A B C D E F G H I J K L M
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A
Absolute
Advantage
The advantage in the
production of a product enjoyed by one country over another when
it uses fewer resources to produce that product than the other
country does.
Accelerator Effect
The tendency for
investment to increase when aggregate output increases and
decrease when aggregate output decreases, accelerating the growth
or decline of output.
Actual Investment
The actual amount of
investment that takes place; it includes items such as unplanned
changes in inventories.
Adjustment Costs
The costs that a
firm incurs when it changes its production level—for
example, the administration costs of laying off employees or the
training costs of hiring new workers.
Adverse Selection
Can occur when a
buyer or seller enters into an exchange with another party who
has more information.
Aggregate Behavior
The behavior of all
households and firms together.
Aggregate Demand
The total demand for
goods and services in the economy.
Aggregate Demand (AD)
Curve
A curve that shows
the negative relationship between aggregate output (income) and
the price level. Each point on the AD curve is a point at which
both the goods market and the money market are in equilibrium.
Aggregate Income
The total income
received by all factors of production in a given period.
Aggregate Output
The total quantity
of goods and services produced (or supplied) in an economy in a
given period.
Aggregate Output (Income)
(Y)
A combined term used
to remind you of the exact equality between aggregate output and
aggregate income.
Aggregate Production
Function
The mathematical
representation of the relationship between inputs and national
output, or gross domestic product.
Aggregate Supply
The total supply of
all goods and services in an economy.
Aggregate Supply (AS)
Curve
A graph that shows
the relationship between the aggregate quantity of output
supplied by all firms in an economy and the overall price level.
Animal Spirits of
Entrepreneurs
A phrase coined by
Keynes to describe investors’ feelings.
Antitrust Division (of
the Department of Justice)
One of two federal
agencies empowered to act against those in violation of antitrust
laws. It initiates action against those who violate antitrust
laws and decides which cases to prosecute and against whom to
bring criminal charges.
Appreciation of a
Currency
The rise in value of
one currency relative to another.
Automatic Destabilizers
Revenue and
expenditure items in the federal budget that automatically change
with the economy in such a way as to destabilize GDP.
Automatic Stabilizers
Revenue and
expenditure items in the federal budget that automatically change
with the state of the economy in such a way as to stabilize GDP.
Autonomous Variable
A variable that is
assumed not to depend on the state of the economy—that is,
it does not change when the economy does.
Average Fixed Cost (AFC)
Total fixed cost
divided by the number of units of output; a per-unit measure of
fixed costs.
Average Product
The average amount
produced by each unit of a variable factor of production.
Average Propensity to
Consume (APC)
The proportion of
income households spend on consumption. Determined by dividing
consumption (C) by income (Y).
Average Total Cost (ATC)
Total cost divided
by the number of units of output.
Average Variable Cost (AVC)
Total variable cost
divided by the number of units of output.
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B
Balance of Payments
The record of a
country’s transactions in goods, services, and assets with
the rest of the world; also the record of a country’s
sources (supply) and uses (demand) of foreign exchange.
Balance of Trade
A country’s
exports of goods and services minus its imports of goods and
services.
Balance on Capital
Account
In the United
States, the sum of the following (measured in a given period):
the change in private U.S. assets abroad, the change in foreign
private assets in the United States, the change in U.S.
government assets abroad, and the change in foreign government
assets in the United States.
Balance on Current
Account
Net exports of
goods, plus net exports of services, plus net investment income,
plus net transfer payments.
Balanced-Budget
Multiplier
The ratio of change
in the equilibrium level of output to a change in government
spending where the change in government spending is balanced by a
change in taxes so as not to create any deficit. The balanced-budget
multiplier is equal to one: The change in Y resulting from the
change in G and the equal change in T is exactly the same size as
the initial change in G or T itself.
Barriers to Entry
Something that
prevents new firms from entering and competing in imperfectly
competitive industries.
Barter
The direct exchange
of goods and services for other goods and services.
Base-Year
The year chosen for
the weights in a fixed-weight procedure.
Black Market
A market in which
illegal trading takes place at market-determined prices.
Bond
A contract between a
borrower and a lender, in which the borrower agrees to pay the
loan at some time in the future, along with interest payments
along the way.
Brain Drain
The tendency for
talented people from developing countries to become educated in a
developed country and remain there after graduation.
