Principles of Economics by Timothy Taylor (3rd edition)

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Principles of Economics by Timothy Taylor (3rd edition) is the third edition of the college textbook, titled Principles of Economics, written by Timothy Taylor and published by Textbook Media.


Glossary

A

  • Absolute advantage. When one nation can produce a product at lower cost relative to another nation.
  • Accounting profit. Total revenue minus the firm’s cost, without taking opportunity cost into account.
  • Acquisition. When one firm purchases another; for practical purposes, often combined with mergers.
  • Adaptive expectations. The theory that people look at past experience and gradually adapt their beliefs and behavior as circumstances change.
  • Adjustable rate mortgage (ARM). A loan used to purchase a home in which the interest rate varies with the rate of inflation.
  • Adverse selection. The problem that arises when one party knows more about the quality of the good than the other, and as a result, the party with less knowledge must worry about ending up at a disadvantage.
  • Affirmative action. Active efforts to improve the job opportunities or outcomes of minority groups or women.
  • Aggregate demand (AD). The relationship between the total quantity of goods and services demanded and the price level for output.
  • Aggregate production function. The process of an economy as a whole turning economic input like labor, machinery, and raw material into output like goods and services used by consumer.
  • Aggregate supply (AS). The relationship between the total quantity that firm choose to produce and sell and the price level for output, holding the price of input fixed.
  • Allocative efficiency. When the mix of goods being produced represents the allocation that society most desires.
  • Anti-dumping laws. Laws that block imports sold below the cost of production and impose tariffs that would increase the price of these imports to reflect their cost of production.
  • 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.
  • Applied research. Research focused on a particular product that promises an economic payoff in the short or medium term.
  • Appreciating. When a currency is worth more in terms of other currencies; also called "strengthening."
  • Asset-liability time mismatch. A bank's liabilities can be withdrawn in the short term while its assets are repaid in the long term.
  • Assets. Items of value owned by a firm or an individual.
  • Automatic stabilizer. Tax and spending rule that have the effect of increasing aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation.

B

  • 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 of trade. The gap, if any, between a nation’s exports and imports.
  • 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.
  • Barrier to entry. The legal, technological, or market force that may discourage or prevent potential competitor from entering a market.
  • Barter. Trading one good or service for another directly, without using money.
  • Basic quantity equation of money. Money supply × Velocity = Nominal GDP.
  • Basic research. Research on fundamental scientific breakthrough that may offer commercial applications only in the distant future.
  • Basket of goods and services. A hypothetical group of different items, with specified quantities of each one, used as a basis for calculating how the price level changes over time.
  • Biodiversity. The full spectrum of animal and plant genetic material.
  • Black market. An illegal market that breaks government rules on prices or sales.
  • Bond. 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 that a bond is expected to pay at the time of purchase.
  • Bondholders. Those who own bond and receive the interest payment.
  • Budget constraint. A diagram that shows the possible choices.
  • Budget deficit. When the federal government spends more than it collects in taxes in a given year.
  • Budget surplus. When the government receives more in taxes than it spends in a year.
  • Bundling. A situation where a customer is allowed to buy one product only if the customer also buys another product; also called “tie-in sales.”
  • Business cycle. The relatively short-term movement of the economy in and out of recession.
  • Capital deepening. When an economy has a higher 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.
  • Cartel. A group of firms that collude to produce the monopoly output and sell at the monopoly price.
  • Central bank. An institution to conduct monetary policy and regulate the banking system.
  • Certificates of deposit (CD). 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.
  • Checking account. A bank account that typically pays little or no interest, but that gives easy access to your 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, a labor market, and a financial capital market.
  • Coinsurance. When an insurance policyholder pays a percentage of a loss, and the insurance company pays the remaining cost.
  • Collateral. 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.
  • Collusion. When firms act together to reduce output and keep prices high.
  • Command economy. An economy in which the government either makes or strongly influences most economic decisions.
  • Command-and-control regulation. Laws that specify allowable quantities of pollution and may also detail which pollution- control technologies must be used.
  • Comparative advantage. The goods in which a nation has its greatest productivity advantage or its smallest productivity disadvantage; also, the goods that a nation can produce at a lower cost when measured in terms of opportunity cost.
  • Complements. Goods that are often used together, so that a rise in the price of one good tends to decrease the quantity consumed of the other good, and vice versa.
