the condition that results from limited resources combined with unlimited wants
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
Factors of Production
resources of land, labor, capital, and entrepreneurship used to produce goods and services
the physical location where production occurs. Includes bodies of water as well as resources extracted from the earth.
the work done by humans that is used in the production of goods and services.
previously manufactured goods used to make other goods and services
the process of starting, organizing, managing, and assuming the responsibility for a business
a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
The quantity of a good or service that consumers are willing and able to purchase at a given price in a given period of time.
The amount of a good or service a consumer is willing and able to purchase at a range of prices.
the demand by all the consumers of a given good or service
Law of Demand
the claim that, ceteris paribus, the quantity demanded of a good falls when the price of the good rises
a graph of the relationship between the price of a good and the quantity demanded.The Law of Demand implies that this curve is negatively sloped.
Determinants of Demand
Anything other than price of the current item that influences consumer buying decisions, including income, tastes and preferences, price of related items (substitutes and complements), number of consumers in the market, and expected future price.
The quantity of a product that producers are willing and able to produce at a given price in a given period of time.
the total of all individual suppliers' products in a market at a particular time
Determinants of Supply
Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price.
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
when a price is below equilibrium causing quantity demanded to be greater than quantity supplied
when a price is above equilibrium causing quantity demanded to be less than quantity supplied
price signals which determines allocation of resources through interaction of supply and demand
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. It is seen as excess utility for the consumer.
the amount a seller is paid for a good minus the seller's cost of providing it. It is viewed as excess satisfaction for the producer.
the sum of consumer and producer surplus; the total benefit to society, this is maximised at the equilibrium.
the apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal
Benefits or customer value received by users of the product
Price Elasticity of Demand
The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.
The demand for a product is highly responsive to price changes. The range of a demand curve where elasticities of demand are greater than 1.0.
The demand for a product is not very responsive to price changes. The range of a demand curve where elasticities of demand are less than 1.0.
a given change in price causes a proportional change in quantity demanded. The point of any demand curve where revenue is maximised.
Perfectly elastic demand
Any increase in price results in all demand being eliminated.
Perfectly inelastic demand
the case where the quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.
Cross (Price) Elasticity of Demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.
two goods for which an increase in the price of one leads to an increase in the demand for the other. Occurs when XED is a positive value.
two goods for which an increase in the price of one leads to a decrease in the demand for the other. Occurs when XED is a negative value.
Income Elasticity of Demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
a good for which demand goes up when income is higher and for which demand goes down when income is lower.
a good that consumers demand less of when their incomes increase. Occurs when yED is a negative value.
Price Elasticity of Supply
a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price
a tax levied on goods or services rather than on persons or organizations
a fixed amount that is imposed upon a product by the government; it has the effect of shifting the supply curve vertically upwards by the amount of the tax.
ad valorem tax
an indirect tax where a percentage is added to the selling price of each unit.
A tax on a good that is often meant to limit consumption of that good.
the actual division of the burden of a tax between buyers and sellers in a market
Government payments given to certain industries to help offset some of their costs of production. It has the effect of shifting the curve vertically downwards.
a maximum price that can be legally charged for a good or service: set below equilibrium
a legal minimum on the price at which a good can be sold: set above equilibrium
economic side effects or by-products that affect an uninvolved third party; can be negative or positive
Positive externality of consumption
When there is a spillover benefit of consuming a good or service onto a third party.
Positive externality of production
when the production of a good or service creates a benefit to third parties.
Marginal Private Benefit
The benefit from an additional unit of a good or service that the consumer of that good or service receives.
Marginal Social Benefit
The true benefit to society of a one unit increase in the production of a good or service
Marginal Private Cost
the cost of producing an additional unit of a good or service that is borne by the producer of that good or service
Marginal Social Cost
the true cost borne by society when the production of a good or service is increased by one unit
a good or service considered as beneficial for people and that would be under provided by the market and so under consumed
a good or service considered to be harmful for people who consume them and society as a whole. If left to the market forces or private enterprise, they would be over-produced and thus over consumed
licenses to emit limited quantities of pollutants that can be bought and sold by polluters (AKA Cap and Trade)
the reduction in economic surplus resulting from a market not being in competitive equilibrium
A good that is neither excludable nor rivalrous in consumption
Free Rider Problem
tendency for people to refrain from contributing to the common good when a resource is available without requiring any personal cost or contribution
Common Access Resource
a resource that is owned by no one, but is available to all users at little or no charge
providing the best outcomes for human and natural environments both in the present and for the future
situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace
a period of time sufficiently short that at least one of the firm's factors of production cannot be varied
A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.
all the goods and services produced by a business during a given period of time with a given amount of input
Law of Diminishing Marginal Returns
As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
The total opportunity costs of production to a firm, including the opportunity cost of entrepreneurship.