Breaking Even
The situation in
which a firm is earning exactly a normal rate of return.
Budget Constraint
The limits imposed
on household choices by income, wealth, and product prices.
Budget Deficit
The difference
between what a government spends and what it collects in taxes in
a given period: G2T.
Business Cycle
The cycle of short-term
ups and downs in the economy.
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C
Capital
Those goods produced
by the economic system that are used as inputs to produce other
goods and services in the future.
Capital Flight
The tendency for
both human capital and financial capital to leave developing
countries in search of higher rates of return elsewhere.
Capital Income
Income earned on
savings that have been put to use through financial capital
markets.
Capital Market
The input/factor
market in which households supply their savings, for interest or
for claims to future profits, to firms that demand funds to buy
capital goods.
Capital Stock
For a single firm,
the current market value of the firm’s plant, equipment,
inventories, and intangible assets.
Capital-Intensive
Technology
A production
technique that uses a large amount of capital relative to labor.
Capitalist Economy
An economy in which
most capital is privately owned.
Cartel
A group of firms
that gets together and makes joint price and output decisions to
maximize joint profits.
Celler-Kefauver Act (1950)
Extended the
government’s authority to ban vertical and conglomerate
mergers.
Ceteris Paribus (i.e.
Everything Else Equal)
A device used to
analyze the relationship between two variables while the values
of other variables are held unchanged.
Change In Business
Inventories
The amount by which
firms’ inventories change during a period. Inventories are
the goods that firms produce now but intend to sell later.
Change In Inventory
Production minus
sales.
Choice Set or
Opportunity Set
The set of options
that is defined and limited by a budget constraint.
Circular Flow
A diagram showing
the income received and payments made by each sector of the
economy.
Clayton Act
Passed by Congress
in 1914 to strengthen the Sherman Act and clarify the rule of
reason, the act outlawed specific monopolistic behaviors such as
tying contracts, price discrimination, and unlimited mergers.
Coase Theorem
Under certain
conditions, when externalities are present, private parties can
arrive at the efficient solution without government involvement.
Collusion
The act of working
with other producers in an effort to limit competition and
increase joint profits.
Command Economy
An economy in which
a central government either directly or indirectly sets output
targets, incomes, and prices.
Commodity Monies
Items used as money
that also have intrinsic value in some other use.
Communism
An economic system
in which the people control the means of production (capital and
land) directly, without the intervention of a government or state.
Comparative Advantage
The advantage in the
production of a product enjoyed by one country over another when
that product can be produced at lower cost in terms of other
goods than it could be in the other country.
Compensating
Differentials
Differences in wages
that result from differences in working conditions. Risky jobs
usually pay higher wages; highly desirable jobs usually pay lower
wages.
Compensation of
Employees
Includes wages,
salaries, and various supplements—employer contributions to
social insurance and pension funds, for example—paid to
households by firms and by the government.
Complements,
Complementary Goods
Goods that “go
together”; a decrease in the price of one results in an
increase in demand for the other, and vice versa.
Consent Decrees
Formal agreements on
remedies between all the parties to an antitrust case that must
be approved by the courts. Consent decrees can be signed before,
during, or after a trial.
Constant Returns to
Scale
An increase in a
firm’s scale of production has no effect on average costs
per unit produced.
Constrained Supply of
Labor
The amount a
household actually works in a given period at the current wage
rate.
Consumer Goods
Goods produced for
present consumption.
Consumer Price Index (CPI)
A price index
computed each month by the Bureau of Labor Statistics using a
bundle that is meant to represent the “market basket”
purchased monthly by the typical urban consumer.
Consumer Sovereignty
The idea that
consumers ultimately dictate what will be produced (or not
produced) by choosing what to purchase (and what not to purchase).
Consumer Surplus
The difference
between the maximum amount a person is willing to pay for a good
and its current market price.
Consumption Function
The relationship
between consumption and income.
Contraction, Recession,
or Slump
The period in the
business cycle from a peak down to a trough, during which output
and employment fall.
Contractionary Fiscal
Policy
A decrease in
government spending or an increase in net taxes aimed at
decreasing aggregate output (income) (Y).
Contractionary Monetary
Policy
A decrease in the
money supply aimed at decreasing aggregate output (income) (Y).
