Economics USA: 21st Century Edition

A

• absolute advantage The ability of one country to produce a commodity more cheaply than another country.
• adaptive expectations A situation where people change their forecasts of the variable in question to conform to its current level.
• accommodative monetary policy A central bank policy designed to stimulate economic growth by lowering short-term interest rates, making money less expensive to borrow.
• aggregate demand The sum of expenditures on consumer goods and services, investment, and non-exports, i.e., all of demand within an economy.
• aggregate demand curve A curve, sloping downward to the right, that shows the level of real national output that will be demanded at various economy-wide price levels.
• aggregate production function The relationship between the amount used of each of the inputs available in the economy and the resulting amount of potential output; that is, the most output that existing technology permits the economy to produce from various quantities of all available inputs.
• aggregate supply curve A curve, sloping upward to the right, that shows the level of real national output that will be supplied at various economy-wide price levels.
• allocation of resources Apportionment of productive assets among different uses.
• alternative cost The value of what certain resources could have produced had they been used in the best alternative way—also called “opportunity cost.”
• American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) A federation of national labor unions formed in 1955 by the merger between the American Federation of Labor (originally a federation of unions organized along craft lines) and the Congress of Industrial Organizations (originally a federation of unions organized along industrial lines).
• antitrust laws Legislation (such as the Sherman Act, the Clayton Act, and the Federal Trade Commission Act) intended to promote competition and control monopoly.
• anti-usury laws Laws that regulate the maximum interest rates that can be set for loans, in order to protect borrowers.
• appreciation of currency An increase in the value of one currency relative to another.
• asset bubbles Form when the prices of assets are over-inflated due to excess demand.
• asset Any item of economic value owned by an individual or corporation, especially that which could be converted to cash.
• automatic stabilizers Structural features of the economy that tend by themselves to stabilize national output, without the help of legislation or government policy measures.
• average fixed cost The firm’s total fixed cost divided by its output.
• average product of an input Total output divided by the amount of input used to produce this amount of output.
• average product of labor Total output per unit of labor.
• average propensity to consume The fraction of disposable income that is spent on consumption—equal to personal consumption expenditure divided by disposable income.
• average total cost The firm’s total cost divided by its output—equal to average fixed cost plus average variable cost.
• average variable cost The firm’s total variable cost divided by its output.

B

• backward-bending supply curve for labor A supply curve for labor inputs showing that, beyond some point, increases in price may result in the supply of smaller amounts of labor.
• balance-of-payments deficit The difference between the quantity supplied and the quantity demanded of a currency when the currency is overvalued (that is, priced above its equilibrium price).
• balance-of-payments surplus The difference between the quantity demanded and the quantity supplied of a currency when the currency is undervalued (that is, priced below its equilibrium price).
• balanced budget A budget in which tax revenues equal government expenditures.
• balance sheet A quantitative summary of a company’s financial condition at a specific point in time, including assets, liabilities, and net worth.
• bank run Takes place when the customers of a bank fear that the bank will become insolvent, and so rush to the bank to take out their money as quickly as possible to avoid losing it.
• barometric firm In an oligopolistic industry, any single firm that is the first to make changes in prices, which are then generally accepted by other firms.
• barriers to entry Obstacles that make it more difficult for new competitors to enter an area of business, e.g., high start-up costs.
• base year A year chosen as a reference point for comparison with some later or earlier year.
• benefits of innovative activity The natural consequences of purposeful changes that improve economic performance such as growth and the external benefits that derive from growth human capital.
• benefits vs. costs of pollution abatement An organization’s attempt at reconciling the price of removing the negative externality of pollution with the immediate profit seen by that organization when nothing is done about pollution.
• bilateral monopoly When a market consists of only one manufacturer and one consumer of the products that manufacturer puts out.
• budget A statement of the government’s expenditures and tax revenues for a fiscal year.
• budget deficit The amount by which tax revenues fall short of government expenditures.
• budget surplus The amount by which tax revenues exceed government expenditures.
• business cycle The cyclical fluctuations in national output over time.

