in hiring, promotion, or access to education to make up for past discrimination

aggregate demand

the amount of total spending on domestic goods and services in an economy

aggregate demand (AD) curve

the total spending on domestic goods and services at each price level

aggregate production function

the process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into output measured as GDP per capita

aggregate supply

the total quantity of output (i.e. real GDP) firms will produce and sell

allocative efficiency

producing the optimal quantity of some output; the quantity where the marginal benefit to society of one more unit just equals the marginal cost

antitrust laws

laws that give government the power to block certain mergers, and even in some cases to break up large firms into smaller ones


something of value that you own with an expectation that it will produce income for you in the future

asset-liability time mismatch

customers can withdraw a bank’s liabilities in the short term while customers repay its assets in the long term

asymmetric information

a situation where the seller or the buyer has more information than the other regarding the quality of the item being sold

automatic stabilizers

tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation

autonomous consumption

the amount of aggregate consumption expenditure that would occur even if income dropped to zero

average profit

profit divided by the quantity of output produced; profit margin

Average total cost

total cost divided by the quantity of output

Average variable cost

variable cost divided by the quantity of output

backward-bending supply curve for labor

the situation when high-wage people can earn so much that they respond to a still-higher wage by working fewer hours

balance sheet

an accounting tool that lists assets and liabilities

balanced budget

when government spending and taxes are equal

bank run

when depositors race to the bank to withdraw their deposits for fear that otherwise they would be lost

barriers to entry

the legal, technological, or market forces that may discourage or prevent potential competitors from entering a market


trading one good or service for another, without using money

base year

arbitrary year whose value as an index number economists define as 100; inflation from the base year to other years can easily be seen by comparing the index number in the other year to the index number in the base year—for example, 100; so, if the index number for a year is 105, then there has been exactly 5% inflation between that year and the base year

basket of goods and services

a hypothetical group of different items, with specified quantities of each one meant to represent a "typical" set of consumer purchases, used as a basis for calculating how the price level changes over time

behavioral economics

a branch of orthodox economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation


the full spectrum of animal and plant genetic material


a financial contract through which a borrower like a corporation, a city or state, or the federal government agrees to repay the amount that was borrowed and also a rate of interest over a period of time in the future

bond yield

the rate of return a bond is expected to pay at the time of purchase


someone who owns bonds and receives the interest payments

budget constraint

all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set

budget constraint line

shows the possible combinations of two goods that are affordable given a consumer’s limited income

budget deficit

when the federal government spends more money than it receives in taxes in a given year

budget surplus

when the government receives more money in taxes than it spends in a year


a situation in which multiple products are sold as one

business cycle

the economy's relatively short-term movement in and out of recession

business models

a particular way of organizing a business including strategies for making money in a market (or several markets)


the availability of functionings coupled with the ability of the individual to achieve a combination of functionings

capital deepening

an increase by society in the average level of physical and/or human capital per person

capital gain

a financial gain from buying an asset, like a share of stock or a house, and later selling it at a higher price

cardinal utility

the idea that the utility a consumer assigns to a product is objective and, therefore, quantifiably measurable


a group of firms that collude to produce the monopoly output and sell at the monopoly price

central bank

institution which conducts a nation’s monetary policy and regulates its banking system

certificate of deposit

a mechanism for a saver to deposit funds at a bank and promise to leave them at the bank for a time, in exchange for a higher rate of interest

ceteris paribus

other things being equal


the belief that the value of money derives, not from the intrinsic value of the commodity, but from its general acceptability for payments and the ability of the state to create demand for it through taxation

checking account

a bank account that typically pays little or no interest, but that gives easy access to money, either by writing a check or by using a “debit card”

circular flow diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

coins and currency in circulation

the coins and bills that circulate in an economy that are not held by the U.S Treasury, at the Federal Reserve Bank, or in bank vaults


when an insurance policyholder pays a percentage of a loss, and the insurance company pays the remaining cost


something valuable—often property or equipment—that a lender would have a right to seize and sell if the loan is not repaid

collective bargaining

negotiations between unions and a firm or firms


when firms act together to reduce output and keep prices high

command economy

an economy where economic decisions are passed down from government authority and where resources are owned by the government

command-and-control regulation

laws that specify allowable quantities of pollution and that also may detail which pollution-control technologies must be used

commodity money

an item that is used as money, but which also has value from its use as something other than money