Costs that do not vary with the quantity of output produced
Costs that vary directly with the level of production
Total Costs divided by quantity. ATC = TC/Q
Increasing returns to scale
When long-run average total cost declines as output increases. Economies of scale outweigh diseconomies of scale
Economies of Scale
factors that cause a producer's average cost per unit to fall as output rises in the long run
Diseconomies of Scale
factors that cause a producer's average cost per unit to rise as output rises in the long run
the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
Total revenue minus total cost, including both explicit and implicit costs - accounting profit minus the opportunity costs.
the payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm
Refers to a firm earning as much sales revenue as possible while, at the same time, keeping costs to a minimum. Profit maximisation is the most common goal for a firm. Occurs at the quantity of output where MR=MC
An alternative goal of some firms: to produce the output level yielding the highest value of sales (MR=0)
An alternative goal of some firms: to expand output as quickly as possible
Choosing an option that is acceptable, although not necessarily the best or perfect.
a market structure in which a large number of firms all produce the same product and no single seller controls supply or price and barriers to entry are low
products that have income elasticity between 0 and 1. When consumer income grows, quantity demanded rises by less than the rise in income.
goods that have income elasticities greater than 1. when consumer income grows, quantity demanded of luxury goods rises more than the rise in income
Negative externality of consumption
when a good or service consumed by individuals adversely affects third parties
Negative externality of production
when the production of a good or service adversely affects third parties
the average amount produced by each unit of a variable factor of production
The increase in output that arises from an additional unit of input
the extra cost of producing one more unit of output
the sum of the fixed and variable costs for any given level of production
the production of a good in the least costly way: occurs at ATC minimum.
Decreasing returns to scale
when long-run average total cost increases as output increases: diseconomies of scale outweigh economies of scale
Constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
Revenue per unit produced. It is calculated by dividing TR by the output. NOTE: This is always equals Price if there is no price discrimination.
the additional income from selling one more unit of a good; sometimes equal to price
a short-run decision not to produce anything during a specific period of time because of current market conditions. This would minimize losses for the firm if AVC > AR at Qpm. The firm would only be losing it's fixed costs.
Operate at a loss
a short-run decision to continue operating in spite of losses. Losses would be minimized with this decision if AR>AVC at Qpm. In other words, the revenue would be paying for all of the variable costs and some portion of the fixed costs.
a strategy that firms use to achieve market power. Accomplished by producing products that have distinct positive identities in consumers' minds.
the branch of economics that studies the overall working of a national economy
Circular Flow of Income
economic model that pictures income as flowing continuously between businesses and consumers
withdrawals from an economy's circular flow which include savings, taxes, and imports
additions to an economy's circular flow which include investments, government spending, and exports
Gross Domestic Product
The total value of goods and services produced within the borders of a country during a specific time period, usually one year.
Gross National Product
The total value of goods and services, including income received from abroad, produced by a country's factors of production within a specific time period, usually one year.
Net National Product
A measure of all goods and services produced by a country in a year, including production from its investments abroad, minus the loss or degradation of natural resource capital as a result of productivity.
Purchasing Power Parity
a measure of how many units of currency are needed in one country to buy the amount of goods and services that one unit of currency will buy in another country
any economic statistic adjusted for changes in price
any unadjusted number
impact of production on air pollution, water pollution, soil depletion, and the loss of other natural resources
The value of output produced by the economy, but only counting the value added at each stage of production.
A method used to measure the value of aggregate output of an economy, which adds up all spending on final goods and services produced within a country within a given time period. C+I+G+(X-M)
Adding up all the money earned by people and firms in producing this year's output, wages and salaries+ rent+ profits+ interest
a statistical factor designed to remove the effect of inflation
a period of economic growth as measured by a rise in real GDP
a period of economic decline marked by falling real GDP
the phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again
recurring fluctuations in economic activity consisting of contraction and recovery and growth and decline. It is measured in terms of Real GDP.
The real output (GDP) an economy can produce when it fully employs its available resources
the amount of goods and services in the economy that will be purchased at all possible price levels
the total amount of goods and services in the economy available at all possible price levels
spending by households on goods and services, with the exception of purchases of new housing
spending on capital equipment, inventories, and structures, including household purchases of new housing
Changes in the stock of unsold goods and raw materials held during a period.
spending on domestically produced goods by foreigners minus spending on foreign goods by domestic residents
the extent to which people are optimistic or pessimistic about the future health of the economy and how they will fare down the road. These beliefs influence how much money they will pump into the economy when making discretionary purchases.
the money left to spend or save after taxes have been paid
An unexpected event that causes the short-run aggregate supply curve to shift
Short Run Aggregate Supply
The relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant.