Corn Laws
The tariffs,
subsidies, and restrictions enacted by the British Parliament in
the early nineteenth century to discourage imports and encourage
exports of grain.
Corporate Bonds
Promissory notes
issued by corporations when they borrow money.
Cost Shock, or Supply
Shock
A change in costs
that shifts the aggregate supply (AS) curve.
Cost-Benefit Analysis
The formal technique
by which the benefits of a public project are weighed against its
costs.
Cost-of-Living
Adjustments (COLAs)
Contract provisions
that tie wages to changes in the cost of living. The greater the
inflation rate, the more wages are raised.
Cost-Push, or Supply-Side,
Inflation
Inflation caused by
an increase in costs.
Cournot Model
A model of a two-firm
industry (duopoly) in which a series of output–adjustment
decisions leads to a final level of output between the output
that would prevail if the market were organized competitively and
the output that would be set by a monopoly.
Cross-Price Elasticity
of Demand
A measure of the
response of the quantity of one good demanded to a change in the
price of another good.
Crowding-Out Effect
The tendency for
increases in government spending to crowd out investment
Currency Debasement
The decrease in
value of money that occurs when its supply is increased rapidly.
Current Dollars
The current (i.e.
"today's") prices that one pays for goods and services.
Cyclical Deficit
The deficit that
occurs because of a downturn in the business cycle.
Cyclical Unemployment
The increase in
unemployment that occurs during recessions and depressions.
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D
Debt Rescheduling
An agreement between
banks and borrowers through which a new schedule of repayments of
the debt is negotiated; often some of the debt is written off and
the repayment period is extended.
Decreasing Returns to
Scale, or Diseconomies of Scale
An increase in a
firm’s scale of production leads to higher average costs per
unit produced.
Deficit Response Index (DRI)
The amount by which
the deficit changes with a $1 change in GDP.
Deflation
A decrease in the
overall price level.
Demand
Curve
A graph illustrating
how much of a given product a household would be willing to buy
at different prices.
Demand
Determined Price
The price of a good
that is in fixed supply; it is determined exclusively by what
firms and households are willing to pay for the good.
Demand Schedule
A table showing how
much of a given product a household would be willing to buy at
different prices.
Demand-Pull Inflation
Inflation that is
initiated by an increase in aggregate demand.
Depreciation
The amount by which
an asset’s value falls in a given period.
Depreciation of a
Currency
The fall in value of
one currency relative to another.
Depression
A prolonged and deep
recession. The precise definitions of prolonged and deep are
debatable.
Derived Demand
The demand for
resources (inputs) that is dependent on the demand for the
outputs those resources can be used to produce.
Descriptive Economics
The compilation of
data that describe phenomena and facts.
Desired, or Optimal,
Level of Inventories
The level of
inventory at which the extra cost (in lost sales) from lowering
inventories by a small amount is just equal to the extra gain (in
interest revenue and decreased storage costs).
Desired, or Planned,
Investment
Those additions to
capital stock and inventory that are planned by firms.
Diamond/Water Paradox
A paradox stating
that (1) the things with the greatest value in use frequently
have little or no value in exchange, and (2) the things with the
greatest value in exchange frequently have little or no value in
use.
Discount Rate
Interest rate that
banks pay to the Fed to borrow from it.
Discouraged-Worker
Effect
The decline in the
measured unemployment rate that results when people who want to
work but cannot find jobs grow discouraged and stop looking, thus
dropping out of the ranks of the unemployed and the labor force.
Discretionary Fiscal
Policy
Changes in taxes or
spending that are the result of deliberate changes in government
Discretionary Fiscal
Policy
Changes in taxes or
spending that are the result of deliberate changes in government
Disposable Personal
Income or After-Tax Income
Personal income
minus personal income taxes. The amount that households have to
spend or save.
Disposable, or After-Tax,
Income (Yd)
Total income minus
net taxes: Y2T.
Dividends
The portion of a
corporation’s profits that the firm pays out each period to
its shareholders.
Dominant Strategy
In game theory, a
strategy that is best no matter what the opposition does.
Drop-In-the-Bucket
Problem
A problem intrinsic
to public goods: The good or service is usually so costly that
its provision generally does not depend on whether or not any
single person pays.
Dumping
A firm or industry
sells products on the world market at prices below the cost of
production.
Durable Goods
Goods that last a
relatively long time, such as cars and household appliances.