C

• C + I + G + (X – M _I) line A curve showing total intended spending (the sum of intended consumption expenditure, investment expenditure, government expenditure, and net exports) at various levels of gross domestic product.
• capital Resources (such as factory buildings, equipment, raw materials, and inventories) that are created within the economic system for the purpose of producing other goods.
• capital consumption allowance The value of the capital (that is, the plant, equipment, and structures) that is worn out in a year—also called depreciation.
• capital formation Investment in plant and equipment.
• capital goods Output consisting of plant and equipment that are used to make other goods.
• capital investment Money invested in a business venture with an expectation of income, and recovered through earnings generated by the business over several years.
• capital-output ratio The ratio of the total capital stock to annual national output.
• capitalism An economic system characterized by private ownership of the tools of production, freedom of choice and enterprise whereby consumers and firms can pursue their own self-interest, competition for sales among producers and resource owners, and reliance on the free market.
• capitalization of assets A method of computing the value of an asset by calculating the present value of the expected future income this asset will produce.
• cash vs. in-kind transfers Reconciling the utility of providing either a) money; or b) goods, commodities, or services.
• cartel An open formal collusive arrangement among firms.
• central bank A government-established agency that controls the supply of money and supervises the country’s commercial banks—the central bank of the United States is the Federal Reserve.
• checkoff A system whereby an employer deducts union dues from each worker’s pay and hands them over to the union.
• choices Opportunities presented via Rational Choice Theory, given the pre-existing notion that resources are scarce.
• circular flow Cyclical representation describing how households give money to firms, which then provide goods and services for households.
• classical economics Refers to work done by a group of economists in the eighteenth and nineteenth centuries, emphasizing economic freedom and promoting such ideas as “laissez-faire” and “free competition.”
• closed shop A situation where firms can only hire workers who are already union members.
• collective bargaining A process of negotiation between union and management over wages and working conditions.
• collusion A covert arrangement whereby firms agree on price and output levels in order to decrease competition and increase profits.
• commercial banks Financial institutions that hold demand and other checkable deposits and permit checks to be written on them, and lend money to firms and individuals.
• comparative advantage The law that states that a country should produce and export goods which it can produce at relatively lower costs than other countries
• compensation of employees The wages and salaries paid by firms and government agencies to the suppliers of labor, including supplementary payments for employee benefits (such as payments into public and private pension and welfare funds).
• complements Commodities that tend to be consumed together; that is, commodities with a negative cross-elasticity of demand such that a decrease in the price of one will result in an increase in the quantity demanded of the other.
• competitive price system An arrangement of manufacturers in constant contest with one another to make their prices for their products the most attractive, either simply by lowering them or by adding incentives, e.g., payment plans, etc.
• concentration ratio The percentage of a market taken up by a certain number of firms; used to determine competitiveness of the market.
• constant dollar amounts Amounts measured in base-year dollars (that is, according to the purchasing power of the dollar in some earlier year), in order to express value in a way that corrects for changes in the price level.
• constant growth rate rule A policy that targets a constant growth rate for a specific economic variable. Monetarists argue for a constant money supply growth rate to facilitate a certain nominal GDP growth rate.
• constant prices Refers to valuation of transactions, wherein the influence of price changes from the base year to the current year has been removed.
• constant returns to scale A long-run situation where, if the firm increases the amount of all inputs by the same proportion, output increases by the same proportion as each of the inputs.
• consumer An individual or household that purchases the goods and services produced by the economic system.
• consumer durables Major consumer purchases that generally have a useful life of greater than three years.
• consumer goods Output consisting of items that consumers purchase, such as clothing, food, and drink.
• Consumer Price Index A measure of U.S. inflation, calculated by the Bureau of Labor Statistics, originally intended to measure changes in the prices of goods and services purchased by urban wage earners and clerical workers. Expanded in 1978 to cover all urban consumers.
• consumption The using-up of goods and services by consumer purchasing or in the production of other goods.
• consumption function The relationship between consumption spending and disposable income; that is, the amount of consumption expenditure that will occur at various levels of disposable income.
• corporate profits The net income of corporations (corporate profits before income taxes), including dividends received by the stockholders, retained earnings, and the amount paid by corporations as income taxes.
• corporation A fictitious legal “person” separate and distinct from the stockholders who own it, governed by a board of directors elected by the stockholders.
• cost-benefit analysis In governmental planning and budgeting, the attempt to measure whether alleged outputs will outweigh the known inputs.
• cost function The relationship between cost and a firm’s level of output; that is, what a firm’s costs will be at various levels of output.
• cost minimization Pursuit of incurring the fewest expenses during the manufacturing process.
• cost of living adjustments COLA. An annual adjustment in wages to offset a change (usually a loss) in purchasing power, as measured by the Consumer Price Index.
• cost-push inflation Persistently rising general price levels brought about by rising input costs, usually brought about by rising wages, increases in corporate taxes, and imported inflation.
• Council of Economic Advisers A group established by the Employment Act of 1946, whose function is to help the president formulate and assess the economic policies of the government.
• craft union A labor union that includes workers in a particular craft (such as machinists or carpenters).
• credibility of government policies A concept dealing with the likelihood that a policy authority will stick to an announced policy. The less flexibility a policymaker has in deviating from the announced policy, the more credible that policy becomes.
• creeping inflation An increase in the general price level of a few percent per year that gradually erodes the value of money.
• cross-elasticity of demand The percentage change in the quantity demanded of one commodity resulting from a one-percent change in the price of another commodity. May be either positive or negative.
• crowding-out effect The tendency for an increase in public-sector expenditure to result in a cut in private-sector expenditure.
• crude quantity theory of money and prices The theory that if the velocity of circulation of money remains constant and real gross domestic product remains fixed at its full-employment level, it follows from the equation of exchange (MV = PQ) that the price level will be proportional to the money supply.
• current prices The value based on prices during the reference year; nominal year.
• cyclical unemployment Joblessness that occurs because of business fluctuations.
• cyclically balanced budget Refers to running a surplus in boom years and a deficit in lean years; in theory the two offset each other over time.

D

• debt-to-GDP ratio A measure of a country’s federal debt relative to its gross domestic product (GDP); one measure of a country’s ability to pay back its debt.
• decreasing returns to scale A long-run situation where, if the firm increases the amount of all inputs by the same proportion, output increases by a smaller proportion than each of the inputs.
• deficit When government spending is greater than government revenue.
• deflating The conversion of values expressed in current dollars into values expressed in constant dollars, in order to correct for changes in the price level.
• demand curve for loanable funds A curve showing the quantity of loanable funds that will be demanded at each interest rate.
• demand curve for money A curve representing the quantity of money that will be demanded at various interest rates (holding constant real GDP and the price level).
• demand deposits Checking accounts. Bank deposits subject to payment on demand.
• demand elasticity Responsiveness of consumer preferences to a change in price, with all other factors held constant.
• demand-side inflation An increase in the general price level that occurs because of rightward shifts of the aggregate demand curve. There is too much aggregate spending, too much money chasing, too few goods.
• deposit contraction Reduction in the quantity of money following the drain of currency from banks to reduce their reserves.
• deposit insurance Protection provided by a government agency to depositors against risk of loss arising from failure of a bank or other depository institution.
• depreciation The value of the capital (that is, plant, equipment, and structures) that is worn out in a year. Also called capital consumption allowance.
• depreciation of currency A decrease in the value of one currency relative to another.
• depression A period when national output is well below its potential (full-employment) level. A severe recession.
• derived demand Demand for labor and other inputs not as ends in themselves but as means to produce other things.
• devaluation of currency Under the gold standard, a decrease in the value of a currency as a consequence of an increase In the price of gold.
• differentiated oligopoly A market structure (such as those for automobiles and machinery) where there are only a few sellers of somewhat-different products.
• diffusion process The process by which the use of an innovation spreads from firm to firm and from use to use.
• diminishing returns The decrease in the yield of a production process as one input of that production process increases, when all other variables of that production remain constant.
• diminishing returns to labor When each additional unit of labor added to other resources used in the production of goods and services adds a smaller additional output than the previous unit.
• direct regulation Government issue of enforceable rules concerning the conduct of firms.
• discount rate The interest rate the Federal Reserve charges for loans to commercial banks.
• discretionary policy Policy that is formulated at the discretion of the policymakers (in contrast to rigid policy rules or feedback policy rules).
• discrimination Making an economic distinction in a market.
• disincentives to work Any factors discouraging the making or saving of money.
• disposable income The total amount of income people receive after taxes.
• dominant firm In an oligopolistic industry, a single large firm that sets the price for the industry but lets the small firms sell all they want at that price.
• double-counting Including the value of intermediate goods more than once in the value of gross domestic product (GDP).

