Aggregate demand curve: a curve relating the total demand for the economy’s goods and services at each price level, given the level of wages
Aggregate supply: the amount of goods that firms would be willing to supply, given their plant and equipment, assuming wages and prices are flexible and adjust to that the labor force is fully employed
Aggregate supply curve: a curve relating the total supply of the economy’s goods and services at each price level, given the level of wages
Asset: any item that is long-lived, purchased for the service it renders over its life and for what one will receive when one sells it
Black Market: an illegal market in which proscribed trades occur. For instance, in war time, when coupons are required to buy certain basic commodities, it may be illegal to buy and sell coupons; black markets typically develop in which these coupons are in fact traded
Budget Constraint: the limitations on consumption of different goods imposed by the fact that house holds have only a limited amount of money to spend (their budget). The budget constraint defines the opportunity set of individuals, when the only constraint that they face is money
Capital: funds used for investment; the term is also used for the value of an individual’s investment or a firm’s capital stock
Capital market: the various institutions concerned with raising funds and sharing and insuring risks; it includes banks, insurance markets, bond markets, and the stock market
Communism: an economic system in which the government owns all property and in which it is responsible for most economic decision making
Comparative advantage: a country has a comparative advantage over another country in one good as opposed to another good of its relative efficiency in the production of the first good is higher than the other country’s
Competitive equilibrium price: the price at which the quantity supplied and the quantity demanded are equal to each other
Competitive model: the basic model of the economy, in which profit-maximizing firms interact with rational, self-interested consumers in competitive markets, in which all participants are price takers (that is, they assume that prices are unaffected by their actions)
Complement: two goods are complements if the demand for one (at a given price) decreases as the price of the other increases
Constant returns to scale: a production function has constant returns when increases in all output proportionately
Consumer price index: a price index in which the basket of goods is defined by what a typical consumer purchases
Demand Curve: the relationship between the quantity demanded of a good and the price, whether for an individual or for the market (all individuals) as a whole
Devaluation: a reduction in the rate of exchange between one currency and other currencies under a fixed exchange rate system
Diminishing returns: the principle that says that as one input increases, with other inputs fixed, the resulting increase in output tends to be smaller and smaller
Discount rate: the interest rate charged to banks when they wish to borrow from the central bank
Economics: the social science that studies how individuals, firms, governments, and other organizations make choices, and how those choices determine the way the resources of society are used
Endogenous factors: properties of the economy itself, such as a tendency of the economy to become overconfident in expansions, which tend to generate or exacerbate economic fluctuations; more generally, an endogenous variable in a model is any variable that is determined within the model itself
Equilibrium: a condition in which there are no forces (reasons) for change
Equilibrium quantity: the quantity demanded (which equals the quantity supplied) at the equilibrium price, where demand equals supply
Exchange rate: the rate at which one currency (such as dollars) can be exchanged for another (such as marks, yen, or ponds)
Exit the market: a consumer exits the market when he decides that at that price, he would prefer to consume none of the product in that market
Expected return: the average return-a single number that combines the various possible returns per dollar invested with the chances that each of these returns will actually be paid
Experimental economics: the branch of economics which analyzes certain aspects of economic behavior in a controlled, laboratory setting
Exports: goods produced domestically but sold abroad
Externality: a phenomenon that arises when an individual or firm takes an action but does not bear all the costs (negative externality) or receive all the benefits (positive externality)
Federal debt: the cumulative amount that the federal government owes
Federal Reserve Board (Fed): the government agency responsible for controlling the money supply and interest rates
Final goods approach to measuring GDP: the approach to measuring GDP which adds up the total dollar value of goods and services produced, categorized by their ultimate users/purchasers (consumption by households, investment by firms, investment by government, and net exports)
Fixed exchange rate system: an exchange rate system in which the value of each currency is fixed in relationship to other currencies
Flexible or floating exchange rate system: a system in which exchange rates are determined by market forces, the law of supply and demand, without government interference