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E
Easy Monetary Policy
Fed policies that expand the money
supply in an effort to stimulate the economy.
Economic Growth
An increase in the total output of
an economy. It occurs when a society acquires new resources or
when it learns to produce more using existing resources.
Economic Income
The amount of money a household can
spend during a given period without increasing or decreasing its
net assets. Wages, salaries, dividends, interest income, transfer
payments, rents, and so forth are sources of economic income.
Economic Integration
Occurs when two or more nations join
to form a free-trade zone.
Economic Problem
Given scarce resources, how exactly
do large, complex societies go about answering the three basic
economic questions?
Economic Theory
A statement or set of related
statements about cause and effect, action and reaction.
Economics
The study of how individuals and
societies choose to use the scarce resources that nature and
previous generations have provided.
Efficiency
In economics, allocative efficiency.
An efficient economy is one that produces what people want at the
least possible cost.
Efficiency Wage Theory
An explanation for unemployment that
holds that the productivity of workers increases with the wage
rate. If this is so, firms may have an incentive to pay wages
above the market-clearing rate.
Efficient Market
A market in which profit
opportunities are eliminated almost instantaneously.
Elastic Demand
A demand relationship in which the
percentage change in quantity demanded is larger in absolute
value than the percentage change in price (a demand elasticity
with an absolute value greater than 1).
Elasticity
A general concept used to quantify
the response in one variable when another variable changes.
Elasticity of Labor Supply
A measure of the response of labor
supplied to a change in the price of labor.
Elasticity of Supply
A measure of the response of
quantity of a good supplied to a change in price of that good.
Likely to be positive in output markets.
Empirical Economics
The collection and use of data to
test economic theories.
Employed
Any person 16 years old or older (1)
who works for pay, either for someone else or in his or her own
business for 1 or more hours per week, (2) who works without pay
for 15 or more hours per week in a family enterprise, or (3) who
has a job but has been temporarily absent, with or without pay.
Entrepreneur
A person who organizes, manages, and
assumes risk, in order to combine the factors of production into
a product/service
Equilibrium
Occurs when there is no tendency for
change. In the macroeconomic goods market, equilibrium occurs
when planned aggregate expenditure is equal to aggregate output.
Equilibrium Price Level
The point at which the aggregate
demand and aggregate supply curves intersect.
Equity
Fairness.
European Union (EU)
The European trading bloc composed
of Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden, and the United Kingdom
Excess Demand or Shortage
The condition that exists when
quantity de-manded exceeds quantity supplied at the current price.
Excess Labor, Excess Capital
Labor and capital that are not
needed to produce the firm’s current level of output.
Excess Reserves
The difference between a bank’s
actual reserves and its required reserves.
Excess Supply or Surplus
The condition that exists when
quantity supplied exceeds quantity demanded at the current price.
Exchange Rate
The price of one country’s
currency in terms of another country’s currency; the ratio
at which two currencies are traded for each other.
Expansion or Boom
The period in the business cycle
from a trough up to a peak, during which output and employment
rise.
Expansionary Fiscal Policy
An increase in government spending
or a reduction in net taxes aimed at increasing aggregate output
(income) (Y).
Expansionary Monetary Policy
An increase in the money supply
aimed at increasing aggregate output (income) (Y).
Expected Rate of Return
The annual rate of return that a
firm expects to obtain through a capital investment.
Expenditure Approach
A method of computing GDP that
measures the amount spent on all final goods during a given
period.
Explicit Contracts
Employment contracts that stipulate
workers’ wages, usually for a period of 1 to 3 years.
Export Promotion
A trade policy designed to encourage
exports.
Export Subsidies
Government payments made to domestic
firms to encourage exports.
Externality
A cost or benefit resulting from
some activity or transaction that is imposed or bestowed on
parties outside the activity or transaction. Sometimes called
spillovers or neighborhood effects.
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F
Factor Endowments
The quantity and quality of labor,
land, and natural resources of a country.
Factor Substitution Effect
The tendency of firms to substitute
away from a factor whose price has risen and toward a factor
whose price has fallen.
Factors of Production
The inputs into the production
process. Land, labor, and capital are the three key factors of
production.
Fallacy of Composition
The erroneous belief that what is
true for a part is necessarily true for the whole.
Favored Customers
Those who receive special treatment
from dealers during situations of excess demand.