E

• easy monetary policy A monetary policy that increases the money supply and reduces interest rates.
• economic activity The production, distribution, purchase, and consumption of goods and services.
• economic efficiency Generating the greatest results from the fewest resources.
• economic growth A positive change in the level of production of goods and services by a country over a certain period of time.
• economic profits The excess of a firm’s profits over what it could make in other industries.
• economic resources Resources that are scarce and thus command a nonzero price.
• economics The study of how resources are allocated among alternative uses to satisfy human wants.
• economies of scale Efficiencies that result from carrying out a process (such as production or sales) on a large scale.
• effluent fee A fee that a polluter must pay to the government for discharging waste.
• elastic supply and demand Consumers’ and/or producers’ willingness and ability to produce or consume goods and services, subject to changes in prices or incomes.
• emerging markets (economies) Economies that are either in the early stages of development or in a state of economic transition (the former Communist bloc countries). Also known as developing economies.
• equation of exchange A way of restating the definition of the velocity of circulation of money, such that the amount received for the final goods and services during a period equals the amount spent on those final goods and services during the same period (that is, MV = PQ).
• equilibrium A situation in which there is no tendency for change.
• equilibrium level of gross domestic product The value of national output at which the flow of income generated by this level of output results in a level of spending precisely sufficient to buy this level of output.
• equilibrium price A price that shows no tendency for change, because it is the price at which the quantity demanded equals the quantity supplied. The price toward which the actual price of a good always tends to move.
• excessive risk taking and leverage The overemphasis on practicing behaviors that have the potential to be harmful or dangerous, yet at the same time provide the opportunity for some kind of outcome that can be perceived as positive.
• exchange rate The number of units of one currency that can purchase a unit of another currency.
• excise tax A tax imposed on each unit sold of a particular product, such as cigarettes or liquor.
• expansion The phase in the business cycle after the trough during which national output rises.
• explicit cost The cost of resources for which there is an explicit payment.
• exports The goods and services that a country sells to other countries.
• external debt Part of the total debt in a country that is owed to creditors outside the country.
• external diseconomy A situation that occurs when consumption or production by one person or firm results in uncompensated costs to another person or firm.
• external economy A situation that occurs when consumption or production by one person or firm results in uncompensated benefits to another person or firm.
• externalities External economies and diseconomies.

F

• farm price supports Maintenance of costs for a raw material or commodity, usually through public subsidy or government intervention.
• FDIC – The Federal Deposit Insurance Corporation A federal agency that insures deposits in member banks and thrifts up to $250,000 per account.
• featherbedding A practice whereby a union restricts output per worker in order to increase the amount of labor required to do a certain job.
• Federal Open Market Committee (FOMC) A group, composed of the seven members of the Federal Reserve Board plus five presidents of Federal Reserve Banks, which makes decisions concerning the purchase and sale of government securities, in order to control bank reserves and the money supply.
• Federal Reserve Board The Board of Governors of the Federal Reserve System, composed of seven members appointed by the president for fourteen-year terms, whose function is to promote the nation’s economic welfare by supervising the operations of the U.S. money and banking system.
• Federal Reserve System A system established by Congress in 1913 that includes commercial banks, the twelve Federal Reserve Banks, and the Board of Governors of the Federal Reserve System.
• feedback policy rule A rule allowing the behavior of the variable governed by the policy rule to change, depending on future circumstances.
• final goods and services Goods and services that are destined for the ultimate user (such as flour purchased for family consumption).
• firm An organization that produces a good or service for sale in an attempt to make a profit.
• firm’s demand curve for labor A curve showing the relationship between the price of labor and the amount of labor demanded by a firm; that is, the amount of labor that will be demanded by a firm at various wage rates.
• firm’s supply curve A curve, usually sloping upward to the right, showing the quantity of output a firm will produce at each price.
• fiscal dividend The increase in federal revenues that accompanies economic growth; sometimes argued to follow as a benefit from reduced taxation and increased government expenditures.
• fiscal drag Acts as a damper on the economy when, during inflation, rising incomes draw people into higher tax brackets, so that the purchasing power of their disposable incomes falls.
• fiscal policy The policy of the government regarding taxes and government expenditures to stabilize the economy.
• fixed exchange rate System in which the value of a country’s currency, in relation to the value of other currencies, is maintained at a fixed conversion rate through government intervention.
• fixed input A resource used in the production process (such as plant and equipment) whose quantity cannot be changed during the particular period under consideration.
• flexible exchange rate System in which the value of the currency is determined by the free market.
• food programs Federal antipoverty programs that distribute food to the poor, either directly from surpluses produced by farm programs or indirectly via stamps that can be exchanged for food.
• forgone consumption Saving, as opposed to spending; nonspending.
• 45-degree line A line that contains all points where the amount on the horizontal axis equals the amount on the vertical axis.
• fractional-reserve banking The practice whereby banks hold less cash than the amount they owe their depositors.
• free resources Resources (such as air) that are so abundant that they can be obtained without charge.
• free riders Those that enjoy the benefits of a collective effort, while having contributed nothing to that collective effort.
• frictional unemployment Temporary joblessness, such as that occurring among people who have quit jobs, people looking for their first job, and seasonal workers.
• full employment The minimum level of joblessness that the economy could achieve without undesirably high inflation, recognizing that there will always be some frictional and structural unemployment.