Free-rider problem: the problem that occurs when someone thinks he may be able to enjoy something without paying for it, and so fails to contribute to the cost; free-rider problems arise in the provision of public goods
Gains from trade: the benefits that each side enjoys from a trade
General Agreement on Tariffs and Trade (GATT): the agreement among the major trading countries of the world that created the framework for lowering barriers to trade and resolving trade disputes; established after World War II, it has know been succeeded by the World Trade Organization (WTO)
General equilibrium: the full equilibrium of the economy, when all markets clear simultaneously
Green GDP: a measurement of national output which attempts to take into account effects on the environment and natural resources
Gross domestic product (GDP): the total money value of the goods and services produced by the residents of a nation during a specified period
Gross national product (GNP): a measure of the incomes of residents of a country, including income they receive from abroad but subtracting similar payments made to those abroad
Human capital: investments in people (such as through education and training)
Imperfect information: a situation in which market participants lack information (such as information about prices or characteristics of goods and services) important for their decision making
Imports: goods produced abroad but bought domestically
Incentive-equality trade-off: in general, the greater the incentives, the greater the resulting inequality
Income effect: the reduced consumption of a good whose price has increased that is due to the reduction in a person’s buying power, or "real" income; when a person’s real income is lower, normally he will consume less of all goods, including the higher-priced good
Inflation: the rate of increase of the general level of prices
Inputs: the various material, labor, and other factors used in production
Interest: the return a saver receives in addition to the original amount he deposited (loaned), and the amount a borrower must pay in addition to the original amount he borrowed
Labor market: the market in which labor services are bought and sold
Law of supply and demand: the law in economics that holds that in equilibrium prices are determined so that demand equals supply. Changes in prices thus reflect shifts in the demand or supply curves
Legal entitlement: a right (or entitlement) granted by law; for instance. rent control laws may grant current occupants the right to continue to occupy an apartment for life at a pre-specified rent
M1, M2, M3: measures of the money supply: M1 includes currency and checking accounts; M2 includes M1 plus savings deposits, CDs, and money market funds; M3 includes M2 plus large-denomination savings deposits and institutional money-market mutual funds
Macroeconomics: the top-down view of the economy, focusing on aggregate characteristics
Marginal benefit: the extra benefits resulting, for instance, from the increased consumption of a commodity
Marginal cost: the additional cost corresponding to an additional unit of output produced
Marginal revenue: the extra revenue received by a firm for selling one additional unit of good
Market clearing: the situation that exist when supply equals demand, so there is neither excess supply nor excess demand
Market demand: the total amount of a particular good or service demand in the economy
Market demand curve: the total amount of a particular good or service demanded in the economy at each price; it is calculated by "adding horizontally" the individual demand curves, that is, at any given price, it is the sum of the individual demands
Market failure: the situation in which a market economy fails to attain economic efficiency
Markets: places where goods or services (including labor) are bought, sold, and traded. The term is used today metaphorically; there is no single marketplace where any particular good is bought an sold; the collection of all the places where exchanges take place is thought of as "the market." See also Capital market
Market supply: the total amount of a particular good or service that all the firms in the economy together would like to supply at each price; it is calculated by "adding horizontally" the individual firm’s supply curves, that is, it is the sum of the amounts each firm is willing to supply at any given price
Missing market: when there is a good or service which individuals would like to purchase (at a price at which that good could be profitably produced) but which is not available in the market, the market for that good or service is said to be missing
Model: a set of assumptions and data used by economists to study an aspect of the economy and make predictions about the future or about the consequences of various policy changes
Monopoly: a market consisting of only one firm
Moral hazard: the principle that says that those who purchase have a reduced incentive to avoid what they are insured against
Natural endowments: a country’s natural resources, such as good climate, fertile lands, or minerals
Natural rate of unemployment: the rate of unemployment at which the rate of inflation is zero
Opportunity cost: the cost of a resource, measured by the value of the next-best, alternative use of that resource
Output per capita: a nation’s output divided by the number of individuals in the country