Commodity-backed currencies

dollar bills or other currencies with values backed up by gold or another commodity

comparative advantage

when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production


goods that are often used together so that consumption of one good tends to enhance consumption of the other

Compound interest

an interest rate calculation on the principal plus the accumulated interest

concentration ratio

an early tool to measure the degree of monopoly power in an industry; measures what share of the total sales in the industry are accounted for by the largest firms, typically the top four to eight firms

conspicuous consumption

consumption of goods and services because they allow the consumer to demonstrate or enhance her prestige, rather than for their capacity to produce personal satisfaction (utility)

constant returns to scale

expanding all inputs proportionately does not change the average cost of production

constant unitary elasticity

when a given percent price change in price leads to an equal percentage change in quantity demanded or supplied

consumer equilibrium

when the ratio of the prices of goods is equal to the ratio of the marginal utilities (point at which the consumer can get the most satisfaction)

Consumer Price Index

a measure of inflation that U.S. government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer's purchases

consumer surplus

the extra benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid


the social preoccupation with acquiring and identifying with consumer goods

contractionary fiscal policy

tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures

contractionary monetary policy

a monetary policy that reduces the supply of money and loans

contractual rights

the right to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of noncompliance


pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes

coordination argument

downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other laborers and market participants


when an insurance policyholder must pay a small amount for each service, before insurance covers the rest


a form of legal protection to prevent copying, for commercial purposes, original works of authorship, including books and music

core inflation index

a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and persistent trend in long-term prices

corporate bond

a bond issued by firms that wish to borrow

corporate governance

the rules and practices defining how and by whom a business is directed as well as how members of the business will interact with each other and those outside of the business

corporate income tax

a tax imposed on corporate profits


a business owned by shareholders who have limited liability for the company’s debt yet a share of the company’s profits; may be private or public depending on whether its stocks are traded on a public market


another person or firm who legally pledges to repay some or all of the money on a loan if the original borrower does not do so

cost-of-living adjustment

a contractual provision that wage increases will keep up with inflation

cost-plus regulation

when regulators permit a regulated firm to cover its costs and to make a normal level of profit


the process of estimating the costs of production before production actually takes place


moving in the opposite direction of the business cycle of economic downturns and upswings

coupon rate

the interest rate paid on a bond; can be annual or semi-annual

credit card

immediately transfers money from the credit card company’s checking account to the seller, and at the end of the month the user owes the money to the credit card company; a credit card is a short-term loan

cross-price elasticity of demand

the percentage change in the quantity of good A that is demanded as a result of a percentage change in good B

crowding out

federal spending and borrowing causes interest rates to rise and business investment to fall

current account balance

a broad measure of the balance of trade that includes trade in goods and services, as well as international flows of income and foreign aid

cyclical unemployment

unemployment closely tied to the business cycle, like higher unemployment during a recession

deadweight loss

the loss in social surplus that occurs when a market produces an inefficient quantity

debit card

a card that lets the person make purchases, and the cost is immediately deducted from that person’s checking account


an amount that the insurance policyholders must pay out of their own pocket before the insurance coverage pays anything


negative inflation; most prices in the economy are falling


the relationship between price and the quantity demanded of a certain good or service

demand curve

a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis

demand deposits

checkable deposit in banks that is available by making a cash withdrawal, writing a check, or using a debit card

demand management

the processes by which businesses (or governments) encourage spending so as to promote sales and profits

demand schedule

a table that shows a range of prices for a certain good or service and the quantity demanded at each price

deposit insurance

an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt

depository institutions

institution that accepts money deposits and then uses these to make loans


the process by which capital ages over time and therefore loses its value


an especially lengthy and deep decline in output


removing government controls over setting prices and quantities in certain industries

differentiated products

a product that is perceived by consumers as distinctive in some way

diminishing marginal utility

the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit

discount rate

the interest rate charged by the central bank on the loans that it gives to other commercial banks

discouraged workers

those who have stopped looking for employment due to the lack of suitable positions available

discretionary fiscal policy

the government passes a new law that explicitly changes overall tax or spending levels with the intent of influencing the level or overall economic activity


actions based on the belief that members of a certain group or groups are in some way inferior solely because of a factor such as race, gender, or religion

diseconomies of scale

the long-run average cost of producing each individual unit increases as total output increases

