Economics

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absolute advantage

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the ability to produce something with fewer resources than other producers would use to produce the same thing

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accounting profit

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a firm's total revenue minus its explicit cost

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activists

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those who consider the private sector to be relatively unstable and able to absorb economic shocks only with the aid of discretionary government policy

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actual investment

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the amount of investment actually undertaken during a year; equals planned investment plus unplanned changes in inventories

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adverse selection

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a situation in which those on the informed side of the market self-elect in a way that harms the uninformed side of the market

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adverse supply shocks

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unexpected events that reduce aggregate supply, sometimes only temporarily

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agent

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a person who performs work or provides a service on behalf of another person, the principal

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aggregate demand

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the relation between the price level in the economy and the quantity of aggregate output demanded

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aggregate demand curve

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a curve representing the relation between the economy's price level and the amount of aggregate output demanded per period of time, other things held constant

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aggregate expenditure

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total spending on final goods and services at a given price level during a given time period

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aggregate expenditure function

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a relationship showing, for a given price level, the amount of planned spending for each level of income; the total of C + I + NX

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aggregate income

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the sum of all income earned by resource suppliers in an economy during a given time period

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aggregate output

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the total quantity of final goods and services produced in an economy during a given time period

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aggregate supply curve

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a curve representing the relation between the economy's price level and the amount of aggregate output supplied per period of time, other things held constant

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allocative efficiency

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the condition that exists when firms produce the output that is most preferred by consumers; marginal cost of each good just equals the marginal benefit that consumers derive from that good

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alternative goods

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other goods that use some of the same type of resources used to produce the good in question

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annually balanced budget

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budget philosophy prior to the Great Depression; aimed at equating revenues with expenditures, except during times of war

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annuity

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a given sum of money received each year for a specified number of years

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antitrust activity

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government activity aimed at preventing monopoly and fostering competition

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applied research

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research that seeks to answer particular questions or to apply scientific discoveries to the development of specific products

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arbitrageur

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a person who takes advantage of temporary geographic differences in the exchange rate by simultaneously purchasing foreign exchange in one market and selling it in another market

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asset

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anything of value that is owned

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association-causation fallacy

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the incorrect idea that if two variables are associated in time, one must necessarily cause the other

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asymmetric information

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an inequality in the information known by each party to a transaction; or, a situation in which one side of the market has more reliable information than does the other side

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autarky

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a situation of national self-sufficiency in which there is no economic interaction with foreigners

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automatic stabilizers

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structural features of government spending and taxation that smooth fluctuations in disposable income over the business cycle

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autonomous

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a term that means "independent"; an investment that is independent of the level of income

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autonomous government purchases

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government purchases that do not vary with the level of real GDP

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autonomous net taxes

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taxes minus transfers, independent of the level of real GDP

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average fixed cost

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total fixed cost divided by output

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average revenue

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total revenue divided by output

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average total cost

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total cost divided by output; the sum of average fixed cost plus average variable cost

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average variable cost

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total variable cost divided by output

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backward-bending supply curve of labor

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occurs when the income effect of a higher wage dominates the substitution effect of a higher wage

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balance of payments

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a record of all economic transactions between residents of one country and residents of the rest of the world during a given time period

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balance on current account

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a section of a country's balance of payments account that measures the sum of the country's net unilateral transfers and its balance on goods and services

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balance on goods and services

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a section of a country's balance of payments account that measures the difference in value between a country's exports of goods and services and its imports of goods and services

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balance sheet

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a financial statement that shows assets, liabilities, and net worth at a given point in time

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balanced budget amendment

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proposed amendment to the U.S. Constitution requiring a balanced federal budget

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balance budget multiplier

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a factor that shows that identical changes in government purchases and net taxes change equilibrium real GDP demanded by that same amount

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bank holding company

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a corporation that owns banks

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bank notes

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papers promising a specific amount of money in gold to bearers who presented them to issuing banks for redemption; an early type of money

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barrier to entry

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any impediment that prevents new firms from competing on an equal basis with existing firms in an industry

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barter

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the direct exchange of one good for another without the use of money

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base year

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a reference year against which other years are measured

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basic research

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the search for knowledge without regard to how that knowledge will be used; a first step toward technological advancement

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behavioral assumption

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an assumption that describes the expected behavior of economic actors

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beneficial supply shocks

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unexpected events that increase aggregate supply, sometimes only temporarily

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bilateral monopoly

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a situation in which a single seller, or monopolist, bargains with a single buyer, or monopsonist

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binding arbitration

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negotiation in which both parties in a union-management dispute agree to accept an impartial observer's resolution of the dispute

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bond

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a certificate reflecting a firm's promise to pay the holder a periodic interest payment until the date of maturity and a fixed sum of money on the designated maturity date

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bounded rationality

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the notion that there is a limit on the amount of information an economic agent, such as a manager, can comprehend