G

• game A competitive situation where two or more players pursue their own interests, no player can dictate the outcome, and all players are mutually aware.
• globalization Pertaining to deeper integration and more rapid interaction of economies through production, trade, and financial transactions.
• gold-exchange standard An exchange-rate system developed after World War II, under which the dollar was directly convertible into gold at a fixed price, and other currencies, since they could be converted into dollars at fixed exchange rates, were thus indirectly convertible into gold at a fixed price.
• gold standard A method of exchange-rate determination prevailing until the 1930s, under which currencies were convertible into a certain amount of gold.
• government intervention in currency markets A contentious debate involving the role of government in determining exchange rates. A government that intervenes and keeps its exchange rate below the free-market level effectively provides an export subsidy, or an import tariff, for its domestic industries giving them an advantage over producers in other countries.
• government purchases Federal, state, and local government spending on final goods and services, excluding transfer payments.
• government transfers Government revenue paid to individuals or businesses not in exchange for goods or services; e.g., welfare, financial aid, Social Security, etc.
• gross domestic product (GDP) The value of the total amount of final goods and services produced by the economy during a period of time. Measured either by the expenditure on the final goods and services or by the income generated by the output.
• gross national product (GNP) The value of all the goods and services produced in an economy, plus the value of the goods and services imported, less the goods and services exported.
• gross private domestic investment All additions to a country’s stock of private investment goods; that is, all investment spending, including purchases of tools, equipment, and machinery, all construction expenditures, and the change in total inventories.

H

• historical cost of assets What a firm actually paid for its assets.
• holding companies Business organizations that allow firms (called “parents”) and their directors to control or influence other firms (called “subsidiaries”).
• housing A long-lasting form of investment that drives a lot of economic growth, but that historically has not been used primarily to produce other goods and services for sale in the economy.
• human capital The education, training, and experience of a person that are productive in an economic context.

I

• immigration and foreign direct investment The notion that immigration creates an incentive for a company from one country to make a physical investment into building a factory in another country.
• implicit contracts Agreements between workers and firms that are not found in any formal, written contracts.
• implicit cost The cost (for which there is no explicit payment) of the resources that are provided by the owners of a firm, measured by what these resources could bring if they were used in their best alternative employment.
• imports The goods and services that a country buys from other countries.
• income elasticity of demand The percentage change in the quantity demanded of a commodity resulting from a one-percent increase in total money income (all prices being held constant).
• income tax A federal, state, or local tax imposed on personal income and corporate profits.
• incomes policy A policy to control inflation that sets some targets for wages and prices in the economy as a whole, gives particular firms and industries detailed guides for making wage and price decisions, and provides some inducements for firms and unions to follow these guidelines.
• increasing returns to scale A long-run situation where if a firm increases the amount of all inputs by the same proportion, output increases by a larger proportion than each of the inputs.
• indirect business taxes Taxes—such as general sales taxes, excise taxes, and customs duties—that are imposed not directly on the business itself but on its products or services, and hence are treated by firms as costs of production.
• individual demand curve A curve showing the relationship between individual consumer demand for a good and its price; that is, how much of a good an individual consumer will demand at various prices.
• industrial union A labor union that includes all the workers in a particular plant or industry (such as autos or steel).
• Inefficient allocation of resources Occurs when government ineffectively intervenes in market decisions (a.k.a. “government failure”).
• inelastic supply and demand Changes in price have very small effects on consumer and producer preferences.
• inflation An increase in the general level of prices economy-wide.
• inflation targeting A monetary policy strategy in which a central bank (in the U.S., the Federal Reserve) estimates and makes public a projected, or “target,” inflation rate and then attempts to steer actual inflation toward the target through the use of interest rate changes and other monetary tools.
• inflation expectations Rate of inflation that workers, businesses, and investors think will prevail in the future, and that they will therefore factor into their decision making.
• inflationary gap A positive gap between actual and potential output.
• injections Nonconsumption expenditures on gross domestic product, including investment expenditures, government purchases, and exports.
• innovation The first commercial application of a new technology.
• innovator A firm that is first to apply a new technology.
• input Any resource used in the production process.
• inside policy lag The amount of time it takes for a government or a central bank to respond to a shock in the economy.
• interest The payment of money by borrowers to suppliers of money capital.
• interest sensitivity of investment Degree of change in amount of capital stock put in place in response to a change in the market interest rates on money borrowed to finance such endeavors.
• interest rate The annual amount that a borrower must pay for the use of a dollar for a year.
• interest rate target An interest rate that the central bank determines to be appropriate for increasing, decreasing, or holding constant the level of economic activity.
• interest rate vs. monetary aggregates targets Rate which is charged or paid for the use of money within the money supply.
• internal debt That part of a country’s total debt that is owed to lenders within that country.
• intermediate good A good that is not sold to the ultimate user but is used as an input in producing final goods and services (such as flour to be used in manufacturing bread).
• investment in human capital Allocating resources based on the skills of employees.
• invisible hand The self-regulating nature of a free-market system, as coined by economist Adam Smith.