disposable income

income after taxes


investing in a wide range of companies to reduce the level of risk


making loans or investments with a variety of firms, to reduce the risk of being adversely affected by events at one or a few firms


a direct payment from a firm to its shareholders

division of labor

the way in which the work required to produce a good or service is divided into tasks performed by different workers

double coincidence of wants

a situation in which two people each want some good or service that the other person can provide

double counting

a potential mistake to avoid in measuring GDP, in which output is counted more than once as it travels through the stages of production


an oligopoly with only two firms

earned income tax credit (EITC)

a method of assisting the working poor through the tax system

ecological economics

a heterodox school of economic thought that situates the economy as a subordinate structure within the natural environment

economic profit

total revenues minus total costs (explicit plus implicit costs)

economic surplus

see social surplus

economics (heterodox definition)

the study of social provisioning, in which an understanding of the development of political economies is rooted in social, political, natural, and cultural processes

economics (orthodox definition)

the study of how humans make choices under conditions of scarcity

economies of scale

the long-run average cost of producing each individual unit decreases as total output increases

effective income tax

percentage of total taxes paid divided by total income

efficiency wage theory

the theory that the productivity of workers, either individually or as a group, will increase if the employer pays them more

elastic demand

when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

elastic supply

when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price


an economics concept that measures responsiveness of one variable to changes in another variable

elasticity of savings

the percentage change in the quantity of savings divided by the percentage change in interest rates

Employment Cost Index

a measure of inflation based on wages paid in the labor market


the long-run process of firms entering an industry in response to industry profits


the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change

equilibrium price

the price where quantity demanded is equal to quantity supplied

equilibrium quantity

the quantity at which quantity demanded and quantity supplied are equal for a certain price level


the monetary value a homeowner would have after selling the house and repaying any outstanding bank loans used to buy the house

estate and gift tax

a tax on people who pass assets to the next generation—either after death or during life in the form of gifts

estate tax

a tax imposed on the value of an inheritance

excess demand

at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage

excess reserves

reserves banks hold that exceed the legally mandated limit

excess supply

at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus

exchange rate

the price of one currency in terms of another currency

excise tax

a tax on a specific good—on gasoline, tobacco, and alcohol

exclusive dealing

an agreement that a dealer will sell only products from one manufacturer


the long-run process of firms reducing production and shutting down in response to industry losses

expansionary fiscal policy

tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession

expansionary monetary policy

a monetary policy that increases the supply of money and the quantity of loans

expected rate of return

how much a project or an investment is expected to return to the investor, either in future interest payments, capital gains, or increased profitability

expenditure multiplier

Keynesian concept that asserts that a change in autonomous spending causes a more than proportionate change in real GDP

expenditure-output model

a model in the heterodox tradition of Keynes that shows aggregate expenditure as a function of income and equilibrium at the point where spending and output are equal

explicit costs

out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials


the idea that a producer or producers of a product receive compensation that is less than the value of what the producer or producers contributed to the production process


products (goods and services) made domestically and sold abroad

exports of goods and services as a percentage of GDP

the dollar value of exports divided by the dollar value of a country’s GDP


a market exchange that affects a third party who is outside or “external” to the exchange; sometimes called a “spillover”


a market exchange that affects a third party who is outside or “external” to the exchange; sometimes called a “spillover”

face value

the amount that the bond issuer or borrower agrees to pay the investor

factors of production

the combination of labor, materials, and machinery that is used to produce goods and services; also called inputs

federal funds rate

the interest rate at which one bank lends funds to another bank overnight


when medical care providers are paid according to the services they provide

fiat money

has no intrinsic value, but is declared by a government to be the country's legal tender

final goods and services

output used directly for consumption, investment, government, and trade purposes; contrast with "intermediate good"

financial capital

the international flows of money that facilitates trade and investment

financial intermediary

an institution, like a bank, that receives money from savers and provides funds to borrowers


an organization that combines inputs of labor, capital, land, and raw or finished component materials to produce outputs

fiscal policy

economic policies that involve government spending and taxes

fixed costs

expenditure that must be made before production starts and that does not change regardless of the level of production

four-firm concentration ratio

the percentage of the total sales in the industry that are accounted for by the largest four firms

free and common socage

a system of land tenure in the American colonies which included perpetual ownership, transmissible to heirs, free disposal of property, alienability

free rider

those who want others to pay for the public good and then plan to use the good themselves; if many people act as free riders, the public good may never be provided

frictional unemployment

unemployment that occurs as workers move between jobs

full-employment GDP

another name for potential GDP, when the economy is producing at its potential and unemployment is at the natural rate of unemployment


a state of being for an individual as well as the collection of all things an individual can be doing


the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual

game theory

a branch of mathematics often used by economists that analyzes situations in which players must make decisions and then receive payoffs based on what decisions the other players make

