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The Economy (CORE) Units 1-11 Key Concepts

Terms in this set (98)

altruism
The willingness to bear a cost in order to benefit somebody else. [4.0][13.5][KC4]
asset
Anything of value that is owned. [10.7][11.5][KC11]
asset price bubble
Sustained and significant rise in the price of an asset fuelled by expectations of future price increases. [11.7][KC9]
asymmetric information
Information that is relevant to the parties in an economic interaction, but is known by some but not by others. [6.10][10.4][KC10]
balance sheet
A record of the assets, liabilities, and net worth of an economic actor such as a household, bank, firm, or government. [10.7][KC11][KC13]
bank money
Money in the form of bank deposits created by commercial banks when they extend credit to firms and households. [10.8][KC11]
bargaining power
The extent of a person's advantage in securing a larger share of the economic rents made possible by an interaction. [5.1][16.3][KC4][KC14]
base money
Cash and the balances held by commercial banks in their accounts at the central bank, known as reserves. [10.8][KC11]
best response
In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select. [4.2][KC4]
broad money
The stock of money in circulation, which is the sum of base money (excluding legal tender held by banks) and bank money. [10.8][KC11]
budget constraint
An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one's budgetary resources. [3.7][KC3]
capitalism
An economic system in which private property, markets, and firms play an important role. [1.6][KC1]
capitalist revolution
Rapid improvements in technology combined with the emergence of a new economic system. [1.1][KC1]
ceteris paribus
Economists often simplify analysis by setting aside things that are thought to be of less importance to the question of interest. The literal meaning of the expression is 'other things equal'. In an economic model it means an analysis 'holds other things constant'. [2.3][KC2]
collateral
An asset that a borrower pledges to a lender as a security for a loan. If the borrower is not able to make the loan payments as promised, the lender becomes the owner of the asset. [10.0][12.7][KC11]
competitive equilibrium
A market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplied is equal to the quantity demanded. [8.2][KC8]
constrained choice problem
This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce. [3.5][7.5][KC3]
consumer surplus
The consumer's willingness to pay for a good minus the price at which the consumer bought the good, summed across all units sold. [7.7][KC7]
credit-constrained
A description of individuals who are able to borrow only on unfavourable terms. [10.12][12.7][KC11]
credit-excluded
A description of individuals who are unable to borrow on any terms. [10.12][12.7][KC11]
deadweight loss
A loss of total surplus relative to a Pareto-efficient allocation. [7.7][KC7]
demand curve
The curve that gives the quantity consumers will buy at each possible price. [7.1][KC7]
democracy
A political system, that ideally gives equal political power to all citizens, defined by individual rights such as freedom of speech, assembly, and the press; fair elections in which virtually all adults are eligible to vote; and in which the government leaves office if it loses. [1.10][KC1]
differentiated product
A product produced by a single firm that has some unique characteristics compared to similar products of other firms. [7.4][KC7]
diminishing average product of labour
A situation in which, as more labour is used in a given production process, the average product of labour typically falls. [2.7][KC2]
diminishing marginal returns to consumption
The value to the individual of an additional unit of consumption declines, the more consumption the individual has. [10.3][KC11]
discount rate
A measure of the person's impatience: how much the person values an additional unit of consumption now relative to an additional unit of consumption later. It is the slope of the person's indifference curve for consumption now and consumption later, minus one. [10.4][KC11]
division of labour
The specialization of producers to carry out different tasks in the production process. [4.1][6.1][KC6]
dominant strategy equilibrium
An outcome of a game in which every player plays his or her dominant strategy. [4.2][KC4]
economic rent
A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option). [2.3][3.3][KC2][KC5]
economic system
The institutions that organize the production and distribution of goods and services in an entire economy. [1.6][KC1]
economics
The study of how people interact with each other and with their natural surroundings in providing their livelihoods, and how this changes over time. [1.11][KC1]
economies of scale
These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm's long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. [7.2][1.7][KC7]