Long Run Aggregate Supply
Output isn't affected by the price level; curve is vertical. Viewpoint associated with the New Classical/Monetarist Viewpoint
"Sticky wages and prices"
Keynesian viewpoint: wages and prices can easily rise, but are unlikely to fall.
Keynesian Aggregate Supply
Aggregate Supply goes from high levels of spare capacity (low competition) to low levels of spare capacity (high competition) as a result of increasing Aggregate Demand.
Full Employment Level of Aggregate Supply
When an economy is producing at a level of output at which almost all the nation's resources are employed. The unemployment rate at this level of output equals the natural rate of unemployment, and includes only frictional, seasonal and structural unemployment.
Short Run Equilibrium
tthe condition that exists in the economy when the aggregate demand for Real GDP equals the aggregate supply of Real GDP. Where the aggregate demand curve intersects the short run aggregate supply curve.
Long Run Equilibrium
The real GDP is at its potential output, the actual employment rate will equal the natural rate of unemployment. AD intersects SRAS and LRAS at the same level of national output.
The level of aggregate demand in the economy is not sufficient to buy up the potential output that could be produced by the economy at the full employment level of output.
A situation where real GDP is greater than potential GDP, and unemployment is lower than the natural rate of unemployment.
Marginal Propensity to Consume (MPC)
the portion of additional income that is spent on consumption
Marginal Propensity to Save (MPS)
the portion of additional income that is saved
Marginal Propensity to Tax (MPT)
the portion of additional income that is paid as tax
Marginal Propensity to buy Imports (MPM)
the portion of additional income that is spent on consumption of imports
An increase in aggregate demand raises income, which increases consumption spending increasing income further resulting in an overall increase in output greater than in the initial increase in aggregate demand
Keynesian Multiplier (formulae)
1/(1-MPC) or 1/(MPS+MPT+MPM) or 1/MPW
the proportion of the labor force actively seeking work but unable to find jobs
Workforce (Labor force)
The total number of people of working age who are working or actively seeking employment
workers are overqualified for their jobs or work fewer hours than they would prefer
Unemployment that is not accounted in official unemployment statistics because of such factors as the exclusion of discouraged workers, the practice of considering part time workers as full-time workers, and others.
unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season
unemployment that occurs when workers' skills do not match the jobs that are available
unemployment that rises during economic downturns and falls when the economy improves
Natural Rate of Unemplyment (NRU)
The "normal" unemployment rate due to frictional and structural conditions in labor markets. It is the unemployment rate that occurs when the economy is operating at a sustainable rate of output.
a rise in the average price level
a reduction in the rate of inflation
A decrease in the average price level
Consumer Price Index (CPI)
a measure of the overall cost of the goods and services bought by a typical consumer
Producer Price Index (PPI)
An average of the prices received by producers of goods and services at all stages of the production process.
Core/ Underlying Rate of Inflation
A rate of inflation based on consumer price index that excludes goods with highly volatile (unstable) prices such as food and energy.
theory that prices rise as the result of excessive business and consumer demand; demand increases faster than total supply, resulting in shortages that lead to higher prices
inflation caused by rising production costs that result in businesses increasing their prices
indicates a short-run inverse relationship between inflation and unemployment rates
Phillips Curve (Long Run)
indicates that there is no trade-off in the long run between unemployment and inflation
A period of falling output and rising prices
a steady, long-term increase in real GDP
all human-made goods that are used to produce other goods and services; tools and buildings
the knowledge and skills that workers acquire through education, training, and experience
Refers to an expanded meaning of the factor of production land, including everything that is included in land plus additional natural resources occurring naturally in the environment such as air, biodiversity, soil quality, the ozone layer, and the global climate.
The quantity of goods and services produced from each unit of labor input
Equity vs Equality
equity means each person gets what they contributed, equality means each person gets the same no matter what they contributed
A summary measure of the information contained in the Lorenz Curve of an economy. The closer the Gini coefficient is to 1, the greater the income inequality. The closer the Gini coefficient is to 0, the greater the income equality.
the condition experienced by people whose incomes are too low to be able to afford even the most basic necessities for a healthy and safe existence
poverty defined according to the living standards of the majority in any given society
a tax paid directly by the person or organization on whom it is levied
A tax for which the MTR increases as the value of the item (such as income) being taxed increases MTR>ATR
A tax for which the MTR decreases as the value of the item (such as income) being taxed increases MTR<ATR
A tax in which the average tax rate is the same regardless of the value of the item (such as income) being taxed MTR=ATR
payments made to groups or individuals when no good or service is received in return
Government policy that attempts to manage the economy by controlling taxing and spending.