Federal Budget
The budget of the federal government.
Federal Debt
The total amount owed by the federal
government.
Federal Open Market Committee (FOMC)
A group composed of the seven
members of the Fed’s Board of Governors, the president of
the New York Federal Reserve Bank, and 4 of the other 11 district
bank presidents on a rotating basis; it sets goals concerning the
money supply and interest rates and directs the operation of the
Open Market Desk in New York.
Federal Reserve System (the Fed)
The central bank of the United
States.
Federal Surplus (1) or Deficit (2)
Federal government receipts minus
expenditures.
Federal Trade Commission (FTC)
A federal regulatory group created
by Congress in 1914 to investigate the structure and behavior of
firms engaging in interstate commerce, to determine what
constitutes unlawful “unfair” behavior, and to issue
cease-and-desist orders to those found in violation of antitrust
law.
Fertility Rate
The birth rate. This rate is equal
to (the number of births per year divided by the population) x
100.
Fiat, or Token, Money
Items designated as money that are
intrinsically worthless.
Final Goods and services
Goods and services produced for
final use.
Financial Capital Market
The complex set of institutions in
which suppliers of capital (households that save) and the demand
for capital (business firms wanting to invest) interact.
Financial Intermediaries
Banks and other institutions that
act as a link between those who have money to lend and those who
want to borrow money.
Fine-Tuning
The phrase used by Walter Heller to
refer to the government’s role in regulating inflation and
unemployment.
Firm
An organization that comes into
being when a person or a group of people decides to produce a
good or service to meet a perceived demand. Most firms exist to
make a profit.
Fiscal Drag
The negative effect on the economy
that occurs when average tax rates increase because taxpayers
have moved into higher income brackets during an expansion.
Fiscal Policy
Government policies concerning taxes
and expenditures.
Fixed Cost
Any cost that does not depend on the
firm’s level of output. These costs are incurred even if the
firm is producing nothing. There are no fixed costs in the long
run.
Fixed-Weight Procedure
A procedure that uses weights from a
given base year.
Floating, or Market-Determined, Exchange
Rates
Exchange rates that are determined
by the unregulated forces of supply and demand.
Food Stamps
Vouchers that have a face value
greater than their cost and that can be used to purchase food at
grocery stores.
Foreign Exchange
All currencies other than the
domestic currency of a given country.
Free-Rider Problem
A problem intrinsic to public goods:
Because people can enjoy the benefits of public goods whether
they pay for them or not, they are usually unwilling to pay for
them.
Frictional Unemployment
The portion of unemployment that is
due to the normal working of the labor market; used to denote
short-run job/skill matching problems.
Full-Employment Budget
What the federal budget would be if
the economy were producing at a full-employment level of output.
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G
Game Theory
Analyzes oligopolistic behavior as a
complex series of strategic moves and reactive countermoves among
rival firms. In game theory, firms are assumed to anticipate
rival reactions.
General Agreement on Tariffs and Trade (GATT)
An international agreement signed by
the United States and 22 other countries in 1947 to promote the
liberalization of foreign trade.
General Equilibrium
The condition that exists when all
markets in an economy are in simultaneous equilibrium.
Gini Coefficient
A commonly used measure of
inequality of income derived from a Lorenz curve. It can range
from 0 to a maximum of 1.
Goods Market
The market in which goods and
services are exchanged and in which the equilibrium level of
aggregate output is determined.
Government Consumption and Gross
Investment (G)
Expenditures by federal, state, and
local governments for final goods and services.
Government Failure
Occurs when the government becomes
the tool of the rent seeker and the allocation of resources is
made even less efficient by the intervention of government.
Government Franchise
A monopoly by virtue of government
directive.
Government Spending Multiplier
The ratio of the change in the
equilibrium level of output to a change in government spending.
Great Depression
The period of severe economic
contraction and high unemployment that began in 1929 and
continued throughout the 1930s.
Gross Domestic Product (GDP)
The total market value of all final
goods and services produced within a given period by factors of
production located within a country.
Gross Investment
The total value of all newly
produced capital goods (plant, equipment, housing, and inventory)
produced in a given period.
Gross National Product (GNP)
The total market value of all final
goods and services produced within a given period by factors of
production owned by a country’s citizens, regardless of
where the output is produced.