J

K

• Keynesians Economists who share many of the beliefs of John Maynard Keynes. His principal tenet was that a capitalist system does not automatically tend toward a full-employment equilibrium (due in part to the rigidity of wages). Keynesians tend to believe that a free-enterprise economy has weak self-regulating mechanisms that should be supplemented by activist fiscal (and other) policies.
• Keynesian cross The standard diagram used in Keynesian economics to identify the equilibrium level of aggregate output (that is, gross domestic product), with aggregate expenditures measured on the vertical axis and aggregate output measured on the horizontal axis.

L

• labor Human effort, both physical and mental, used to produce goods and services.
• labor force The number of people employed plus the number of those unemployed (actively looking for work and willing to take a job if one were offered).
• labor productivity The amount of output divided by the number of units of labor employed.
• labor-saving technology Technological devices used purely for the purpose of diminishing the amount of labor necessary to accomplish goals.
• Laffer curve A curve representing the relationship between the amount of income tax revenue collected by the government and the marginal tax rate; that is, how much revenue will be collected at various marginal tax rates.
• land Natural resources, including minerals as well as plots of ground, used to produce goods and services.
• loans An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time.
• law of diminishing marginal returns The principle that if equal increments of a given input are added (the quantities of other inputs being held constant), the resulting increments of product obtained from the extra unit of input (the marginal product) will begin to decrease beyond some point.
• law of diminishing marginal utility The principle that if a person consumes additional units of a given commodity (the consumption of other commodities being held constant), the resulting increments of utility derived from the extra unit of the commodity (the marginal utility) will begin to decrease beyond some point.
• law of increasing costs The principle that as more and more of a good is produced, the production of each additional unit of the good is likely to entail a larger and larger opportunity cost.
• leakages Nonconsumption uses of income, including saving, taxes, and imports.
• legal reserve requirements Regulations imposed by the Federal Reserve System in order to control the money supply, requiring banks (and other institutions) to hold a certain fraction of deposits as cash reserves.
• lender of last resort Lender who acts as the ultimate source of credit to the banking system. In the United States, this role is carried out by the twelve Federal Reserve Banks, which supply credit through the Federal Reserve Discount Window.
• liabilities The debts of a firm.
• loanable funds Funds—including those supplied by households and firms that find the rate of interest high enough to get them to save—that are available for borrowing by consumers, businesses, and government.
• long run The period of time during which all of a firm’s inputs are variable; that is, during which the firm could completely change the resources used in the production process.
• long-run average cost function The minimum average cost of producing various output levels when any desired type or scale of plant can be built.
• lump-sum tax A fixed amount that has to be paid by everyone regardless of the level of his or her income.

M

• Ml Narrowly defined money supply, which includes coins, currency, demand deposits, and other checkable deposits.
• M2 Broadly defined money supply, which includes savings deposits, small time deposits, money market mutual fund balances, and money market deposit accounts, as well as the components of the narrowly defined money supply, Ml (coins, currency, demand deposits, and other checkable deposits).
• marginal cost The addition to total cost resulting from the addition of the last unit of output.
• marginal private vs. marginal social costs Marginal private costs are the incremental costs incurred by a consumer in consuming a good or service. Marginal social costs are the incremental costs of an activity as viewed by the society, and expressed as the sum of marginal external cost and marginal private cost.
• marginal product of an input The addition to total output that results from the addition of an extra unit of input (the quantities of all other inputs being held constant).
• marginal product of labor The additional output resulting from the addition of an extra unit of labor.
• marginal propensity to consume The fraction of an extra dollar of disposable income that is spent on consumption.
• marginal propensity to save the fraction of an extra dollar of disposable income that is saved.
• marginal revenue The addition to total revenue that results from the addition of one unit to the quantity sold.
• marginal tax rate The proportion of an extra dollar of income that must be paid in taxes.
• marginal utility The additional satisfaction derived from consuming an additional unit of a commodity.
• marginal value product of capital Measure of a firm’s revenue contributed by the last unit of a productive factor employed.
• marginalism How much extra use is gained from incremental increases in the quantity of goods created, sold, etc., and how those measures relate to consumer choice and demand.
• market A group of firms and individuals that are in touch with each other in order to buy or sell some good or service.
• market demand curve A curve, usually sloping downward to the right, showing the relationship between a product’s price and the quantity demanded of the product.
• market demand curve for labor A curve showing the relationship between the price of labor and the total amount of labor demanded in the market.
• market failure Inefficient allocation of goods and services by the market. Efficient allocation of goods and services means there is no other outcome under which a market participant can be made better off, without making someone else worse off. Market failures are often used as a justification for government intervention in an economy.
• market inefficiency A condition that occurs when current prices don’t reflect the available information regarding securities.
• market structure The type or organization of a market, determined by the number and size of buyers and sellers in the market, the ease with which new firms can enter, the extent of product differentiation, and other factors.
• market supply curve A curve, usually sloping upward to the right, showing the relationship between a product’s price and the quantity supplied of the product.
• market supply curve for labor A curve showing the relationship between the price of labor and the total amount of labor supplied in the market.
• means test Measures need based on income and assets.
• Medicaid A federal program that pays for the health care of the poor.
• Medicare A compulsory hospitalization program plus a voluntary insurance plan for doctors’ fees for people over 65, included in the Social Security program.
• menu cost A cost incurred when a firm changes its price.
• merger The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.
• merit goods Goods or services provided for free by a government based on need, rather than ability to pay.
• methods of production Processes and techniques used to manufacture a product.
• model A theory composed of assumptions that simplify and abstract from reality, from which conclusions or predictions about the real world are deduced.
• monetarists Economists generally sharing the belief that business-cycle fluctuations are due largely to changes in the money supply. Many monetarists think that a free-enterprise economy has effective self-regulating mechanisms that activist fiscal and monetary policies tend to disrupt. Some monetarists, like Milton Friedman, advocate a rule for stable growth in the money supply of three to five percent per year.
• monetary aggregate target A specific level of a money-supply measure deemed appropriate for a desired level of GDP; often implemented in theory by targeting a specific growth rate of a money-supply measure thought to be appropriate for a desired level of GDP growth.
• monetary base The reserves of commercial banks plus currency outside the banks.
• monetary policy The exercise of the central bank’s control over the quantity of money and the level of interest rates in order to promote the objectives of national economic policy.
• money Anything that serves as a medium of exchange and a standard and store of value. The unit in which the prices of goods and services are measured.
• money income Income measured in current dollars (actual money amounts).
• money supply The total amount of money that is available to be spent in an economy at a given time. Currency is only one component of the money supply.
• monopolistic competition A market structure in which there are many sellers of somewhat-differentiated products, entry is easy, and there is no collusion among sellers. Retailing seems to have many of the characteristics of monopolistic competition.
• monopoly A market structure (such as those for public utilities) in which there is only one seller of a product.
• monopoly power A firm’s degree of control over a price for a good.
• monopoly profits Economic gain for a firm that comes as a result of that firm’s control over the market.
• monopsony A market state in which there is only one producer of a good or service.
• multiple expansion of bank deposits When banks lend and create deposits, thereby losing their reserves to other banks, which in turn increase their loans and thus create new deposits.
• multiplier Number which indicates the magnitude of a particular macroeconomics policy measure.