Also referred to as government income; it includes tax and other revenues a government collects.
Is the market value of government purchases of goods and services (G)
A shortfall of tax revenue from government spending. a situation in which the government spends more than it takes in
an excess of tax revenue over government spending A situation in which the government takes in more than it spends
Budget in which revenues are equal to spending
changes in taxes or spending that are the result of deliberate changes in government policy (eg: lower taxes or increase govt. spending during recession)
Expansionary Fiscal Policy
An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output
Contractionary Fiscal Policy
Fiscal policy used to decrease aggregate demand. Deliberate measures to decrease government expenditures, increase taxes, or both.
Government spending and taxes that automatically increase or decrease along with the business cycle
Changes in the supply of money and the availability of credit initiated by a nation's central bank to achieve macroeconomic objectives
an institution designed to oversee the banking system and conduct Monetary Policy in an economy
The cost of borrowing money
Easy Monetary Policy
a (monetary) policy of decreasing interest rates to increase the money supply, stimulating aggregate demand and economic growth
Tight Monetary Policy
a (monetary) policy of increasing interest rates to reduce or slow the growth in money supply, slowing aggregate demand and economic growth
Inflation Rate Targeting
a monetary policy strategy in which the central bank makes a public commitment to achieve an explicit inflation target and explain how its policy actions will achieve it
periods between the time fiscal policy is enacted and the time it becomes effective, reducing the effectiveness of the policy
Supply Side Policies
Government policies that focus on stimulating aggregate supply instead of aggregate demand.
Interventionist Supply -Side Policies
Any policy based on government intervention in the market intended to affect the supply-side of the economy, usually to shift the LRAS curve to the right, increase potential output and achieve long term economic growth.
the basic physical and organizational structures and facilities (e.g., buildings, roads, and power supplies) needed for the operation of a society or enterprise.
Market Based Supply-Side Policies
Government adopted strategies to reduce its control over markets and encourage competition with the effect of increasing national output
Labor Market Reforms
reforms intended to make labor markets more competitive and flexible, to make wages respond to the forces of supply and demand, to lower labor costs, and increase employment by lowering the natural rate of unemployment
a market-based policy which involves using incentives to increase the amount of supply (eg. personal income tax cuts to increase incentive to work, business tax cuts to increase incentive to invest)
The absence of government intervention of any kind in international trade, so that trade takes place without any restrictions between individuals or firms in different countries.
the ability to produce more of a given product using a given amount of resources
The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.
a nation's supply of usable factors of production, including mineral deposits, raw materials, and labor
World Trade Organization (WTO)
An international agency which encourages trade between member nations, administers global trade agreements and resolves disputes when they arise.
Government intervention in international trade through imposition of trade restrictions to prevent the free entry of imports into a country and protect the domestic economy from foreign competition.
A tax on imported goods
A limit placed on the quantities of a product that can be imported
the value of one currency expressed in terms of another currency.
Floating Exchange Rates
exchange rates that are allowed to fluctuate in the open market in response to changes in supply and demand.
A decrease in the value of currency in the context of a floating (or flexible) exchange rate system
A increase in the value of currency in the context of a floating (or flexible) exchange rate system
Fixed Exchange Rates
system under which the price of one currency is fixed in terms of another so that the rate does not change
Managed Exchanged Rates
A system where the value of a currency is allowed to fluctuate but the government will intervene to keep it within a given range
an increase in the value of a currency that is set under a fixed exchange rate regime
an decrease in the value of a currency that is set under a fixed exchange rate regime
Balance of Payments
A record of all transactions between the residents of a country and the residents of all other countries. It is composed of the current, capital and financial accounts.
the part of the balance of payments that includes balance of payments of goods and services plus net international transfer payments and net factor income
the part of the balance of payments that includes capital transfers and non-produced, non-financial assets.
the part of the balance of payments that includes direct investment, portfolio investment, and reserve assets
Current Account Deficit
Not the exact same as a trade deficit, but a trade deficit is usually the cause
Current Account Surplus
Not the exact same as a trade surplus, but a trade surplus is usually the cause
policies, which lead to a fall in spending on imports and a rise in spending on domestically produced goods in both export and domestic markets.
Policies lowers domestic aggregate demand hence the demand for imports.