  • Compound interest. When interest payments accumulate, so that in later time periods, the interest rate is paid on the interest that has been earned and reinvested in previous years.
  • Constant returns to scale. When expanding all inputs does not change the average cost of production.
  • Consumer Price Index (CPI). A measure of inflation calculated by U.S. government statisticians based on the price level from a basket of goods and services that represents the purchases of the average consumer.
  • Consumer surplus. The 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.
  • Consumption function. The relationship between income and expenditures on consumption.
  • Contractionary fiscal policy. When fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases in taxes.
  • Contractionary monetary policy. A monetary policy that reduces the supply of money and loans; also called a "tight" monetary policy.
  • Convergence. When economies with low per capita incomes are growing faster than economies with high per capita incomes.
  • Copayment. When an insurance policyholder must pay a small amount for each service, before insurance covers the rest.
  • Copyright. A form of legal protection to prevent copying for commercial purposes original works of authorship, including books and music.
  • Corporate bonds. Bonds issued by firms that wish to borrow.
  • Corporate income tax. A tax imposed on corporate profits.
  • Cosigner. On a loan, another person or firm that legally pledges to repay some or all of the money if the original borrower does not do so.
  • Cost-of-living adjustments (COLAs). 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.
  • Countercyclical. Moving in the opposite direction of the business cycle of economic downturns and upswings.
  • 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. When government borrowing soaks up available financial capital and leaves less for private investment in physical capital.
  • Currency. Coins and paper bills.
  • 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 you make purchases, where the cost is immediately deducted from your checking account.
  • Decreasing returns to scale. A situation in which as the quantity of output rises, the average cost of production rises.
  • Deductible. An amount that the insurance policyholders must pay out of their own pocket before the insurance coverage pays anything.
  • Deflation. Negative inflation.
  • Demand. A relationship between price and the quantity demanded of a certain good or service.
  • Demand curve. A line that shows the relationship between price and quantity demanded of a certain good or service on a graph, with quantity on the horizontal axis and the price on the vertical axis.
  • Demand deposits. Deposits in banks that are available by making a cash withdrawal or writing a check.
  • 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.
  • Depreciating. When a currency is worth less in terms of other currencies; also called "weakening."
  • Depression. An especially lengthy and deep decline in output.
  • Deregulation. Removing government controls over setting prices and quantities in certain industries.
  • Differentiated products. Products that are distinctive in a particular way.
  • Diminishing marginal returns. When the marginal gain in output diminishes as each additional unit of input is added.
  • 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 when it makes loans to commercial banks.
  • Discretionary fiscal policy. When the government passes a new law that explicitly changes overall tax or spending levels.
  • Diseconomies of scale. Another term for decreasing returns to scale.
  • Diversification. Investing in a wide range of companies, to reduce the level of risk.
  • Diversify. 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.
  • Dividend. A direct payment from a firm to its shareholders.
  • Division of labor. Dividing the work required to produce a good or service into tasks performed by different workers.
  • Dollarize. When a country that is not the United States uses the U.S. dollar as its currency.
  • Double coincidence of wants. A situation in which both of two people each wants some good or service that the other person can provide.
  • Double counting. A potential mistake to be avoided in measuring GDP, in which output is counted two or more times as it travels through the stages of production.
  • Dumping. Selling internationally traded goods below their cost of production.
  • Duopoly. An oligopoly with only two firms.
  • Durable goods. Long-lasting goods like cars and refrigerators.
  • Economic profit. Total revenues minus all of the firm's costs, including opportunity costs.
  • Economics. The study of the production, distribution, and consumption of goods and services.
  • Economies of scale. When the average cost of producing each individual unit declines as total output increases.
  • Economy. The social arrangements that determine what is produced, how it is produced, and for whom it is produced.
  • Efficiency. When it is impossible to get more of something without experiencing a trade-off of less of something else.
  • Efficiency wage theory. The theory that the productivity of workers, either individually or as a group, will increase if they are paid more.
  • Elastic. The elasticity calculated from the appropriate formula has an absolute value greater than 1.
  • Elasticity. How much a percentage change in quantity demanded or quantity supplied is affected by a percentage change in price.
  • Elasticity of demand. The percentage change in quantity demanded divided by the percentage change in price.