GDP deflator

a measure of inflation based on the prices of all the GDP components

GDP per capita

GDP divided by the population


the trend in which buying and selling in markets have increasingly crossed national borders

going concern

an organization which is expected to continue to exist into the foreseeable future

going concern prices

a concept of prices as being determined by the particular needs of the businesses setting their prices to allow themselves to survive and grow

goods and services market

a market in which firms are sellers of what they produce and households are buyers

gross domestic product (GDP)

measure of the size of total production in an economy

gross national product

includes what is produced domestically and what is produced by domestic labor and business abroad in a year

Head Start program

a program for early childhood education directed at families with limited educational and financial resources

health maintenance organization (HMO)

an organization that provides health care and is paid a fixed amount per person enrolled in the plan—regardless of how many services are provided

Herfindahl-Hirschman Index (HHI)

approach to measuring market concentration by adding the square of the market share of each firm in the industry

high yield bonds

bonds that offer relatively high interest rates to compensate for their relatively high chance of default

human capital

the accumulated skills and education of workers


an outburst of high inflation that often occurs (although not exclusively) when economies shift from a controlled economy to a market-oriented economy 


the ideas, beliefs, subjective values, and prevailing world views that a person holds

imperfect information

a situation where either the buyer or the seller, or both, are uncertain about the qualities of what is being bought and sold

imperfectly competitive

firms and organizations that fall between the extremes of monopoly and perfect competition

implementation lag

the time it takes for the funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs

implicit contract

an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong

implicit costs

opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned


products (goods and services) made abroad and then sold domestically


a flow of money received, often measured on a monthly or an annual basis

income effect

a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect

income inequality

when one group receives a disproportionate share of total income or wealth than others

index fund

a mutual fund that seeks only to mimic the overall performance of the market

index number

a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100


a price, wage, or interest rate is adjusted automatically for inflation

individual income tax

a tax based on the income, of all forms, received by individuals

industrial revolution

the widespread adoption of power-driven machinery and the economic and social changes that occurred roughly over the first half of the 1800s

inelastic demand

when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes

inelastic supply

when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price

inferior good

a good in which the quantity demanded falls as income rises, and in which quantity demanded rises and income falls

infinite elasticity

the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance


a general and ongoing rise in price levels in an economy

inflation targeting

a rule that the central bank is required to focus only on keeping inflation low

inflationary gap

equilibrium at a level of output above potential GDP


the common structures, facilities, and systems necessary for organizations to operate

initial public offering

the first sale of shares of stock by a firm to outside investors


putting advances in knowledge to use in a new product or service


the combination of labor, materials, and machinery that is used to produce goods and services; also called factors of production

insider-outsider model

those already working for the firm are "insiders" who know the procedures; the other workers are "outsiders" who are recent or prospective hires


collectively shared habits of thought–of knowing, doing, and valuing–that control, expand, and liberate individual action


method of protecting a person from financial loss, whereby policy holders make regular payments to an insurance entity; the insurance firm then remunerates a group member who suffers significant financial damage from an event covered by the policy

intangible value

the value of a business enterprise over and above the value of its tangible assets

intellectual property

the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions

interest rate

the “price” of borrowing in the financial market; a rate of return on an investment

intermediate goods

output provided to other businesses at an intermediate stage of production, not for final users; contrast with "final good and service"

international externalities

externalities that cross national borders and that cannot be resolved by a single nation acting alone