N

• national debt The amount owed by the government. To cover the difference between expenditures and tax revenues, the government sells bonds, notes, and other forms of IOUs.
• natural monopoly An industry in which the average costs of producing the product reach a minimum at an output rate large enough to satisfy the entire market, so that competition among firms cannot be sustained and one firm becomes a monopolist.
• near-money Assets (such as government bonds) that can be converted into cash, though not quite as easily as time and savings accounts.
• negative income tax A system whereby families with incomes below a certain break-even level would receive, rather than make, a government income tax payment.
• net exports The amount spent by foreigners on a country’s goods and services (exports) minus the amount a country spends on foreign goods and services (imports).
• network effects or externalities Situations where the value of a product to one user increases with the number of other users.
• new classical macroeconomists A group, led by Robert Lucas, that believes that the government cannot use monetary and fiscal policies to close recessionary and inflationary gaps because, if firms and individuals formulate their expectations rationally, they will tend to frustrate the government’s attempts to use activist stabilization policies.
• new Keynesians A group that believes, like the Keynesians, that prices and wages tend to be rigid in the short run (but, in contrast to the Keynesians, has developed theories to explain why such wage and price stickiness can be expected).
• nominal Expressed in current dollars (actual money amounts).
• nonprice competition Market contest between firms involving ANYTHING but price, e.g., quality, convenience, style.
• nonrival consumption Consumption by one consumer does not affect the ability of other consumers to consume the same unit of the same good.
• non-exclusion The concept whereby it is not possible to keep those who have not paid for a good from having access to it and using it.
• normative economics Economic propositions about what ought to be, or about what a person, organization, or country ought to do.

O

• old-age insurance Benefits paid under the Social Security program to retired workers.
• oligopoly A market structure (such as those for autos and steel) in which there are only a few sellers of products that can be either identical or differentiated.
• open market operations The purchase and sale of U.S. government securities on the open market by the Federal Reserve in order to control the quantity of bank reserves.
• open shop A situation where a firm can hire both union and nonunion workers, with no requirement that nonunion workers ever join a union.
• opportunity cost The value of what certain resources could have produced had they been used in the best alternative way. Also called alternative cost.
• outside policy lag The time between corrective government action responding to a shock to the economy and the resulting effect on the economy.
• overvaluation of currency The setting of a currency’s price above the equilibrium price.