  • Elasticity of labor supply. The percentage change in hours worked divided by the percentage change in wages.
  • Elasticity of savings. The percentage change in the quantity of savings divided by the percentage change in interest rates.
  • Elasticity of supply. The percentage change in quantity supplied divided by the percentage change in price.
  • Employment Cost Index. A measure of inflation based on the wage paid in the labor market.
  • Entry. The long-run process of firms beginning and expanding production when they see opportunity for profits.
  • Equilibrium. The combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to shift.
  • 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 at a certain price.
  • Equity. 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 "shortage."
  • Excess reserves. Reserves that banks hold above the legally mandated limit.
  • Excess supply. When at the existing price, quantity supplied exceeds the quantity demanded; also called a "surplus."
  • Exchange rate. The rate at which one currency exchanges for another.
  • Excise taxes. 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.
  • Exit. The long-run process of firms reducing production and shutting down because they expect losses.
  • Expansionary fiscal policy. When fiscal policy increases the level of aggregate demand, through either increases in government spending or reductions in taxes.
  • Expansionary monetary policy. A monetary policy that increases the supply of money and the quantity of loans; also called a "loose" monetary policy.
  • Expenditure-output model. A macroeconomic model in which equilibrium output occurs where the total or aggregate expenditures in the economy are equal to the amount produced; also called the "Keynesian cross model."
  • Exports. Goods and services that are produced domestically and sold in another country.
  • Externality. When a market exchange affects a third party who is outside or "external" to the exchange; sometimes called a "spillover."
  • Federal funds rate. The interest rate at which one bank lends funds to another bank overnight.
  • Fee-for-service. When medical care providers are paid according to the services they provide.
  • Final goods and services. Output used directly for consumption, investment, government, and trade purposes; contrast with "intermediate goods."
  • Financial capital market. The market in which those who save money provide financial capital and receive a rate of return from those who wish to raise money and pay a rate of return.
  • Financial intermediary. An institution that operates between a saver with financial assets to invest and an entity who will receive those assets and pay a rate of return.
  • Fiscal policy. Economic policies that involve government spending and taxation.
  • Fixed costs. Expenditures that must be made before production starts and that do not change regardless of the level of production.
  • Floating exchange rate. When a country lets the value of its currency be determined in the exchange rate market.
  • Foreign direct investment. Purchases of firms in another country that involve taking a management responsibility.
  • Foreign exchange market. The market in which people buy one currency while using another currency.
  • Four-firm concentration ratio. What percentage share of the total sales in the industry is accounted for by the largest four firms.
  • 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.
  • Fundamentals trading. Buying or selling stock based on estimates of the future expected profits.
  • Game theory. A branch of mathematics often used by economists that analyzes situations in which players must make decisions and then receive payoffs.
  • GDP deflator. A measure of inflation based on all the components of GDP.
  • Giffen good. The theoretical but unrealistic possibility that a higher price for a good could lead to a higher quantity demanded (or a lower price leads to a lesser quantity demanded).
  • Globalization. The trend in which buying and selling in markets have increasingly crossed national borders.
  • Goods and services market. A market in which firms are sellers of what they produce and households are buyers.
  • Government debt. The total accumulated amount that the government has borrowed and not yet paid back over time.
  • Gross domestic product (GDP). The value of the output of all goods and services produced within a country.
  • Hard peg. An exchange rate policy in which the central bank sets a fixed and unchanging value for the exchange rate.
  • 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.
  • Hedge. Using a financial transaction as protection against risk.
  • Herfindahl-Hirschman Index (HHI). Take the market share of each firm in the industry, square each one, and add them.
  • Human capital. The skills and education of workers.
  • Hyperinflation. Extremely high rates of inflation.
  • Imperfect competition. Competition that does not fit the definition of perfect competition either because it involves a smaller number of firms or only one firm, or products that aren't identical.
  • Imperfect information. A situation where the buyer or the seller, or both, are uncertain about the qualities of what is being bought and sold.
  • 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.
  • Import quotas. Numerical limitations on the quantity of products that can be imported.
  • Imports. Goods and services produced abroad and then sold domestically.
  • Income effect. A change in price affects the buying power of income, with a higher price meaning that the buying power of income has been reduced, so that there is usually (with normal goods) an incentive to buy less of both goods, and a lower price meaning that the buying power of income has been increased, so that there is usually an incentive to buy more of both goods; always happens simultaneously with a substitution effect.