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budget deficit

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amount by which government spending during the year exceeds government revenues

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budget line

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a line showing all combinations of two goods that can be purchased at given prices with a fixed amount of income

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bureaucratic coordination

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a type of economic coordination whereby an administrative hierarchy directs the activities of economic actors

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bureaus

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government agencies charged with implementing legislation and financed by appropriations from legislative bodies

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business cycle

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the rise and fall of economic activity relative to the long-term growth trend of the economy

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capital

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all buildings, equipment, and human skill used to produce goods and services

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capital account

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the record of a country's international transactions involving purchases or sales of financial and real assets

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cartel

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a group of firms that agree to coordinate their production and pricing decisions

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change in demand

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a shift in a given demand curve caused by a change in one of the determinants of demand for the good

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change in quantity demanded

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a movement along the demand curve for a good in response to a change in the price of a good

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change in quantity supplied

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a movement along the supply curve for a good in response to a change in the price of the good

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change in supply

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a shift in a given supply curve caused by a change in one of the determinants of the supply of the good

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checkable deposits

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deposits in financial institutions against which checks can be written

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classical economists

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a group of eighteenth- and nineteenth-century British economists who criticized mercantilism and believed that self-interest and competition promoted economic development

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Coase theorem

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the theory that as long as bargaining costs are small, an efficient solution to the problem of externalities will be achieved by assigning property rights

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cold turkey

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the announcement and execution of tough measures to reduce high inflation

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collective bargaining

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the process by which union and management negotiate a mutually agreeable labor agreement

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command economy

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an economic system characterized by centralized economic planning and public ownership of resources

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commercial banks

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depository institutions that make short-term loans primarily to businesses

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commodity money

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anything that serves both as money and as a commodity

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common pool problem

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the problem that unrestricted access to a resource results in overuse until the net marginal value of additional use drops to zero

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comparable worth

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the principle that pay should be determined by job characteristics rather than by supply and demand

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comparative advantage

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the ability to produce something at a lower opportunity cost than other producers face

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competing-interest legislation

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legislation that imposes concentrated costs on one group and provides concentrated benefits to another group

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complements

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goods that are related in such a way that an increase in the price of one leads to a decrease in the demand for the other

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concentration ratio

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a measure of the market share of the largest firms in an industry

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conglomerate merger

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a merger involving the combination of firms producing in different industries

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consent decree

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a legal agreement through which the accused party, without admitting guilt, agrees to refrain in the future from certain illegal activity if the government drops the charges

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constant-cost industry

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an industry that can expand or contract without affecting the long-run per-unit cost of production; the long-run industry supply curve is horizontal

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constant-cost industry

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an industry that can expand or contract without affecting the long-run per-unit cost of production; the long-run industry supply curve is horizontal

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constant elasticity of demand

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the type of demand that exists when price elasticity is the same everywhere along the curve; the elasticity value is constant

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consumer equilibrium

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the condition in which an individual consumer's budget is completely exhausted and the last dollar spent on each good yields the same marginal utility

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consumer price index (CPI)

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a measure over time of the cost of a fixed "market basket" of consumer goods and services

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consumer surplus

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the difference between the maximum amount that a consumer is willing to pay for a given quantity of a good and what the consumer actually pays

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consumption

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all household purchases of final goods and services

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consumption function

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the relation between the level of income in an economy and the amount households spend on consumption, other things constant

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consumption possibilities schedule

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a schedule reflecting the alternative consumption possibilities available in an economy; in the absence of trade, the consumption it is the same as the production possibilities schedule

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contestable market

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one in which potential entrants can serve the same market and have access to the same technology as the existing firm

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continuing resolution

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budget agreements that allow agencies, in the absence of an approved budget, to spend at the rate of the previous year's budget

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contractionary gap

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the amount by which actual output in the short run falls below the economy's potential output

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convergance

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a theory that economies around the world will grow more alike over time, with poorer countries catching up with richer countries

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corporate profits

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a component of the government measure of national income; the net revenues received by incorporated business before corporate income taxes are subtracted

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corporation

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a legal entity owned by stockholders whose liability is limited to the value of their stock

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cost-plus pricing

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a method of determining the price of a good by adding a percentage markup to the average variable cost

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cost-plus inflation

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a continuous rise in the price level caused by reductions in aggregate supply

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craft union

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a union whose members have a particular skill or work at a particular craft, such as plumbers or carpenters

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cross-price elasticity of demand

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the percentage change in the quantity demanded of one good (holding the price constant) divided by the percentage change in the price of another good

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cross-subsidization

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a firm's use of revenues from profitable activities to subsidize unprofitable activities

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crowding in

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the potential for government spending to stimulate private investment in an otherwise sluggish economy

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crowding out

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the displacement of interest-sensitive private investment that occurs when increased government spending drives up interest rates

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currency appreciation

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a decrease in the number of units of a particular currency needed to purchase one unit of another currency