P

• parity The principle that farmers should be able to exchange a given quantity of farm output for the same quantity of nonfarm goods and services they would have been able to purchase at some point in the past. In effect, the principle that farm prices should increase at the same rate as the prices of the goods and services that farmers buy.
• partnership A form of business organization whereby two or more people agree to own and conduct a business, with each party contributing some proportion of the capital and/or labor and receiving some proportion of the profit or loss.
• peak The point in the business cycle where national output is highest relative to its potential (full-employment) level.
• perfect competition A market structure in which there are many sellers of identical products, no one seller or buyer has control over the price, entry is easy, and resources can switch readily from one use to another. Many agricultural markets have many of the characteristics of perfect competition.
• personal consumption expenditures The spending by households on durable goods, nondurable goods, and services.
• Phillips curve A curve representing the relationship between the rate of increase in the price level and the level of unemployment.
• pollution tax vs. pollution control The comparison on the part of government of whether it is more beneficial to an economy to impose a revenue-based cost on pollution, or to attempt to curb pollution by imposing strict laws against it.
• pools Resources grouped together by companies in an attempt to gain mutual market leverage.
• positive economics Descriptive statements, propositions, and predictions about the economic world that are generally testable by an appeal to the facts.
• potential gross domestic product The total amount of goods and services that could have been produced had the economy been operating at full capacity or full employment.
• precautionary demand for money The demand for money because of uncertainty about the timing and size of future disbursements and receipts.
• predatory pricing Setting products at a low price with the intention of driving out competition and preventing new competition.
• present value of an investment Future value of resources minus the value of those resources when initially put toward a certain production.
• price collusion A secret agreement between rival firms for the purpose of receiving large profits or cornering the market through price fixing or supply reduction.
• price controls A maximum or minimum cost established by a government for a particular good.
• price discrimination The practice whereby one buyer is charged more than another buyer for the same product.
• price elastic The demand for a good if its price elasticity of demand is greater than one.
• price elasticity of demand The percentage change in quantity demanded resulting from a one-percent change in price—by convention, always expressed as a positive number.
• price elasticity of supply The percentage change in quantity supplied resulting from a one-percent change in price.
• price incentives When the price of a product is reduced to make that product more attractive to consumers.
• price index The ratio of the value of a set of goods and services in current dollars to the value of the same set of goods and services in constant dollars.
• price inelastic The demand for a good if its price elasticity of demand is less than one.
• price leader In an oligopolistic industry, a firm that sets a price that other firms are willing to follow.
• price stability and elasticity Prices in an economy don’t change over time, which should, in turn, have very little effect on consumer preferences.
• price supports Price floors imposed by the government on a certain good.
• price system A system under which every good and service has a price and which in a purely capitalistic economy carries out the basic functions of an economic system (determining what goods and services will be produced, how the output will be produced, how much of it each person will receive, and what the country’s growth of per capita income will be).
• price=marginal cost efficiency Measuring the effect that a change in total cost, arising when the quantity produced changes by one unit, has on price.
• private cost The price paid by the individual user for the use of a resource.
• product differentiation The process by which producers create real or apparent differences between products that perform the same general function.
• product group A group of firms that produce similar products that are fairly close substitutes for one another.
• product life cycle The period of time over which an item is developed, brought to market, and eventually removed from the market.
• productive resources Materials, labor, or money used to create goods and services.
• productivity A measure of output from a production process, per unit of input.
• product market A market where products are bought and sold.
• production function The relationship between the quantities of various inputs used per period of time and the maximum quantity of output that can be produced per period of time; that is, the most output that existing technology permits the firm to produce from various quantities of inputs.
• production possibilities curve A curve showing the combinations of amounts of various goods that a society can produce with given (fixed) amounts of resources.
• profit The difference between a firm’s revenue and its costs.
• progressive tax A tax whereby the rich pay a larger proportion of their income for the tax than do the poor.
• prohibitive tariff A tariff so high that it prevents imports of a good.
• property tax A tax imposed on real estate and/or other property.
• proportional tax A system in which all levels of income are taxed at the same rate; a.k.a. flat tax.
• proprietors’ income The net income of unincorporated businesses (proprietorships and partnerships).
• proprietorship A firm owned by a single individual.
• prosperity A period when national output is close to its potential (full-employment) level.
• protectionism and job security The argument that the losses in consumer surplus created by imposing tariffs on foreign goods are justifiable because they preserve employment in certain occupations, usually those with significant lobbying and political influence.
• protectionism and national defense The argument that the losses in consumer surplus created by imposing tariffs on goods critical for national defense are justified so that a country does not become dependent on potential enemies during times of war.
• public debt The total financial obligations incurred by all governmental bodies of a nation; the national debt. At the federal level, part of the national debt is held by members of the public and part by agencies within the government.
• public goods Goods and services which can be consumed by one person without diminishing the amount of them that others can consume and which there is no way to prevent citizens from consuming, whether they pay for them or not.
• public sector The government sector of the economy.
• purchasing power Value of money (currency) measured by the quantity and quality of goods and services it can buy.
• pure oligopoly A market structure (like those for steel, cement, tin cans, and petroleum) in which there are only a few sellers of an identical product.
• pure rate of interest The interest rate on a riskless loan.

Q

• quota A limit imposed on the amount of a commodity that can be imported annually.

R

• rate of return The annual profit per dollar invested that businesses can obtain by building new structures, adding new equipment, or increasing their inventories. The interest rate earned on the investment in a particular asset.
• rational expectations Expectations that are correct on the average (forecasting errors are random). The forecaster makes the best possible use of whatever information is available.
• real Expressed in constant dollars.
• real business cycle models Theories asserting that business fluctuations are due predominantly to shifts in the aggregate supply curve resulting from new technology, good or bad weather, and so on.
• real income Income measured in constant dollars (that is, the amount of goods and services that can be bought with the income).
• recession The phase in the business cycle after the peak, during which national output falls.
• recessionary gap A negative gap between actual and potential output.
• regressive tax A tax whereby the rich pay a smaller proportion of their income for the tax than do the poor.
• regulation Management of an economy by an outside (usually governing) body or set of pre-existing laws.
• regulatory capture A theory associated with George Stigler, a Nobel laureate economist, whereby an agency—formed to set parameters on industry movements for the sake of public interest—eventually acts in ways that benefit the very industry they set out to control.
• rent In the context of Chapter 23, the return derived from an input that is fixed in supply.
• rent controls A maximum price imposed by government on how much someone may charge a tenant for a rental property.
• reproduction cost of assets What the firm would have to pay to replace its assets.
• required reserve ratio Amount of money and liquid assets that Federal Reserve System member banks must hold in cash or on deposit with the Federal Reserve System, usually a specified percentage of their demand deposits and time deposits.
• reserve ratio The portion (expressed as a percentage) of depositors’ balances banks must have on hand as cash.
• resource market A market where resources are bought and sold.
• resources Inputs used to produce goods and services.
• retained earnings The total amount of profit that the stockholders of a corporation have reinvested in the business, rather than withdrawing as dividends.
• return on a fixed investment When money put into capital goods yields either a profit or a loss.
• rigid policy rule A rule specifying completely the behavior of the variable governed by the policy rule (for example, Milton Friedman’s suggestion that the money supply be set so that it grows at a fixed, agreed-on rate).
• rule of reason The principle that not all trusts but only unreasonable combinations in restraint of trade require conviction under the antitrust laws.
• runaway inflation A very rapid increase in the general price level that wipes out practically all the value of money.