  • Increasing returns to scale. When a larger-scale firm can produce at a lower cost than a smaller-scale firm; also called economies of scale.
  • Index fund. A mutual fund that seeks only to mimic the overall performance of the market.
  • Index number. When one arbitrary year is chosen to equal 100, and then values in all other years are set proportionately equal to that base year.
  • Indexed. When 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 use of power-driven machinery and the economic and social changes that occurred in the first half of the 1800s.
  • Inelastic. The elasticity calculated from the appropriate formula has an absolute value less than 1.
  • Inequality. When one group receives a higher share of total income or wealth than others.
  • Infant industry argument. An argument to block imports for a short time, to give the infant industry time to mature, before eventually it starts competing on equal terms in the global economy.
  • Inferior goods. Goods where the quantity demanded falls as income rises.
  • Infinite elasticity. The extremely elastic situation where quantity changes by an infinite amount in response to even a tiny change in price.
  • Inflation. A general and ongoing rise in the level of prices in an economy.
  • Inflationary gap. The gap between real GDP and potential GDP, when the level of output is above the level of potential GDP.
  • Inflation-targeting. A rule that the central bank is required to focus only on keeping inflation low.
  • Initial public offering (IPO). When a firm first sells shares of stock to outside investors.
  • Insider-outsider model. A model that divides workers into "insiders" already working for the firm who know the procedures and "outsiders" who are recent or prospective hires.
  • Insurance. A group of people who face a risk of a certain bad experience all make regular payments, and those members of the group who actually suffer a bad experience receive payments.
  • Intellectual property. The body of law including patents, trademarks, copyrights, and trade secret law that protects the right of inventors to produce and sell their inventions.
  • Interest rate. A payment calculated as a percentage of the original amount saved or borrowed, and paid by the borrower to the saver.
  • Intermediate goods and services. Output provided to other businesses at an intermediate stage of production, not for final users; contrast with "final goods and services."
  • International Price Index. A measure of inflation based on the prices of merchandise that is exported or imported.
  • Intra-industry trade. International trade of goods within the same industry.
  • Inventories. Goods that have been produced, but not yet been sold.
  • Junk bonds. Bonds that offer relatively high interest rates to compensate for their relatively high chance of default.
  • 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 market. The market in which households sell their labor as workers to business firms or other employers.
  • Labor union. An organization of workers that negotiates with employers as a group 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.
  • Law of diminishing marginal utility. As a person receives more of a good, the marginal utility from each additional unit of the good is smaller than from the previous unit.
  • 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 is associated with a greater quantity supplied.
  • Lender of last resort. An institution that provides short-term emergency loans in conditions of financial crisis.
  • Liabilities. Any amounts or debts owed by a firm or an individual.
  • Life-cycle theory of savings. The common pattern that many people save little or borrow heavily early in life, save more in the middle of life, and then draw upon their accumulated savings later in life.
  • Liquidity. How easy it is to sell an asset when desired.
  • Logrolling. When a group of legislators all agree to vote for a package of otherwise unrelated laws that they individually favor.
  • Lorenz curve. A graph that shows the share of population on the horizontal axis and the cumulative percentage of total income received on the vertical axis.
  • M1. A narrow definition of the money supply that includes currency, traveler's checks, and checking accounts in banks.
  • M2. A definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit.
  • Macroeconomics. The branch of economics that focuses on the economy as a whole, including issues like growth, unemployment, inflation, and the balance of trade.
  • Marginal analysis. Comparing the benefits and costs of choosing a little more or a little less of a good.
  • Marginal cost. The additional cost of producing one more unit.
  • Marginal physical product. The quantity of goods produced by an additional input (like an additional worker).
  • Marginal propensity to consume (MPC). The share of an additional dollar of income that goes to consumption.
  • Marginal propensity to import (MPI). The share of an additional dollar of income that goes to imports.
  • Marginal propensity to save (MPS). The share of an additional dollar that goes to saving.
  • Marginal revenue. The additional revenue gained from selling one more unit.
  • Marginal revenue product (MRP). Reveals how much revenue a firm could receive from hiring an additional worker and selling the output of that worker.
  • Marginal utility. The additional utility provided by one additional unit of consumption.
  • Market. An institution that brings together buyers and sellers of goods or services.