Gross Private Domestic Investment (I)
Total investment in capital—that
is, the purchase of new housing, plants, equipment, and inventory
by the private (or nongovernment) sector.
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H
Heckscher-Ohlin Theorem
A theory that explains the existence
of a country’s comparative advantage by its factor
endowments: A country has a comparative advantage in the
production of a product if that country is relatively well
endowed with inputs used intensively in the production of that
product.
Herfindahl-Hirschman Index (HHI)
A mathematical calculation that uses
market share figures to determine whether or not a proposed
merger will be challenged by the government.
Homogeneous Products
Undifferentiated outputs; products
that are identical to, or indistinguishable from, one another.
Households
The consuming units in an economy.
Human Capital
A form of intangible capital that
includes the skills and other knowledge that workers have or
acquire through education and training and that yields valuable
services to a firm over time.
Hyperinflation
A period of very rapid increases in
the overall price level.
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I
Identity
Something that is always true.
Imperfect Competition
An industry in which single firms
have some control over price and competition. Imperfectly
competitive industries give rise to an inefficient allocation of
resources.
Imperfect Information
The absence of full knowledge
concerning product characteristics, available prices, and so
forth.
Imperfectly Competitive Industry
An industry in which single firms
have some control over the price of their output.
Implementation Lag
The time it takes to put the desired
policy into effect once economists and policy makers recognize
that the economy is in a boom or a slump.
Import Substitution
An industrial trade strategy that
favors developing local industries that can manufacture goods to
replace imports.
Impossibility Theorem
A proposition demonstrated by
Kenneth Arrow showing that no system of aggregating individual
preferences into social decisions will always yield consistent,
nonarbitrary results.
Income Approach
A method of computing GDP that
measures the income—wages, rents, interest, and profits—received
by all factors of production in producing final goods.
Income Elasticity of Demand
Measures the responsiveness of
demand to changes in income.
Increasing Returns to Scale, or
Economies of Scale
An increase in a firm’s scale
of production leads to lower average costs per unit produced.
Indirect Taxes
Taxes like sales taxes, customs
duties, and license fees.
Industrial Policy
Government involvement in the
allocation of capital across manufacturing sectors.
Industrial Revolution
The period in England during the
late eighteenth and early nineteenth centuries in which new
manufacturing technologies and improved transportation gave rise
to the modern factory system and a massive movement of the
population from the countryside to the cities.
Inelastic Demand
Demand that responds somewhat, but
not a great deal, to changes in price. Inelastic demand always
has an absolute value between zero and one.
Infant Industry
A young industry that may need
temporary protection from competition from the established
industries of other countries to develop an acquired comparative
advantage.
Inferior Goods
Goods for which demand tends to fall
when income rises.
Inflation
An increase in the overall price
level.
Inflation Rate
The percentage change in the price
level.
Injunction
A court order forbidding the
continuation of behavior that leads to damages.
Innovation
The use of new knowledge to produce
a new product or to produce an existing product more efficiently.
Input or Factor Markets
The markets in which the resources
used to produce products are exchanged.
Inputs
The goods and services that firms
purchase and turn into output.
Intangible Capital
Nonmaterial things that contribute
to the output of future goods and services.
Interest
The fee that borrowers pay to
lenders for the use of their funds.
Interest Rate
The annual interest payment on a
loan expressed as a percentage of the loan. Equal to the amount
of interest received per year divided by the amount of the loan.
Interest Sensitivity or Insensitivity of
Planned Investment
The responsiveness of planned
investment spending to changes in the interest rate. Interest
sensitivity means that planned investment spending changes a
great deal in response to changes in the interest rate; interest
insensitivity means little or no change in planned investment as
a result of changes in the interest rate.
Intermediate Goods
Goods that are produced by one firm
for use in further processing by another firm.
International Monetary Fund (IMF)
An international agency whose
primary goals are to stabilize international exchange rates and
to lend money to countries that have problems financing their
international transactions.
Interstate Commerce Commission (ICC)
A federal regulatory group created
by Congress in 1887 to oversee and correct abuses in the railroad
industry.
Invention
An advance in knowledge.
Inventory Investment
Occurs when a firm produces more
output than it sells within a given period.
Investment
New capital additions to a firm’s
capital stock. Although capital is measured at a given point in
time (a stock), investment is measured over a period of time (a
flow). The flow of investment increases the capital stock.