employment rent
The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative (that is, being unemployed). [6.4][KC6]
equilibrium
A model outcome that is self-perpetuating. In this case, something of interest does not change unless an outside or external force is introduced that alters the model's description of the situation. [2.2][4.2][KC2]
equity
An individual's own investment in a project. This is recorded in an individual's or firm's balance sheet as net worth. [10.10][14.3][KC11]
external effect
A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in a contract. It is called an external effect because the effect in question is outside the contract. [12.0][KC10]
feasible set
All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces. [3.4][15.4][KC3]
firm
A business organization which pays wages and salaries to employ people, and purchases inputs, to produce and market goods and services with the intention of making a profit. [1.6][6.0][KC1]
firm-specific asset
Something that a person owns or can do that has more value in the individual's current firm than in their next best alternative. [6.1][KC6]
fundamental value of a share
The share price based on anticipated future earnings and the level of systematic risk, which can be interpreted as a measure of the benefit today of holding the asset now and in the future. [11.5][KC9]
game
A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs. [4.1][KC4]
incentive
Economic reward or punishment, which influences the benefits and costs of alternative courses of action. [2.3][5.1][KC2]
income
The amount of profit, interest, rent, labour earnings, and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. The maximum amount that you could consume and leave your wealth unchanged. [1.0][10.1][KC11]
income effect
The effect that the additional income would have if there were no change in the price or opportunity cost. [3.7][KC3]
incomplete contract
A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others). [6.3][12.4][KC6][KC10]
indifference curve
A curve of the points which indicate the combinations of goods that provide a given level of utility to the individual. [3.2][KC3]
Industrial Revolution
A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy. [1.4][2.0][KC1]
inequality aversion
A dislike of outcomes in which some individuals receive more than others. [4.9][19.4][KC4]
innovation rents
Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form, or marketing strategy. [2.3][16.1][KC2]
institution
The laws and social customs governing the way people interact in society. [1.6][5.1][KC1]
isocost line
A line that represents all combinations that cost a given total amount. [2.4][6.7][KC2]
leverage ratio (for banks or households)
The value of assets divided by the equity stake in those assets. [10.10][17.8][KC11]
liability
Anything of value that is owed. [10.7][KC11]
marginal product
The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant. [3.1][KC1][KC3]
marginal rate of substitution (MRS)
The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve. [3.2][20.3][KC3]
marginal rate of transformation (MRT)
The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier. [3.4][20.3][KC3]
marginal social cost (MSC)
The cost of producing an additional unit of a good, taking into account both the cost for the producer and the costs incurred by others affected by the good's production. Marginal social cost is the sum of the marginal private cost and the marginal external cost. [12.1][KC10]
market
A market is a way of connecting people who may mutually benefit by exchanging goods or services through a process of buying and selling. [1.6][KC1]
market failure
When markets allocate resources in a Pareto-inefficient way. [7.10][10.0][KC10]
money
A medium of exchange consisting of bank notes and bank deposits, or anything else that can be used to purchase goods and services, and is accepted as payment because others can use it for the same purpose. [10.1][KC11]
Nash equilibrium
A set of strategies, one for each player in the game, such that each player's strategy is a best response to the strategies chosen by everyone else. [4.13][13.7][KC4]
net worth
Assets less liabilities. [10.7][KC11]
opportunity cost
When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative. [3.3][20.3][KC3]
order book
A record of limit orders placed by buyers and sellers, but not yet fulfilled. [11.6][KC9]
Pareto efficiency curve
The set of all allocations that are Pareto efficient. Often referred to as the contract curve, even in social interactions in which there is no contract, which is why we avoid the term. [5.8][KC5]
Pareto efficient
An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off. [5.2][7.7][KC5]
patent