  • Market failure. A situation in which the market on its own fails to allocate resources efficiently in a way that balances social costs and benefits; externalities are one example of a market failure.
  • Market share. The percentage share of total sales in the market.
  • Marketable permit. A permit that allows a firm to emit a certain amount of pollution, where firms with more permits than pollution can sell the remaining permits to other firms.
  • Market-oriented economy. An economy in which most economic decisions are made by buyers and sellers, who may be individuals or firms.
  • Medium of exchange. Whatever is widely accepted as a method of payment.
  • Menu costs. The costs that firms face in changing prices.
  • Merchandise trade balance. The balance of trade looking only at goods.
  • Merger. When two formerly separate firms combine to become a single firm; for practical purposes, often combined with acquisitions.
  • Microeconomics. The branch of economics that focuses on actions of particular actors 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.
  • Model. A simplified representation of an object or situation that includes enough of the key features to be useful.
  • Momentum trading. Buying or selling stock by following the current trend; that is, buying when the price seems to be rising, or selling stock because the price seems to be falling.
  • Monetary policy. Policy that involves altering the quantity of money and thus affecting the level of interest rates and the extent of borrowing.
  • Money. Whatever serves society in three functions: medium of exchange, unit of account, and store of value.
  • Money market funds. Where the deposits of many investors are pooled together and invested in a safe way like short-term government bonds.
  • Money multiplier. 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, like if the product doesn't work or sometimes even if the buyer decides to return the product.
  • Monopolistic competition. Many firms competing to sell similar but differentiated products.
  • Monopoly. A firm that faces no competitors.
  • Moral hazard. When people have insurance against a certain event, they are less likely to guard against that event occurring.
  • Multiplier. Total increase in aggregate expenditures divided by the original increase in expenditures.
  • Multiplier effect. How a given change in expenditure cycles repeatedly through the economy, and thus has a larger final impact than the initial change.
  • Municipal bonds. Bonds issued by cities that wish to borrow.
  • Mutual funds. A fund that buys a range of stocks or bonds from different companies, thus allowing an investor an easy way to diversify.
  • National income (Y). The sum of all income received for producing GDP.
  • National saving and investment identity. For any country, the quantity of financial capital supplied at any given time by savings must equal the quantity of financial capital demanded for purposes of making investments.
  • Nationalization. When government takes over ownership of firms.
  • Natural monopoly. When the quantity demanded in the market is less than the quantity at the bottom of the long-run average cost curve.
  • 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 time.
  • Near-poor. Those who have incomes just above the poverty line.
  • Negative externality. A situation where a third party, outside the transaction, suffers from a market transaction by others.
  • Neoclassical economists. Economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run.
  • Net worth. Total assets minus total liabilities.
  • Nominal value. The economic statistic actually announced at that time, not adjusted for inflation; contrast with real value.
  • Nondurable goods. Short-lived goods like food and clothing.
  • Nonexcludable. When it is costly or impossible to exclude someone from using the good, and thus hard to charge for it.
  • Nonrivalrous. A good where, when one person uses the good, others can also use it.
  • Nontariff barriers. All the other ways a nation can draw up rules, regulations, inspections, and paperwork to make it more costly or difficult to import products.
  • Normal goods. Goods where the quantity demanded rises when income rises.
  • Normative statements. Statements that describe how the world should be.
  • Occupational licenses. Licenses issued by government agencies that mean that a worker has completed a certain type of education or passed a certain test.
  • Oligopoly. When a few firms have all or nearly all of the sales in an industry.
  • Open market operations. The central bank buying or selling bonds to influence the quantity of money and the level of interest rates.
  • Opportunity cost. Whatever must be given up to obtain something that is desired.
  • Opportunity set. Another name for the budget constraint.
  • Out of the labor force. Those who do not have a job and are not looking for a job.
  • Patent. A government rule that gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time.
  • Payroll tax. A tax based on the pay received from employers; the taxes provide funds for Social Security and Medicare.
  • Peak. During the business cycle, the highest point of output before a recession begins.
  • Per capita GDP. GDP divided by the population.
  • Perfect competition. Each firm faces many competitors that sell identical products.
  • Permanent income hypothesis. When individuals think about how much to consume, they look into the future and consider how much income they expect to earn in their lifetime.