Marshall Lerner Condition
The sum of elasticity of demand for exports and imports must exceed one for a currency devaluation/ depreciation to improve the current account of the balance of payments
Preferential Trade Agreements
as agreement between two of more countries to lower trade barriers between them on particular products, resulting in easier access for markets for member countries compared to others.
involving two parties (usually countries)
involving more than two parties (usually countries)
Free Trade Area
A type of trading bloc, consisting of a group of countries that agree to eliminate trade barriers between themselves.
A type of trading bloc, that fulfills the requirements of a free trade area and adopts a common policy (usually external tariffs) towards all non-member.
A type of trading bloc, that fulfills the requirements of a customs union and allows for the free movement of factors of production within the member countries
Trade created due to regional economic integration; occurs when high-cost domestic producers are replaced by low-cost foreign producers in a free trade area.
Trade diverted due to regional economic integration; occurs when low-cost foreign suppliers outside a free trade area are replaced by higher-cost foreign suppliers in a free trade area.
a group of countries that use a common currency
Terms of Trade
ratio of prices at which exports and imports are exchanged. index of export prices/index of import prices
Broad-based rises in the standard of living and well-being of a population, particularly in economically less developed countries.
equipment that the local community is able to use relatively easily and without much cost, and does not create any new economic problems (such as unemployment)
Arises when low incomes result in low savings, permitting low investments (in physical, human, and natural capital), and therefore, low productivity leading to low incomes.
the simultaneous co-existence in LEDCs of traditional subsistence livelihood systems alongside "modern" market sectors.
Markets in which economic activity is not officially regulated by the government.
Millenium Development Goals
8 development goals adopted by the millennium declaration of 2000, consisting of 18 targets to be achieved by 2015
Human Development Index (HDI)
Measure used by the United Nations that calculates development not in terms of money or productivity but in terms of human welfare. The HDI evaluates human welfare based on three parameters: life expectancy, education, and income.
Gender Inequality Index (GII)
A United Nations index, introduced in 2010, which measures a country's loss of achievement due to gender inequality, based on reproductive health, employment, and general empowerment.
a small loan available to poor entrepreneurs to help small businesses grow and raise living standards
a government policy that uses trade restrictions and subsidies to encourage domestic production of manufactured goods
Refers to a growth and trade strategy where a country attempts to achieve economic growth by expanding its exports. As a trade and strategy, it looks outward towards foreign markets and is based on stronger links between domestic and global economies.
Refers to increasing the variety of goods and services produced and/or exported by a country.
Foreign Direct Investment (FDI)
Investment made by a foreign company in the economy of another country.
Multinational Corporations (MNCs)
companies that produce and sell their goods and services all over the world
the transfer of profits made by doing business or investing in a foreign country, back to the country of origin
Official Development Assistance (ODA)
aid given to developing countries through official government programs to promote economic development and the welfare of the people
Non-governmental Organizations (NGOs)
international organizations that operate outside of the formal political arena but that that are nevertheless influential in spearheading international initiatives on social, economic, and environmental issues
help in the form of goods (food, clothing, shelter, etc.) or services (medical, evacuation, immigration paperwork, etc.) provided in response to a natural disaster or man-made crisis
Foreign aid intended to help economically less developed countries; may involve project aid, program aid, technical assistance, or debt relief.
Foreign aid involving support for specific projects, such as building schools, clinics, hospitals, irrigation systems, other agricultural infrastructure, or others.
When money is borrowed at rates that are less than market rates for the purpose of assisting LEDCs
Money that is transferred to a country for the purpose of development that does not need to be repaid
Foreign aid involving financial support to sectors, such as education, health care, agriculture, urban development, financial sector (credit, banking, insurance), and the environment.
assistance given by one country to another that requires the receiving country to buy goods and services from the donor country
International Monetary Fund (IMF)
An international financial institution whose purpose is to make short-term loans to governments on commercial terms in order to stabilize exchange rates, alleviate balance of payments difficulties, and help countries meet their foreign debt obligations.
A specialized agency of the United Nations that makes loans to countries for economic development, trade promotion, and debt consolidation.
Payment of interest and principal of debt (of a country or individual).
Heavily Indebted Countries Initiative (HIDC)
A debt reduction program that aims to ensure that no poor country faces a debt burden it cannot manage
Market Oriented Policies
Development policies that minimize the role of governments and aid agencies and maximize free operation of supply and demand
Policies that rely on intervention by governments or aid agencies to achieve economic growth and development
Social Safety Nets
broad range of programs that protect the minimum standards of living of families and individuals against some of life's unavoidable circumstances
A market structure in which a few large firms dominate a market
Complete control of a product or business by one person or group
a market structure in which many companies sell products that are similar but not identical