International Price Index

a measure of inflation based on the prices of merchandise that is exported or imported

intrinsic value

the value the object has in and of itself


advances in knowledge

invidious hierarchy

the evolved, socially constructed systems by which people judge themselves and others to be fundamentally inferior or superior to others

invisible hand

idea that self-interested behavior by individuals can lead to positive social outcomes

junk bonds

see high yield bonds

Keynes’ law

"demand creates its own supply"

kinked demand curve

a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases

labor force participation rate

this is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job

labor market

the market in which households sell their labor as workers to business firms or other employers

labor productivity

the value of what is produced per worker, or per hour worked (sometimes called worker productivity)

labor union

an organization of workers that negotiates with employers over wages and working conditions

law of demand

the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant

law of diminishing marginal utility

as we consume more of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units

law of diminishing returns

as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline

law of supply

the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant

legal monopoly

legal prohibitions against competition, such as regulated monopolies and intellectual property protection

legislative lag

the time it takes to get a fiscal policy bill passed

lender of last resort role

an institution that provides short-term emergency loans in conditions of financial crisis


a debt or something you owe


how easily money or financial assets can be exchanged for a good or service, or to pay debt


the situation in which groups of legislators all agree to vote for a package of otherwise unrelated laws that they individually favor

long run aggregate supply (LRAS) curve

vertical line at potential GDP showing no relationship between the price level for output and real GDP in the long run

long-run average cost (LRAC) curve

shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology

long-run equilibrium

where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC

Lorenz curve

a graph that compares the cumulative income actually received to a perfectly equal distribution of income; it shows the share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis

M1 money supply

a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler’s checks

M2 money supply

a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit

macroeconomic externality

occurs when what happens at the macro level is different from and inferior to what happens at the micro level; an example would be where upward sloping supply curves for firms become a flat aggregate supply curve, illustrating that the price level cannot fall to stimulate aggregate demand


the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance

marginal analysis

examination of decisions on the margin, meaning a little more or a little less from the status quo

marginal cost

the additional cost of producing one more unit

marginal profit

profit of one more unit of output, computed as marginal revenue minus marginal cost

marginal propensity to consume

the share of the additional dollar of income a person decides to devote to consumption expenditures

marginal revenue

the additional revenue gained from selling one more unit

marginal tax rates

the tax rate that must be paid on the next dollar of income

marginal utility

the additional utility provided by one additional unit of consumption

marginal utility per dollar

the additional satisfaction gained from purchasing a good given the price of the product; MU/Price


interaction between potential buyers and sellers; a combination of demand and supply

market economy

an economy where economic decisions are decentralized, resources are owned by private individuals, and businesses supply goods and services based on demand

market governance

the rules and practices defining how business enterprises will behave in a market, including especially how they will interact with their competitors

market share

the percentage of total sales in the market

market structure

the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of products that are sold

marketable permit program

a permit that allows a firm to emit a certain amount of pollution; firms with more permits than pollution can sell the remaining permits to other firms

markup pricing

setting the price of a business enterprise’s product by adding some dollar amount over and above average costs of production.  Full cost pricing and target rate of return pricing are two examples

maturity date

the date that a bond must be repaid

median voter theory

theory that politicians will try to match policies to what pleases the median voter preferences


a federal–state joint program enacted in 1965 that provides medical insurance for certain (not all) low-income people, including the near-poor as well as those below the poverty line, and focusing on low-income families with children, the low-income elderly, and the disabled

medium of exchange

whatever is widely accepted as a method of payment

menu costs

costs firms face in changing prices

merchandise trade balance

the balance of trade looking only at goods


when two formerly separate firms combine to become a single firm


the belief that the value of money derives from the intrinsic value of the commodity (for instance, gold) the physical money is made from

methodological individualism

a method of studying economic phenomena that focuses on the motives and actions of the individual, rather than groups, classes, or society as a whole


the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms

minimum resale price maintenance agreement

an agreement that requires a dealer who buys from a manufacturer to sell for at least a certain minimum price

minimum wage

a price floor that makes it illegal for an employer to pay employees less than a certain hourly rate


see theory

monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing

monetary production

the process of turning money into commodity inputs and ultimately selling commodity outputs for money

money market funds

the deposits of many investors are pooled together and invested in a safe way like short-term government bonds

money multiplier formula

total money in the economy divided by the original quantity of money, or change in the total money in the economy divided by a change in the original quantity of money

money-back guarantee

a promise that the buyer’s money will be refunded under certain conditions

monopolistic competition

many firms competing to sell similar but differentiated products


a situation in which one firm produces all of the output in a market

moral hazard

when people have insurance against a certain event, they are less likely to guard against that event occurring

municipal bond

a bond issued by cities that wish to borrow; often called 'munis'