  • Phillips curve. The trade-off between unemployment and inflation.
  • Physical capital. The plant and equipment used by firms in production.
  • 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.
  • Portfolio investment. An investment in another country that is purely financial and doesn't involve any management responsibility.
  • Positive externality. A situation where a third party, outside the transaction, benefits from a market transaction by others.
  • Positive statements. Statements that describe the world as it is.
  • Potential GDP. The maximum quantity that an economy can produce given its existing levels of labor, physical capital, technology, and institutions.
  • Poverty. Falling 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 trap. When antipoverty programs are set up so that government benefits decline substantially as people earn more income—and as a result, working provides little financial gain.
  • Predatory pricing. When an existing firm uses sharp but temporary price cuts to discourage new competition.
  • Premiums. Payments made to an insurance company.
  • Price cap regulation. When the regulator sets a price that a firm cannot exceed over the next few years.
  • Price ceiling. A law that prevents a price from rising above a certain level.
  • Price controls. Government laws to regulate prices.
  • Price elasticity of demand. Same as elasticity of demand.
  • Price elasticity of supply. Same as elasticity of supply.
  • Price floor. A law that prevents a price from falling below a certain level.
  • Price takers. A firm in a perfectly competitive market that must take the prevailing market price as given.
  • Principal. The amount of an original financial investment, before any rate of return is paid.
  • Prisoner's dilemma. A game in which if both players pursue their own self-interest, they both end up worse off than if they cooperate.
  • Private company. A firm owned by the people who run it on a day-to-day basis.
  • Privatization. When a government-owned firm becomes privately owned.
  • Producer Price Index. A measure of inflation based on the prices paid for supplies and inputs by producers of goods and services.
  • Producer surplus. The 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 of a firm turning economic inputs like labor, machinery, and raw materials into outputs like goods and services used by consumers.
  • Production possibilities frontier. A diagram that shows the combinations of output that are possible for an economy to produce.
  • Production technologies. Alternative methods of combining inputs to produce output.
  • Productive efficiency. When it is impossible to produce more of one good without decreasing the quantity produced of another good.
  • Productivity. What is produced per worker, or per hour worked.
  • Progressive tax. A tax that collects a greater share of income from those with high incomes than from those with lower incomes.
  • Property rights. The legal rights of ownership on which others are not allowed to infringe without paying compensation.
  • Proportional tax. A tax that is a flat percentage of income earned, regardless of level of income.
  • Protectionism. Government policies to reduce or block imports.
  • Public company. A firm that has sold stock to the public, which in turn can be bought and sold by investors.
  • Public good. A good that is nonexcludable and nonrivalrous, and thus is difficult for market producers to sell to individual consumers.
  • Purchasing power parity (PPP). The exchange rate that equalizes the prices of internationally traded goods across countries.
  • 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 doesn't take into account improvements in the quality of existing goods or the invention of new goods.
  • Quantity demanded. The total number of units of a good or service purchased at a certain price.
  • Quantity supplied. The total number of units of a good or service sold at a certain price.
  • Quintiles. Dividing a group into fifths, a method often used to look at distribution of income.
  • Race to the bottom. When production locates in countries with the lowest environmental (or other) standards, putting pressure on all countries to reduce their environmental standards.
  • Rate of return. The payment in addition to the original investment from those who have received financial capital to those who provided it.
  • Rational expectations. The theory that people form the most accurate possible expectations about the future that they can, using all information available to them.
  • Rational ignorance. The theory that rational people won't bother incurring the costs of becoming informed and voting because they know that their vote won't be decisive in the election.
  • Real interest rate. The rate of interest with inflation subtracted.
  • Real value. An economic statistic after it has been adjusted for inflation; contrast with nominal value.
  • Recession. A significant decline in national output.
  • Recessionary gap. The gap in output between an economy in recession and potential GDP.
  • Redistribution. 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.
  • Reserve ratio. The proportion of deposits that the bank holds in the form of reserves.
  • Reserve requirement. The proportion of its deposits that a bank is legally required to deposit with the central bank.
  • Reserves. Funds that a bank keeps on hand and that are not loaned out or invested in bonds.
  • Restrictive practices. Practices that reduce competition but that do not involve outright agreements between firms to raise price.
  • Ricardian equivalence. The theory that rational private households might shift their saving to offset government saving or borrowing.