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J
J-Curve Effect
Following a currency depreciation, a
country’s balance of trade may get worse before it gets
better. The graph showing this effect is shaped like the letter
J, hence the name “J-curve effect.”
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K
Kinked Demand Curve Model
A model of oligopoly in which the
demand curve facing each individual firm has a “kink”
in it. The kink follows from the assumption that competitive
firms will follow if a single firm cuts price but will not follow
if a single firm raises price.
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L
Labor Demand Curve
A graph that illustrates the amount
of labor that firms want to employ at the particular wage rate.
Labor Force
The number of people employed plus
the number of unemployed.
Labor Market
The input/factor market in which
households supply work for wages to firms that demand labor.
Labor Productivity
Output per worker hour; the amount
of output produced by an average worker in 1 hour.
Labor Supply Curve
A diagram that shows the quantity of
labor supplied at different wage rates. Its shape depends on how
households react to changes in the wage rate.
Labor Theory of Value
Stated most simply, the theory that
the value of a commodity depends only on the amount of labor
required to produce it.
Labor-Force Participation Rate
The ratio of the labor force to the
total population 16 years old or older.
Labor-Intensive Technology
A production technique that uses a
large amount of labor relative to capital.
Laffer Curve
With the tax rate measured on the
vertical axis and tax revenue measured on the horizontal axis,
the Laffer curve shows there is some tax rate beyond which the
supply response is large enough to lead to a decrease in tax
revenue for further increases in the tax rate
Laissez-Faire Economy
Literally from the French: “allow
[them] to do.” An economy in which individual people and
firms pursue their own self-interests without any central
direction or regulation.
Land Market
The input/factor market in which
households supply land or other real property in exchange for
rent.
Law of Demand
The negative relationship between
price and quantity demanded: As price rises, quantity demanded
decreases. As price falls, quantity demanded increases.
Law of Diminishing Marginal Utility
The more of any one good consumed in
a given period, the less satisfaction (utility) generated by
consuming each additional (marginal) unit of the same good.
Law of Diminishing Returns
When additional units of a variable
input are added to fixed inputs after a certain point, the
marginal product of the variable input declines.
Law of One Price
If the costs of transportation are
small, the price of the same good in different countries should
be roughly the same.
Law of Supply
The positive relationship between
price and quantity of a good supplied: An increase in market
price will lead to an increase in quantity supplied, and a
decrease in market price will lead to a decrease in quantity
supplied.
Legal Tender
Money that a government has required
to be accepted in settlement of debts.
Lender of Last Resort
One of the functions of the Fed: It
provides funds to troubled banks that cannot find any other
sources of funds.
Liability Rules
Laws that require A to compensate B
for damages imposed.
Life-Cycle Theory of Consumption
A theory of household consumption:
Households make lifetime consumption decisions based on their
expectations of lifetime income.
Liquidity Property of Money
The property of money that makes it
a good medium of exchange as well as a store of value: It is
portable and readily accepted and thus easily exchanged for goods.
Logrolling
Occurs when congressional
representatives trade votes, agreeing to help each other get
certain pieces of legislation passed.
Long Run
That period of time for which there
are no fixed factors of production. Firms can increase or
decrease scale of operation, and new firms can enter and existing
firms can exit the industry.
Long-Run Average Cost Curve (LRAC)
A graph that shows the different
scales on which a firm can choose to operate in the long run.
Long-Run Competitive Equilibrium
When P = SRMC = SRAC = LRAC and
profits are zero.
Lorenz Curve
A widely used graph of the
distribution of income, with cumulative percentage of families
plotted along the horizontal axis and cumulative percentage of
income plotted along the vertical axis.
Lucas Supply Function
The supply function embodies the
idea that output (Y) depends on the difference between the actual
price level and the expected price level.
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M
M1, or Transactions Money
Money that can be directly used for
transactions.
M2, or Broad Money
M1 plus savings accounts, money
market accounts, and other near monies.
Macroeconomics
The branch of economics that
examines the economic behavior of aggregates—income,
employment, output, and so on—on a national scale.
Marginal Cost (MC)
The increase in total cost that
results from producing one more unit of output. Marginal costs
reflect changes in variable costs.
Marginal Damage Cost (MDC)
The additional harm done by
increasing the level of an externality-producing activity by one
unit. If producing product X pollutes the water in a river, MDC
is the additional cost imposed by the added pollution that
results from increasing output by one unit of X per period.
