100 terms
100 Economics Terms
Scarcity
the limited nature of society's resources
Economics
the study of how society manages its scarce resources
Efficiency
the property of society getting the most it can from its scarce resources
Equity
the property of distributing economic prosperity fairly among the members of society
Opportunity cost
whatever must be given up to obtain some item
Market economy
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Externality
the impact of one person's actions on the well being of a bystander
Inflation
an increase in the overall level of prices in the economy
Phillips curve
a curve that shows the short run tradeoff between inflation and unemployment
Business cycle
fluctuations in economic activity, such as employment and production
Circular flow diagram
a visual model of the economy that shows how dollars flow through markets and firms
Production possibilities curve
a graph that show the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
Microeconomics
the study of how households and firms make decisions and how they interact in markets
Macroeconomics
the study of economy wide phenomena, including inflation, unemployment, and economic growth
Positive statements
claims that attempt to describe the world as it is
Normative statements
claims that attempt to prescribe how the world should be
Interdependence
a reciprocal relation between interdependent entities
Specialization
to focus on a particular area
Absolute advantage
the comparison among producers of a good according to their productivity
Comparative advantage
the comparison among producers according to their opportunity cost
Imports
goods produced abroad and sold domestically
Exports
goods produced domestically and sold abroad
Law of demand
the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
Normal good
a good for which, other things equal, an increase in income leads to an increase in demand
Inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand
Substitutes
two goods for which an increase in the price of one good leads to an increase in the demand for the other good
Complements
two goods for which an increase in the price of one good leads to a decrease in the demand for the other good
Law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
Equilibrium
a situation in which the price has reached the level where quantity demanded equals quantity supplied
Surplus
a situation in which quantity supplied is greater than quantity demanded
Shortage
a situation in which quantity demanded is greater than quantity supplied
Adam Smith
Scottish political economist and moral philosopher. His inquiry into the Nature and Causes of the Wealth of Nations was one of the earliest attempts to study the historical development of industry and commerce in Europe. That work helped to create the modern academic discipline of economics and provided one of the best known intellectual rationales for free trade and capitalism
John Maynard Keynes
an English economist, whose radical ideas had a major impact on modern economic and political theory as well as Franklin D. Roosevelt's New Deal. He is particularly remembered for advocating interventionist government policy, by which the government would use fiscal and monetary measures to aim to mitigate the adverse effects of economic recessions, depressions, and booms. He is considered to be the founder of macroeconomics.
Elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants
Price elasticity of demand
a measure of how much the quantity demand of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
Income elasticity of demand
a measure of how much the quantity demanded of a good responds too a change in consumer's income, computed as the percentage change in quantity demanded divided by the percentage change in income
Cross price elasticity of demand
a measure of how much the quantity demanded of one goods responds to a change in price of another good, computed as the parentage change in quantity demanded of one good divided by the percentage change in price of the second good
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
Price ceiling
a legal maximum on the price at which a good can be sold
Price floor
a legal minimum on the price at which a good can be sold
Tax incidence
the manner in which the burden of a tax is shared among participants in a market
Welfare economics
the study of how the allocation of resources affects economic well being
Consumer surplus
a buyer's willingness to pay minus the amount the buyer actually pays
Producer surplus
the amount a seller is paid for a good minus the seller's cost
Cost
the value of everything a seller must give up to produce a good
Deadweight loss
the fall in total surplus that results from a market distortion, such as a tax
Laffer Curve
a curved graph that illustrates the theory that, if tax rates rise beyond a certain level, they discourage economic growth, thereby reducing government revenues
Supply side economics
the branch of economics that concentrates on measures to increase output of goods and services in the long run. The basis is that marginal tax rates should be reduced to provide incentives to supply additional labor and capital, and thereby promote long term growth.
Tariff
a tax on goods produced abroad and sold domestically
Import quota
a limit on the quantity of a good that can be produced abroad and sold domestically
Coase theorem
the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
Pigovian tax
a tax enacted to correct the effects of a negative externality
Private goods
goods that are both excludable and rival
Public goods
goods that are neither excludable nor rival
Free rider
a person who receives the benefits of a good but avoids paying for it
Budget surplus
an excess of government receipts over government spending
Budget deficit
a shortfall of tax revenue from government spending
Average tax rate
total taxes paid divided by total income
Marginal tax rate
the extra taxes paid on an additional dollar of income
Lump sum tax
a tax that is the same amount for every person
Proportional tax
a tax for which higher income taxpayers and low income taxpayers pay the same fraction of income
Regressive tax
a tax for which higher income tax payers pay a smaller fraction of their tax than do lower income tax payers
Progressive tax
a tax for which higher income taxpayers pay a larger portion of their tax than do lower income tax payers
Total revenue
the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
Total cost
the value of the inputs a firm uses in production
Profit
total revenue minus total cost
Explicit costs
input costs that require an outlay of money by the firm
Implicit costs
input costs that no not require the outlay of money by the firm
Economic profit
total revenue minus total cost including explicit and implicit costs
Accounting profit
total revenue minus explicit cost
Production function
the relationship between quantities of inputs used to make a good and the quantity of output of that good
Marginal product
the increase in output that arises from an additional unit of input
Diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
Fixed costs
costs that do not vary with the quantity of output produced
Variable cost
costs that vary with the quantity of output produced
Average total cost
total cost divided by the quantity of output
Average fixed cost
fixed costs divided by the quantity of output
Average variable cost
variable costs divided by the quantity of output
Marginal cost
an increase in total cost that arises from an extra unit of production
Efficient scale
the quantity of input that minimizes average total cost
Economies of scale
the property whereby long run average total cost falls as the quantity of output increases
Diseconomies of scale
the property whereby long run average total cost rises as the quantity of output increases
Constant return to scale
the property whereby long run average total cost stays the same as the quantity of output changes
Competitive market
a market with buyers and sellers trading identical products so that each buyer and seller is a price taker
Average revenue
total revenue divided by the quantity sold
Marginal revenue
the change in total revenue from an additional unit sold
Sunk cost
a cost that has already been committed and cannot be recovered
Natural Monopoly
a firm that arises because a single firm can supply a good of service to an entire market at a smaller cost than could two or more firms
Price discrimination
the business practice of selling the same good at different prices to different customers
Oligopoly
a market structure in which only a few sellers offer similar or identical products
Monopolistic completion
a market structure in which many firms sell products that similar but not identical
Collusion
an agreement among firms in a market about quantities to produce or prices to charge
Cartel
a group of firms acting in unison
Nash equilibrium
a situation in which economic actors interaction with one another each choose their best strategy given the strategies that all the other actors have chosen
Game theory
the study of how people behave in strategic situations
Factors of production
the inputs used to produce goods and services
Lorenz Curve
a curve showing the distribution of income in an economy. The cumulated percentage of families (income receivers) is measured along the horizontal axis and the cumulated percentage of income is measured along the vertical axis
Capital
the equipment and structures used to produce goods and services
Monopoly
a firm that is the sole seller of a product without close substitutes
Marginal Product of Labor
the increase in the amount of output from an additional unit of labor