  • Risk group. A group that shares roughly the same risks of an adverse event occurring.
  • Risk premium. A payment to make up for the risk of not being repaid in full.
  • Safety net. Nickname for 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 the money typically requires you to make a trip to the bank or an automatic teller machine.
  • Savings deposits. Bank accounts where you can't 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."
  • Service contract. The buyer pays an extra amount and the seller agrees to fix anything that goes wrong for a set time period.
  • Shareholders. Those who own at least some stock in a firm.
  • Shares. The stock of a firm is divided into individual shares.
  • Shift in demand. When a change in some economic factor related to demand causes a different quantity to be demanded at every price.
  • Shift in supply. When a change in some economic factor related to supply causes a different quantity to be supplied at every price.
  • Shortage. At the existing price, the quantity demanded exceeds the quantity supplied; also called "excess demand."
  • Shutdown point. When the revenue a firm receives does not cover its average variable costs, the firm should shut down immediately; the point where the marginal cost curve crosses the average variable cost curve.
  • Social costs. Costs that include both the private costs incurred by firms and also costs incurred by third parties outside the production process, like costs of pollution.
  • Social surplus. The sum of consumer surplus and producer surplus.
  • Soft peg. An exchange rate policy where the government usually allows the exchange rate to be set by the market, but in some cases, especially if the exchange rate seems to be moving rapidly in one direction, the central bank will intervene.
  • Special-interest groups. Groups that are numerically small but well organized and thus exert a disproportionate effect on political outcomes.
  • Specialization. When workers or firms focus on particular tasks in the overall production process for which they are well-suited.
  • Spillover. When a market exchange affects a third party who is outside or "external" to the exchange; more formally called an externality.
  • Splitting up the value chain. When many of the different stages of producing a good happen in different geographic locations.
  • Stagflation. When an economy experiences stagnant growth and high inflation at the same time.
  • Stock. A claim on partial ownership of a firm.
  • Store of value. Something that serves as a way of preserving economic value that can be spent or consumed in the future.
  • Substitutes. Goods that can replace each other to some extent, so that a rise in the price of one good leads to a lower quantity consumed of another good, and vice versa.
  • 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 doesn't take into account that the person can substitute away from goods whose prices rise by a lot.
  • 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 cost. Costs that were incurred in the past and cannot be recovered, and thus should not affect current decisions.
  • Supply. A 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.
  • Surplus. When at the existing price, quantity supplied exceeds the quantity demanded; also called "excess supply."
  • T-account. A balance sheet with a two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column headings for "Assets" and "Liabilities."
  • Tariffs. Taxes imposed on imported products.
  • Technology. All the ways in which a certain level of capital investment can produce a greater quantity or higher quality, as well as different and altogether new products.
  • Tie-in sales. A situation where a customer is allowed to buy one product only if the customer also buys another product; also called "bundling."
  • Time deposits. Accounts 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 certificates of deposit.
  • Time value of money. The cost of having to wait for repayment.
  • Total cost. All the costs that a firm must incur in the process of production.
  • Total revenue. The quantity of goods and services sold by the firm multiplied by the selling price of these goods and services.
  • Trade balance. Gap between exports and imports.
  • Trade deficit. When imports exceed exports.
  • Trade secrets. Methods of production kept secret by the producing firm.
  • Trade surplus. When exports exceed imports.
  • Trademark. A word, name, symbol, or device that indicates the source of the goods and can only be used by the firm that registered that trademark.
  • Treasury bonds. Bonds issued by the federal government through the U.S. Department of the Treasury.
  • Trough. During the business cycle, the lowest point of output in a recession, before a recovery begins.
  • Unemployment rate. The percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs.
  • Unit of account. The common way in which market values are measured in an economy.
  • Usury laws. Laws that impose an upper limit on the interest rate that lenders can charge.
  • Utility. The level of satisfaction or pleasure that people receive from their choices.
  • Variable costs. Costs of production that increase with the quantity produced.
  • Velocity. The speed with which money circulates through the economy, calculated as the nominal GDP divided by a measure of the size of 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. When a majority prefers A over B, B over C, and C over A.
  • Warranty. A promise to fix or replace the good, at least for a certain period of time.
  • Zero elasticity. The highly inelastic case in which a percentage change in price, no matter how large, results in zero change in the quantity demanded or supplied.
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