Pareto efficient: a resource allocation is said to be Pareto efficient if there is no arrangement which can make anyone better off without making someone else worse off
Perfect competition: a situation in which each firm is a price taker-it cannot influence the market price; at the market price, the firm can sell as mush as it wishes, but if it raises its price, it loses all sales
Phillips curve: the trade-off between unemployment and inflation such that a lower level of unemployment is associated with a higher level of inflation
Physical capital: investments in plant and equipment; the term is used to distinguish these investments from investments in people, called human capital
Price: the price of a good or service is what must be given in exchange for the good
Price system: the economic system in which prices are used to allocate scarce resources
Price takers: firms that take the price for the good or service they sell as given; the price is unaffected by their level of production
Principle of consumer sovereignty: the principle that holds that each individual is the best judge of what makes him better off
Principle of substitution: the principle that holds that in general there are large possibilities for substitution, both by consumers and by firms, so that an increase in the price of say an input will lead the firm to substitute other inputs in its place
Private property: ownership of property (or other assets) by individuals or corporations; under a system of private property, owners have certain property rights but there may also be restrictions on the use of property, such as zoning restrictions which limit the use of property to specified purposes, such as residential or commercial purposes
Production possibilities curve: a curve that defines the opportunity set for a firm or an entire economy and gives the possible combinations of goods (outputs) that can be produced from a given level of inputs
Productivity, or GPD per hour worked: how much an average worker produces per hour, calculated by dividing real GDP by hours worked in the economy
Property rights: the rights of an owner of private property; these typically include the right to use the property as she sees fit (subject to certain restrictions, such as zoning) and the right to sell it when and whom she sees fit
Protectionism: the policy of protecting domestic industries from the competition of foreign-made goods
Public good: a good, such as national defense, that costs little or nothing for an extra individual to enjoy, and the costs of preventing any individual from the enjoyment of which are high; public goods have the properties of nonrivalrous consumption and nonexcludability
Quotas: limits on the amount of foreign goods that can be imported
Rational choice: a choice process in which individuals weigh the costs and benefits of each possibility, and in which the choices made are those within the opportunity set that maximize net benefits
Real wage: the nominal wage divided by the (consumer) price level
Risk premium: the additional interest required by lenders as compensation for the risk that a borrower may default; more generally, the extra return required to compensate an investor for bearing risk
Scarcity: term used to describe the limited availability of resources, so that if no price were charged for a good or service, the demand for it would exceed its supply
Smith’s "invisible hand": the idea that if people act in their own self-interest, they will often also be acting in a broader social interest, as if they had been directed by an "invisible hand"
Stagflation: a situation in which high inflation is combined with low growth and high unemployment
Sticky prices: prices that do not adjust or adjust only slowly toward a new equilibrium
Sticky wages: wages that are slow to adjust in response to a change in labor market conditions
Substitute: two goods are substitutes if the demand for one increases when the price of the other increases
Substitution effect: the reduced consumption of a good whose price has increased that is due to the changed trade-off, the fact that one has to give up more of other goods to get one more unit of the high-priced good; the substitution effect is associated with a change in the slope of the budget constraint
Sunk cost: a cost that had been incurred and cannot be recovered
Supply curve: the relationship between the quantity supplied of a good and the price, whether for a single firm or the market (all firms) as a whole
Sustainable development: development that is based on sustainable principles; sustainable development pays particular concern to environmental degradation and the exploitation of natural resources
Theory: a set of assumptions and the conclusions derived from those assumptions put forward as an explanation for some phenomena
Time constraints: the limitations on consumption of different goods imposed by the fact that households have only a limited amount of time to spend (twenty-four hours a day). The time constraint defines the opportunity set of individuals if the only constraint that they face is time.
Trade-offs: the amount of one good (or one desirable objective) that must be given up to get more of another good (or to attain more of another desirable objective)
Unemployment rate: the fraction of those seeking employment that cannot get jobs