A right of exclusive ownership of an idea or invention, which lasts for a specified length of time. During this time it effectively allows the owner to be a monopolist or exclusive user. [12.5][21.6][KC10]
Pigouvian tax
A tax levied on activities that generate negative external effects so as to correct an inefficient market outcome. [12.3][KC10]
policy (interest) rate
The interest rate set by the central bank, which applies to banks that borrow base money from each other, and from the central bank. [10.9][15.7][KC11][KC14]
positive feedback (process)
A process whereby some initial change sets in motion a process that magnifies the initial change. [11.8][14.6][KC11][KC14]
power
The ability to do (and get) the things one wants in opposition to the intentions of others, ordinarily by imposing or threatening sanctions. [5.1][KC5]
price elasticity of demand
The percentage change in demand that would occur in response to a 1% increase in price. We express this as a positive number. Demand is elastic if this is greater than 1, and inelastic if less than 1. [7.8][KC7]
principal-agent relationship
This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract. [6.0][10.12][KC11]
prisoners' dilemma
A game in which the payoffs in the dominant strategy equilibrium are lower for each player, and also lower in total, than if neither player played the dominant strategy. [4.3][KC4]
private property
The right and expectation that one can enjoy one's possessions in ways of one's own choosing, exclude others from their use, and dispose of them by gift or sale to others who then become their owners. [1.6][5.6][KC1]
procedural judgements of fairness
An evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself, (for example, how unequal it is). [5.3][KC5]
producer surplus
The price at which a firm sells a good minus the minimum price at which it would have been willing to sell the good, summed across all units sold. [7.7][KC7]
profit margin
The difference between the price and the marginal cost. [7.4][KC7]
public good
A good for which use by one person does not reduce its availability to others. [4.6][12.5][KC4][KC10]
pure impatience
This is a characteristic of a person who values an additional unit of consumption now over an additional unit later, when the amount of consumption is the same now and later. It arises when a person is impatient to consume more now because she places less value on consumption in the future for reasons of myopia, weakness of will, or for other reasons. [10.3][20.9][KC10]
reciprocity
A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind. [4.7][KC4]
relative price
The price of one good or service compared to another (usually expressed as a ratio). [2.3][15.1][KC2]
reservation option
A person's next best alternative among all options in a particular transaction. [2.3][5.7][KC2]
reservation wage
What an employee would get in alternative employment, or from an unemployment benefit or other support, were he or she not employed in his or her current job. [5.6][6.5][KC6]
savings
When consumption expenditures is less than net income, saving takes place and wealth rises. [3.1][10.0][KC3]
scarcity
A good that is valued, and for which there is an opportunity cost of acquiring more. [3.0][KC3]
shock
An exogenous change in some of the fundamental data used in a model. [8.6][13.5][KC8]
social dilemma
A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals. [4.0][12.0][KC4]
solvent
A firm or individual for which net worth is positive or zero. For example, a bank for this assets are more than its liabilities (what it owes). [10.10][KC11]
substantive judgements of fairness
Judgements based on the characteristics of the allocation itself, not how it was determined. [5.3][KC5]
substitution effect
The effect that is only due to changes in the price or opportunity cost, given the new level of utility. [3.7][KC3]
technology
A process taking a set of materials and other inputs, including the work of people and machines, to produce an output. [1.4][KC1]
trade union
An organization consisting predominantly of employees, the principal activities of which include the negotiation of rates of pay and conditions of employment for its members. [9.10][KC6]
verifiable information
Information that can be used to enforce a contract. [6.10][12.4][KC10]
wealth
Stock of things owned or value of that stock. It includes the market value of a home, car, any land, buildings, machinery or other capital goods that a person may own, and any financial assets such as shares or bonds. Debts are subtracted—for example, the mortgage owed to the bank. Debts owed to the person are added. [10.1][KC11]
willingness to pay (WTP)
An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good. [7.4][8.1][KC7]
worker's best response function (to wage)
The optimal amount of work that a worker chooses to perform for each wage that the employer may offer. [6.6][KC6]
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