a form of marketing in which businesses promote the belief that consumers are ‘too smart’ to be fooled or persuaded by advertising, brands, and so on

mutual funds

funds that buy a range of stocks or bonds from different companies, thus allowing an investor an easy way to diversify

national debt

the total accumulated amount the government has borrowed, over time, and not yet paid back

national income

includes all income earned: wages, profits, rent, and profit income

national saving and investment identity

national savings and investment identity

natural monopoly

economic conditions in the industry, for example, economies of scale or control of a critical resource, that limit effective competition

natural rate of unemployment

the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time


those who have incomes just above the poverty line


something that is necessary for a human being to sustain basic physical and psychological health

negative externality

a situation where a third party, outside the transaction, suffers from a market transaction by others

net national product

GNP minus depreciation

net worth

asset value minus how much is owed (the liability); also called equity

nominal value

an economic statistic such as GDP as actually announced at that time, not adjusted for inflation; contrast with real value


when it is costly or impossible to exclude someone from using the good, and thus hard to charge for it


even when one person uses the good, others can also use it

normal good

a good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls

normative statement

statement which describes how the world should be

occupational licenses

licenses issued by government agencies, which indicate that a worker has completed a certain type of education or passed a certain test


when a few large firms have all or most of the sales in an industry

open market operations

the central bank selling or buying Treasury bonds to influence the quantity of money and the level of interest rates

opportunity cost

measures cost by what is given up in exchange; opportunity cost measures the value of the forgone alternative

opportunity set

all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income

ordinal utility

the idea that the utility that a consumer assigns to a product is subjective, in the mind of the consumer, and is, therefore, not directly quantifiably measurable


a school of thought, representing the boundary of a discipline, framing the types of questions and phenomena that will be analyzed, and the approach or method of study a theorist will employ

Pareto optimality

when economic outcomes are such that there is no way to make any one or many people better off without making any one person or many worse off


a company run by a group as opposed to an individual


a government rule that gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time

payment system

helps an economy exchange goods and services for money or other financial assets

payroll tax

a tax based on the pay received from employers; the taxes provide funds for Social Security and Medicare


during the business cycle, the highest point of output before a recession begins

perfect competition

a market structure in which each firm faces many competitors that sell identical products

Phillips curve

the tradeoff between unemployment and inflation

physical capital

the plant and equipment that firms use in production; this includes infrastructure

pollution charge

a tax imposed on the quantity of pollution that a firm emits; also called a pollution tax

pork-barrel spending

spending that benefits mainly a single political district

positive externality

a situation where a third party, outside the transaction, benefits from a market transaction by others

positive statement

statement which describes the world as it is

potential GDP

the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions


the situation of being below a certain level of income needed for a basic standard of living

poverty line

the specific amount of income needed for a basic standard of living

poverty rate

percentage of the population living below the poverty line

poverty trap

antipoverty programs set up so that government benefits decline substantially as people earn more income—as a result, working provides little financial gain

predatory pricing

when an existing firm uses sharp but temporary price cuts to discourage new competition


payments made to an insurance company

present value

a bond’s current price at a given time


what a buyer pays and what a seller receives for a unit of the specific good or service

price cap regulation

when the regulator sets a price that a firm cannot exceed over the next few years

price ceiling

a legal maximum price

price controls

government laws to regulate prices instead of letting market forces determine prices

price elasticity

the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied

price elasticity of demand

percentage change in the quantity demanded of a good or service divided the percentage change in price

price elasticity of supply

percentage change in the quantity supplied divided by the percentage change in price

price floor

a legal minimum price

price taker

a firm in a perfectly competitive market that must take the prevailing market price as given


procedures businesses use to determine, beforehand, the price at which they will sell their product once production is up and running and sales can be made

prisoner’s dilemma

a game in which the gains from cooperation are larger than the rewards from pursuing self-interest

private benefits

the dollar value of all benefits of a new product or process invented by a company that can be captured by the investing company

private company

a firm owned by the people who run it on a day-to-day basis

private enterprise

system where the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals

private rates of return

when the estimated rates of return go primarily to an individual; for example, earning interest on a savings account

