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The limited quantities of resources to meet unlimited wants, the condition that results from limited resources combined with unlimited wants.

Comparative Advantage

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.

Opportunity Cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another, the most desirable alternative given up as the result of a decision

Production Possibilities Curve

A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.

Market Price

The price at which buyers and sellers agree to trade. The price determined by supply and demand.

Price Equilibrium

The price at which demand and supply are equal.

Price Elasticity

The measure of how responsive both consumers and producers are to price changes, a measure of consumers price sensitivity e = (percent change in quantity demanded)/(percent change inprice)

Fixed Costs

Costs that do not vary with the quantity of output produced

Variable Costs

Costs that do vary with the quantity of output produced

Average Fixed Cost

The total fixed costs (TFC) divided by the number of units produced. It is the only cost that decreases with production.

Average Variable Cost

Total variable costs divided by the number of units of output.

Marginal Cost

The increase in total cost that arises from an extra unit of production, the increase or decrease in costs as a result of one more or one less unit of output

Law of Diminishing Return

When additonal units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.

Total Product

All the goods and services produced by a business during a given period of time with a given amount of input

Average Product

Total output divided by total units of the variable factor of production

Marginal Product

The increase in output that arises from an additional unit of input, the additional output that can be produced by adding one more unit of a specific input, ceteris paribus.

Explicit Costs

The actual payments a firm makes to its factors of production and other suppliers.

Implicit Costs

All the firm's opportunity costs of the resources supplied by the firm's owners for which the owners do not make an explicit charge

Accounting Profit

Total revenue minus total explicit cost.

Economic Profit

Total revenue minus total cost, including both explicit and implicit costs

Perfect Competition

A market structure in which a large number of firms all produce the same product. The market situation in which there are many sellers in a market and no seller is large enough to dictate the price of a product


Exclusive control of a commodity or service in a particular market, or a control that makes possible the manipulation of prices

Monopolistic Competition

Market or industry characterized by numerous buyers and relatively numerous sellers trying to differentiate their products from those of competitors.


A market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors. A market structure in which a few large firms dominate a market.

Derived Demand

Demand for business or organizational products (tires) caused by demand for consumer goods of services (autos).

Labor Demand

The relationship between the quantity of labor demanded by firms and the wage.

GDP (Gross Domestic Product)

The total market value of all final goods and services produced annually in an economy

CPI (Consumer Price Index)

An index of the cost of all goods and services to a typical consumer

Price Index

An index that traces the relative changes in the price of an individual good (or a market basket of goods) over time

Aggregate Demand

The total demand for goods and services over varying prices within the economy, including componenting such as household consumption, business investment, government spending & net exports., the amount of goods and services in the economy that will be purchased at all possible price levels.

Unemployment Rate

Measures the number of people who are able to work, but do not have a job during a period of time.

Aggregate Supply

The total amount of goods and services in the economy available at all possible price levels

Keynesian Economics

Theory stating that government spending should increase during business slumps and be curbed during booms, economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore, advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.

Money Demand

A relationship between the interest rate and the quantity of money that people are willing to hold at any given interest rate.

Money Supply

The quantity of money available in the economy

Federal Reserve System

The country's central banking system, which is responsible for the nation's monetary policy by regulating the supply of money and interest rates

Money Multiplier

The amount of money the banking system generates with each dollar of reserves, the multiple by which deposits can increase for every dollar increase in reserves; equal to 1 divided by the required reserve ratio.


An increase in the overall level of prices in the economy


A period of slow economic growth and high unemployment while prices rise (inflation)


The state of the economy declines, A period of an economic contraction, sometimes limited in scope or duration.

Automatic Stablizers

Taxes and transfer payments, Federal government expenditures or receipts that automatically increase or decrease without requiring action by Congress or the President. Examples are unemployment compensation and corporate and individual income tax.

Trade Restrictions

Tariffs and quotas restrict the amount of a good imported and supply will decrease

Captial Account

The net result of public and private international investments flowing in and out of a country. The net results includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies.

