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budget constraint

the limit on the consumption bundles that a consumer can afford

Giffen good

a good for which an increase in the price raises the quantity demanded

income effect

the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve

indifference curve

a curve that shows consumption bundles that give the consumer the same level of satisfaction

inferior good

a good for which an increase in income reduces the quantity demanded

marginal rate of substitution

the rate at which a consumer is willing to trade one good for another

normal good

a good for which an increase in income raises the quantity demanded

perfect complements

two goods with right-angle indifference curves

perfect substitutes

two goods with straight-line indifference curves

substitution effect

the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution

adverse selection

the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party

agent

a person who is performing an act for another person, called the principal

Arrow's impossibility theorem

a mathematical result showing that, under certain assumed conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences

behavioral economics

the subfield of economics that integrates the insights of psychology

Condorcet paradox

the failure of majority rule to produce transitive preferences for society

median voter theorem

a mathematical result showing that if voters are choosing a point along a line and each voter wants the point closest to his most preferred point, then majority rule will pick the most preferred point of the median voter

moral hazard

the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior

political economy

the study of government using the analytic methods of economics

principal

a person for whom another person, called the agent, is performing some act

screening

an action taken by an uninformed party to induce an informed party to reveal information

signaling

an action taken by an informed party to reveal private information to an uninformed party

consumption

spending by households on goods and services, with the exception of purchases of new housing

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

government purchases

spending on goods and services by local, state, and federal governments

gross domestic product (GDP)

the market value of all final goods and services produced within a country in a given period of time

investment

spending on capital equipment, inventories, and structures, including household purchases of new housing

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

microeconomics

the study of how households and firms make decisions and how they interact in markets

net exports

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

nominal GDP

the production of goods and services valued at current prices

real GDP

the production of goods and services valued at constant prices

consumer price index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

indexation

the automatic correction by law or contract of a dollar amount for the effects of inflation

inflation rate

the percentage change in the price index from the preceding period

nominal interest rate

the interest rate as usually reported without a correction for the effects of inflation

producer price index

a measure of the cost of a basket of goods and services bought by firms

real interest rate

the interest rate corrected for the effects of inflation

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