Producer Price Index

a measure of inflation based on prices paid for supplies and inputs by producers of goods and services

producer surplus

the extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept

production function

the process whereby a firm turns economic inputs like labor, machinery, and raw materials into outputs like goods and services that consumers use

production possibilities frontier

a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available

production technologies

alternative methods of combining inputs to produce output

productive efficiency

when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

profit margin

profit divided by the quantity of output produced; average profit

progressive tax

a tax that collects a greater share of income from those with high incomes than from those with lower incomes

progressive tax system

a tax system in which the rich pay a higher percentage of their income in taxes, rather than a higher absolute amount

property rights

legal norms defining who can own what, what can be done with that property, and therefore how businesses can generate earnings and who has claims on those earnings

proportional tax

a tax that is a flat percentage of income earned, regardless of level of income

public company

a firm that has sold stock to the public, which in turn can be bought and sold by investors

public good

good that is nonexcludable and nonrivalrous, and thus is difficult for market producers to sell to individual consumers

quality/new goods bias

inflation calculated using a fixed basket of goods over time tends to overstate the true rise in cost of living, because it does not account for improvements in the quality of existing goods or the invention of new goods

quantitative easing

the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand

quantity demanded

the total number of units of a good or service consumers are willing to purchase at a given price

quantity supplied

the total number of units of a good or service producers are willing to sell at a given price


dividing a group into fifths, a method often used to look at distribution of income

rational ignorance

the theory that rational people will not vote if the costs of becoming informed and voting are too high or because they know their vote will not be decisive in the election

real analysis

the study of real changes to output, employment, distribution, and growth without addressing money as anything other than a facilitator of exchange

real GDP

GDP adjusted for changes in prices over time

real value

an economic statistic such as GDP after it has been adjusted for inflation; contrast with nominal value


a significant decline in national output

recessionary gap

equilibrium at a level of output below potential GDP

recognition lag

the time it takes to determine that a recession has occurred


taking income from those with higher incomes and providing income to those with lower incomes

regressive tax

a tax in which people with higher incomes pay a smaller share of their income in tax

regulatory capture

when the firms supposedly being regulated end up playing a large role in setting the regulations that they will follow and as a result, they “capture” the people doing the regulation, usually through the promise of a job in that “regulated” industry once their term in government has ended

reserve requirement

the percentage amount of its total deposits that a bank is legally obligated to to either hold as cash in their vault or deposit with the central bank


money that a bank keeps on hand, and that it does not lend or invest in bonds—and thus does not lead to interest payments

restrictive practices

practices that reduce competition but that do not involve outright agreements between firms to raise prices or to reduce the quantity produced


income from selling a firm’s product; defined as price times quantity sold

Ricardian equivalence

the theory that rational private households might shift their saving to offset government saving or borrowing


a measure of the uncertainty of that project’s profitability

risk group

a group that shares roughly the same risks of an adverse event occurring

safety net

the group of government programs that provide assistance to the poor and the near-poor

savings account

a bank account that pays an interest rate, but withdrawing money typically requires a trip to the bank or an automatic teller machine

savings deposits

bank account where you cannot withdraw money by writing a check, but can withdraw the money at a bank—or can transfer it easily to a checking account

Say’s law

"supply creates its own demand"


when human wants for goods and services exceed the available supply

service contract

the buyer pays an extra amount and the seller agrees to fix anything specified in the contract that goes wrong for a set time period


people who own at least some shares of stock in a firm


the stock of a firm, divided into individual portions

shift in demand

when a change in some economic factor (other than price) causes a different quantity to be demanded at every price

shift in supply

when a change in some economic factor (other than price) causes a different quantity to be supplied at every price

short run aggregate supply (SRAS) curve

positive short run relationship between the price level for output and real GDP, holding the prices of inputs fixed

short-run average cost (SRAC) curves

the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs

shutdown point

level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately

simple interest

an interest rate calculation only on the principal amount

smart card

stores a certain value of money on a card and then one can use the card to make purchases

social benefits

the dollar value of all benefits of a new product or process invented by a company that can be captured by other firms and by society as a whole

social costs

costs that include both the private costs incurred by firms and also additional costs incurred by third parties outside the production process, like costs of pollution

social rate of return

when the estimated rates of return go primarily to society; for example, providing free education

social surplus

the sum of consumer surplus and producer surplus

sole proprietorship

a company run by an individual as opposed to a group

special economic zone

area of a country, usually with access to a port where, among other benefits, the government does not tax trade

special interest groups

groups that are small in number relative to the nation, but well organized and thus exert a disproportionate effect on political outcomes