Long Run Phillips Curve

Relationship between the inflation rate and the unemployment rate in the long run, looks at long-term natural rate of unemployment.

Equilbrium Exchange Rate

Exchange rate at which demand for a currency is equal to the supply of the currency in the economy.

Price Level

An index that traces the relative changes in the price of an individual good (or a market basket of goods) over time

Protectionist Policy

A way to "protect" or insulate a domestic industry from competition by foreign producers of the same good. import tariff allows domestic producers to both capture a larger share of the domestic market and charge a higher price than would otherwise be possible

Comparative Advantage

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.

Absolute Advantage

The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources.

Balance of Payments Account

National account of international payments and receipts, devided into current account, and capital and financial account

Tade Balance

Is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports.

Trade Surplus

When a country exports more than it imports

Trade Deficit

When a country imports more than it exports.

Current Account

That part of the balance of payments recording a nation's exports and imports of goods and services and transfer payments

Foreign Exchange Market

The market in which the currencies of different countries are bought and sold.

Capital Flows

Investment flows per period of time, into and out of a country. EX: Portfolio/FDI

Price Floor

Are minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market, with too low of a price and thus their producers deserve some assistance.

Price Ceilings

Are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them.

Diseconomies Of Scale

An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.

Economies of Scale

The increase in efficiency of production as the number of goods being produced increases.

Growth Rate

Is the percentage increase or decrease of GDP from the previous measurement cycle. It is annualized so it can be compared to the previous year.

Cost Push Inflation

Occurs when businesses respond to rising production costs, by raising prices in order to maintain their profit margins.

Demand Pull Inflation

Inflation resulting from an increase in aggregate demand. Increases in the following factors: money supply, government purchases, and price level in the rest of the world can impact this.

Nominal Value

The value of something in current dollars without taking into account the effects of inflation.

Real Value

Value in current dollars after adjusting for inflation.

Structural Unemployment

Unemployment that occurs when workers' skills do not match the jobs that are available. Changes in technology and tastes can have an impact on this.

Frictional Unemployment

Is unemployment that comes from people moving between jobs, careers, and locations

Cyclical Unemployment

Unemployment that rises during economic downturns and falls when the economy improves. Getting laid off due to a recession is the classic case of this.

Seasonal Unemployment

Unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season.

Nominal Interest Rate

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

Real Interest Rate

The interest rate corrected for the effects of inflation.

Fiscal Policy

The federal government efforts to keep the economy stable by increasing or decreasing taxes or government spending.


A certificate issued by a government or private company which promises to pay back with interest the money borrowed from the buyer of the certificate.

Deadweight Loss

The fall in total surplus that results from a market distortion, such as a tax.

Infant Industries

Developing industries that require protection to get started.


Government loans, grants, and tax deferments given to domestic companies to protect them from foreign competition.

Trade Quotas

Restritions to free trade, put a legal limit on the amount that can be imported, creating shortages which cause prices to rise.


Taxes on imports, raise the price of imported goods, which increases the demand and price for the same goods produced by domestic suppliers. Revenues from these are collected by the domestic government.


Prohibit trade with other nations. They bar a foreign nation's imports or ban exports to that nation or both.

Licenses (Trade)

May be required of importers of foreign goods so that imports can be restricted.

Trade Standards

Are laws or regulations establishing health and safety standards for imported goods, frequently much stricter than those applied to domestically produced goods.

Expansionary Monetary Policy

Federal Reserve system actions to increase the money supply, lower interest rates, and expand real GDP; an easy money policy.

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

Progressive Income Tax

The percentage of income paid in taxes will increase as income increases.


A consortium of independent organizations formed to limit competition by controlling the production and distribution of a product or service. ex/ OPEC


A group of diverse companies under common ownership and run as a single organization.

Marginal Propensity

The smaller marginal propensity to save, the larger the multiplier; the larger the marginal propensity to consume, the larger the multiplier

Spending Multiplier

The reciprocal of 1 minus the marginal propensity to consume. Or the reciprocal of the marginal propensity to save.

Pure Competition

A firm produces a homogeneous product and is a small part o the total supply such that it cannot influence market price and total output.

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