Marginal Private Cost (MPC)
The amount that a consumer pays to
consume an additional unit of a particular good.
Marginal Product
The additional output that can be
produced by adding one more unit of a specific input, ceteris
paribus.
Marginal Product of Labor (MPL)
The additional output produced by
one additional unit of labor.
Marginal Productivity Theory of Income
Distribution
At equilibrium, all factors of
production end up receiving rewards determined by their
productivity as measured by marginal revenue product.
Marginal Propensity to Consume (MPC)
That fraction of a change in income
that is consumed, or spent.
Marginal Propensity to Import (MPM)
The change in imports caused by a $1
change in income.
Marginal Propensity to Save (MPS)
That fraction of a change in income
that is saved.
Marginal Rate of Transformation (MRT)
The slope of the production
possibility frontier (ppf).
Marginal Revenue (MR)
The additional revenue that a firm
takes in when it increases output by one additional unit. In
perfect competition, P=MR.
Marginal Revenue Product (MRP)
The additional revenue a firm earns
by employing one additional unit of input, ceteris paribus.
Marginal Social Cost (MSC)
The total cost to society of
producing an additional unit of a good or service. MSC is equal
to the sum of the marginal costs of producing the product and the
correctly measured damage costs involved in the process of
production.
Marginal Utility (MU)
The additional satisfaction gained
by the consumption or use of one more unit of something.
Market
The institution through which buyers
and sellers interact and engage in exchange.
Market Demand
The sum of all the quantities of a
good or service demanded per period by all the households buying
in the market for that good or service.
Market Failure
Occurs when resources are
misallocated, or allocated inefficiently. The result is waste or
lost value.
Market Power
An imperfectly competitive firm’s
ability to raise price without losing all demand for its product.
Market Supply
The sum of all that is supplied each
period by all producers of a single product.
Market–Socialist Economy
An economy that combines government
ownership with market allocation.
Maximin Strategy
In game theory, a strategy chosen to
maximize the minimum gain that can be earned.
Medicaid and Medicare
In-kind government transfer programs
that provide health and hospitalization benefits: Medicare to the
aged and their survivors and to certain of the disabled,
regardless of income, and Medicaid to people with low incomes.
Microeconomics
The branch of economics that
examines the functioning of individual industries and the
behavior of individuals.
Midpoint Formula
A more precise way of calculating
percentages using the value halfway between P1 and P2 for the
base in calculating the percentage change in price, and the value
halfway between Q1 and Q2 as the base for calculating the
percentage change in quantity demanded.
Minimum Wage Laws
Laws that set a floor for wage rates—that
is, a minimum hourly rate for any kind of labor.
Model
A formal statement of a theory,
usually a mathematical statement of a presumed relationship
between two or more variables.
Modern Economic Growth
The period of rapid and sustained
increase in real output per capita that began in the Western
World with the Industrial Revolution.
Monetary Policy
The behavior of the Federal Reserve
concerning the nation’s money supply.
Money Income
The measure of income used by the
Census Bureau. Because it excludes noncash transfer payments and
capital gains income, it is less inclusive than “economic
income.”
Money Market
The market in which financial
instruments are exchanged and in which the equilibrium level of
the interest rate is determined.
Money Multiplier
The multiple by which deposits can
increase for every dollar increase in reserves; equal to one
divided by the required reserve ratio.
Monopolistic Competition
A common form of industry (market)
structure in the United States, characterized by a large number
of firms, none of which can influence market price by virtue of
size alone. Some degree of market power is achieved by firms
producing differentiated products. New firms can enter and
established firms can exit such an industry with relative ease.
Monopoly
An industry composed of only one
firm that produces a product for which there are no close
substitutes and in which significant barriers exist to prevent
new firms from entering the industry.
Moral Hazard
Arises when one party to a contract
passes the cost of its behavior on to the other party to the
contract.
Moral Suasion
The pressure exerted by the Fed on
member banks to discourage them from borrowing heavily from the
Fed.
Mortality Rate
The death rate. Equal to (the number
of deaths per year divided by the population) X 100.
Movement Along a Demand Curve
The change in quantity demanded
brought about by a change in price.
Multiplier
The ratio of the change in the
equilibrium level of output to a change in some autonomous
variable.
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