Special Supplemental Food Program

a federally funded program, started in 1964, in which each month poor people receive SNAP cards they can use to buy food


a market exchange that affects a third party who is outside or “external” to the exchange; usually called an “externality”


an economy experiences stagnant growth and high inflation at the same time

standard of deferred payment

money must also be acceptable to make purchases today that will be paid in the future

standard of living

all elements that affect people’s happiness, whether people buy or sell these elements in the market or not

standardized employment budget

the budget deficit or surplus in any given year adjusted for what it would have been if the economy were producing at potential GDP

sticky wages and prices

a situation where wages and prices do not fall in response to a decrease in demand, or do not rise in response to an increase in demand


a claim on partial ownership of a specific firm

store of value

something that serves as a way of preserving economic value that one can spend or consume in the future

structural unemployment

unemployment that occurs because individuals lack skills valued by employers


a good that can replace another to some extent, so that greater consumption of one good can mean less of the other

substitution bias

an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not take into account that the person can substitute away from goods whose prices rise considerably

substitution effect

when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect

sunk costs

costs that are made in the past and cannot be recovered


the relationship between price and the quantity supplied of a certain good or service

supply curve

a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis

supply schedule

a table that shows a range of prices for a good or service and the quantity supplied at each price

tax incidence

manner in which the tax burden is divided between buyers and sellers

technological change

a combination of invention—advances in knowledge—and innovation


all the ways in which existing inputs produce more or higher quality, as well as different and altogether new products; or, as John Kenneth Galbraith defined it, “the application of scientific or other organized knowledge to practical tasks”


the organization of people who participate in the group decision-making that directs the business enterprise through time

terminal venture

a form of business enterprise having a clearly defined beginning and end date


a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation

three cardinal principles of women’s dress

the three ways in which clothing can help to 'show off' status and wealth. Thorstein Veblen analyzed these in relation to women's dress, but they can be applied to many other consumption goods as well

time deposits

account that the depositor has committed to leaving in the bank for a certain period of time, in exchange for a higher rate of interest; also called certificate of deposit

total cost

the sum of fixed and variable costs of production

total utility

satisfaction derived from consumer choices

trade balance

gap between exports and imports

trade deficit

exists when a nation's imports exceed its exports and it calculates them as imports – exports

trade secrets

methods of production kept secret by the producing firm

trade surplus

exists when a nation's exports exceed its imports and it calculates them as exports – imports


an identifying symbol or name for a particular good and can only be used by the firm that registered that trademark

traditional economy

typically an agricultural economy where things are done the same as they have always been done

transaction costs

the costs associated with finding a lender or a borrower for money

Treasury bond

a bond issued by the federal government through the U.S. Department of the Treasury


during the business cycle, the lowest point of output in a recession, before a recovery begins

twin deficits

deficits that occur when a country is running both a trade and a budget deficit

Tying sales

a situation where a customer is allowed to buy one product only if the customer also buys another product


individuals who are employed in a job that is below their skills

underground economies

a market where the buyers and sellers make transactions in violation of one or more government regulations

unemployment rate

the percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs

unilateral transfers

"one-way payments" that governments, private entities, or individuals make that they sent abroad with nothing received in return

unit of account

the common way in which we measure market values in an economy

unitary elasticity

when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied


the idea that the value of an object is based on how useful the product is to the consumer.  Products have an intrinsic value to their consumers

usury laws

laws that impose an upper limit on the interest rate that lenders can charge


satisfaction, usefulness, or value one obtains from consuming goods and services

variable costs

cost of production that increases with the quantity produced


the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply

venture capital

financial investments in new companies that are still relatively small in size, but that have potential to grow substantially

voting cycle

the situation in which a majority prefers A over B, B over C, and C over A

wage elasticity of labor supply

the percentage change in hours worked divided by the percentage change in wages


something that is desired, but also not necessary for an individual to live and function in a society


a promise to fix or replace the good for a certain period of time


the sum of the value of all assets, including money in bank accounts, financial investments, a pension fund, and the value of a home

zero elasticity

the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance


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Principles of Economics: Scarcity and Social Provisioning (2nd Ed.) Copyright © 2020 by Rice University; Dean, Elardo, Green, Wilson, Berger is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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