S

• sales tax A tax imposed on the goods consumers buy (with the exception, in some states, of food and medical care).
• saving The process by which people give up a claim on present consumption goods in order to receive consumption goods in the future.
• saving function The relationship between total saving and disposable income; that is, the total amount of saving that will occur at various levels of disposable income.
• Say’s law The principle that the production of a certain amount of goods and services results in the generation of an amount of income precisely sufficient to buy that output.
• scarcity of resources The basic principle of limited resources within an economy of unlimited wants.
• shift in demand A change in the quantity of a good or service consumers are willing and able to buy at every price level.
• shifts in the supply and demand curves Consumer or producer willingness and ability to produce or consume goods and services shifts at every price level.
• short-run and long-run elasticity Measures in the response to price movements; long-run measures total response, and short-run measures immediate response.
• short run In the context of Chapters 15 to 20, the period during which at least one of a firm’s inputs (generally its plant and equipment) is fixed.
• size of the deficit vs size of the government A notion referring to the tendency of some to assess the size of government with the size of the deficit.
• social insurance program Government-sponsored arrangement whereby: a) the benefits, eligibility requirements, and other aspects of the program are defined by statute; b) explicit provision is made to account for the income and expenses (often through a trust fund); c) it is funded by taxes or premiums paid by (or on behalf of) participants (although additional sources of funding may be provided as well), and; d) the program serves a defined population, and participation is either compulsory or the program is heavily enough subsidized that most individuals choose to participate.
• Social Security A program that imposes taxes on wage earners and employers and provides old-age, survivors’, disability, and medical benefits to workers covered under the Social Security Act.
• specialization The usage of economic resources for specific tasks; “resources” can refer to materials or labor.
• specialization and trade When individuals or countries specialize in producing the goods and services for which they have the lowest opportunity cost and trade with other individuals or countries in order to consume more and reach a higher standard of living than would be possible in the absence of trade.
• stagflation A simultaneous combination of high unemployment and high inflation.
• structural deficit The difference between government expenditures and tax revenues that would result if gross domestic product were at its potential, not its actual, level.
• structural unemployment Joblessness that occurs when new goods or new technologies call for new skills, and workers with older skills cannot find jobs.
• substitutes Commodities with a positive cross-elasticity of demand (a decrease in the price of one commodity will result in a decrease in the quantity demanded of the other commodity).
• supply curve A curve, usually sloping upward to the right, showing the relationship between a product’s price and the quantity supplied of the product.
• supply curve for loanable funds A curve showing the relationship between the quantity of loanable funds supplied and the pure interest rate.
• supply and demand for loanable funds The amount available for lending in the general money market vs. the interest rates that consumers are willing to pay to borrow money.
• supply shock An event that suddenly changes the price of a commodity or service.
• supply-side economics A set of propositions concerned with influencing the aggregate supply curve through the use of financial incentives such as tax cuts.
• supply-side inflation Inflation resulting from leftward shifts of the aggregate supply curve.

T

• tariff A tax imposed by the government on imported goods (designed to cut down on imports and thus protect domestic industry and workers from foreign competition).
• tax avoidance Legal steps taken by taxpayers to reduce their tax bills.
• tax distortions Inefficiencies in the free market, resulting from the imposition of taxes.
• tax evasion Misreporting of income or other illegal steps taken by taxpayers to reduce their tax bills.
• taxes Fees charged by a government on a product, income, or activity.
• technological change New methods of producing existing products, new designs that make it possible to produce new products, and new techniques of organization, marketing, and management.
• technology Society’s pool of knowledge concerning how goods and services can be produced from a given amount of resources.
• terms of trade The ratio of an index of export prices to an index of import prices.
• theory of social choice The philosophical and mathematical study of the type of conclusions that can be determined through various aggregation methods to create a social welfare function from individual preferences.
• tight monetary policy A monetary policy that restrains or reduces the money supply and raises interest rates.
• total cost The sum of a firm’s total fixed cost and total variable cost.
• total fixed cost A firm’s total expenditure on fixed inputs per period of time.
• total revenue A firm’s total dollar sales volume.
• total variable cost A firm’s total expenditure on variable input per period of time.
• trade and efficiency The use of trade policy that maximizes total surplus, both for consumers by importing items produced at lower costs in other countries and for producers by exporting items produced at lower costs domestically than is possible in other countries.
• trade-off Refers to losing one quality or aspect of something in return for gaining another quality or aspect.
• transactions demand for money The holding of money in cash or in checking accounts in order to pay for final goods and services.
• transferable emissions permit Each permit allows the holder of the permit to generate a certain amount of pollution. These permits, limited in number, are sold by the government to the highest bidders at a price set by supply and demand.
• transfer payments Payments made by the government or private business to individuals who do not contribute to the production of goods and services in exchange for them.
• trough The point in the business cycle where national output is lowest relative to its potential (full-employment) level.
• trusts A group of companies that illegally work together to reduce competition and control prices.
• tying contract The practice whereby buyers must purchase other items in order to get the product they want.

U

• uncertainty A situation in which, given the best information available, multiple outcomes are possible.
• undervaluation of currency The setting of a currency’s price below the equilibrium price.
• unemployment According to the definition of the Bureau of Labor Statistics, joblessness among people who are actively looking for work and would take a job if one were offered.
• unemployment rate The number of people who are unemployed divided by the number of people in the labor force.
• union shop A situation where firms can hire nonunion workers who must then become union members within a certain length of time after being hired.
• unitary elasticity A price elasticity of demand equal to one.
• utility A number representing the level of satisfaction that a consumer derives from a particular good or group of goods.

V

• value-added The amount of value added by a firm or industry to the total worth of a product.
• value of the marginal product of labor The marginal product of labor (the additional output resulting from the addition of an extra unit of labor) multiplied by the product’s price.
• variable input A resource used in the production process (such as labor or raw material) whose quantity can be changed during the particular period under consideration.
• velocity of circulation of money Rate at which the money supply is used to make transactions for final goods and services; that is, the average number of times per year that a dollar is used to buy the final goods and services produced. It equals nominal GDP divided by the money supply.

W

• wage and price controls Limits imposed by the government on the amount by which wages and prices can rise, in order to reduce the inflation rate at a given unemployment rate.
• wage-price spiral A series of steps whereby higher wage demands by workers prompt firms to raise their prices to consumers. This in turn raises the general cost of living and prompts workers to make yet-higher wage demands.
• wage rate The price of labor.

X

Y

Z