100 Economics Terms

Scarcity
the limited nature of society's resources

Economics
the study of how society manages its scarce resources

Efficiency
the property of society getting the most it can from its scarce resources

Equity
the property of distributing economic prosperity fairly among the members of society

Opportunity cost
whatever must be given up to obtain some item

Market economy
an economy that allocates resources through the decentralized decisions of many firms
and households as they interact in markets for goods and services

Externality
the impact of one person's actions on the well being of a bystander

Inflation
an increase in the overall level of prices in the economy

Phillips curve
a curve that shows the short run tradeoff between inflation and unemployment

Business cycle
fluctuations in economic activity, such as employment and production

Circular flow diagram

a visual model of the economy that shows how dollars flow through markets and firms
Production possibilities curve
a graph that show the combinations of output that the economy can possibly produce
given the available factors of production and the available production technology

Microeconomics
the study of how households and firms make decisions and how they interact in markets

Macroeconomics
the study of economy wide phenomena, including inflation, unemployment, and
economic growth

Positive statements
claims that attempt to describe the world as it is

Normative statements
claims that attempt to prescribe how the world should be

Interdependence
a reciprocal relation between interdependent entities

Specialization
to focus on a particular area

Absolute advantage
the comparison among producers of a good according to their productivity

Comparative advantage
the comparison among producers according to their opportunity cost

Imports
goods produced abroad and sold domestically

Exports
goods produced domestically and sold abroad

Law of demand
the claim that, other things equal, the quantity demanded of a good falls when the price
of the good rises

Normal good
a good for which, other things equal, an increase in income leads to an increase in
demand

Inferior good
a good for which, other things equal, an increase in income leads to a decrease in
demand

Substitutes
two goods for which an increase in the price of one good leads to an increase in the
demand for the other good

Complements
two goods for which an increase in the price of one good leads to a decrease in the
demand for the other good

Law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of
the good rises

Equilibrium
a situation in which the price has reached the level where quantity demanded equals
quantity supplied

Surplus
a situation in which quantity supplied is greater than quantity demanded

Shortage
a situation in which quantity demanded is greater than quantity supplied

Adam Smith
Scottish political economist and moral philosopher. His inquiry into the Nature and
Causes of the Wealth of Nations was one of the earliest attempts to study the historical
development of industry and commerce in Europe. That work helped to create the
modern academic discipline of economics and provided one of the best known
intellectual rationales for free trade and capitalism

John Maynard Keynes

an English economist, whose radical ideas had a major impact on modern economic
and political theory as well as Franklin D. Roosevelt's New Deal. He is particularly
remembered for advocating interventionist government policy, by which the government
would use fiscal and monetary measures to aim to mitigate the adverse effects of
economic recessions, depressions, and booms. He is considered to be the founder of
macroeconomics.

Elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to one of
its determinants

Price elasticity of demand

a measure of how much the quantity demand of a good responds to a change in the
price of that good, computed as the percentage change in quantity demanded divided
by the percentage change in price

Income elasticity of demand

a measure of how much the quantity demanded of a good responds too a change in
consumer's income, computed as the percentage change in quantity demanded divided
by the percentage change in income

Cross price elasticity of demand

a measure of how much the quantity demanded of one goods responds to a change in
price of another good, computed as the parentage change in quantity demanded of one
good divided by the percentage change in price of the second good

Price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the
price of that good, computed as the percentage change in quantity supplied divided by
the percentage change in price

Price ceiling
a legal maximum on the price at which a good can be sold
Price floor
a legal minimum on the price at which a good can be sold

Tax incidence
the manner in which the burden of a tax is shared among participants in a market

Welfare economics
the study of how the allocation of resources affects economic well being

Consumer surplus
a buyer's willingness to pay minus the amount the buyer actually pays

Producer surplus
the amount a seller is paid for a good minus the seller's cost

Cost
the value of everything a seller must give up to produce a good

Deadweight loss
the fall in total surplus that results from a market distortion, such as a tax

Laffer Curve
a curved graph that illustrates the theory that, if tax rates rise beyond a certain level,
they discourage economic growth, thereby reducing government revenues

Supply side economics

the branch of economics that concentrates on measures to increase output of goods
and services in the long run. The basis is that marginal tax rates should be reduced to
provide incentives to supply additional labor and capital, and thereby promote long term
growth.

Tariff
a tax on goods produced abroad and sold domestically

Import quota
a limit on the quantity of a good that can be produced abroad and sold domestically
Coase theorem
the proposition that if private parties can bargain without cost over the allocation of
resources, they can solve the problem of externalities on their own

Pigovian tax
a tax enacted to correct the effects of a negative externality

Private goods
goods that are both excludable and rival

Public goods
goods that are neither excludable nor rival

Free rider
a person who receives the benefits of a good but avoids paying for it

Budget surplus
an excess of government receipts over government spending

Budget deficit
a shortfall of tax revenue from government spending

Average tax rate

total taxes paid divided by total income

Marginal tax rate

the extra taxes paid on an additional dollar of income

Lump sum tax

a tax that is the same amount for every person

Proportional tax
a tax for which higher income taxpayers and low income taxpayers pay the same
fraction of income
Regressive tax
a tax for which higher income tax payers pay a smaller fraction of their tax than do lower
income tax payers

Progressive tax
a tax for which higher income taxpayers pay a larger portion of their tax than do lower
income tax payers

Total revenue
the amount paid by buyers and received by sellers of a good, computed as the price of
the good times the quantity sold

Total cost
the value of the inputs a firm uses in production

Profit
total revenue minus total cost

Explicit costs
input costs that require an outlay of money by the firm

Implicit costs
input costs that no not require the outlay of money by the firm

Economic profit
total revenue minus total cost including explicit and implicit costs

Accounting profit
total revenue minus explicit cost

Production function
the relationship between quantities of inputs used to make a good and the quantity of
output of that good
Marginal product
the increase in output that arises from an additional unit of input

Diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the
input increases

Fixed costs
costs that do not vary with the quantity of output produced

Variable cost
costs that vary with the quantity of output produced

Average total cost

total cost divided by the quantity of output

Average fixed cost

fixed costs divided by the quantity of output

Average variable cost

variable costs divided by the quantity of output

Marginal cost
an increase in total cost that arises from an extra unit of production

Efficient scale
the quantity of input that minimizes average total cost

Economies of scale
the property whereby long run average total cost falls as the quantity of output
increases

Diseconomies of scale
the property whereby long run average total cost rises as the quantity of output
increases
Constant return to scale
the property whereby long run average total cost stays the same as the quantity of
output changes

Competitive market
a market with buyers and sellers trading identical products so that each buyer and seller
is a price taker

Average revenue
total revenue divided by the quantity sold

Marginal revenue
the change in total revenue from an additional unit sold

Sunk cost
a cost that has already been committed and cannot be recovered

Natural Monopoly
a firm that arises because a single firm can supply a good of service to an entire market
at a smaller cost than could two or more firms

Price discrimination
the business practice of selling the same good at different prices to different customers

Oligopoly
a market structure in which only a few sellers offer similar or identical products

Monopolistic completion
a market structure in which many firms sell products that similar but not identical

Collusion
an agreement among firms in a market about quantities to produce or prices to charge

Cartel
a group of firms acting in unison
Nash equilibrium
a situation in which economic actors interaction with one another each choose their best
strategy given the strategies that all the other actors have chosen

Game theory
the study of how people behave in strategic situations

Factors of production
the inputs used to produce goods and services

Lorenz Curve
a curve showing the distribution of income in an economy. The cumulated percentage of
families (income receivers) is measured along the horizontal axis and the cumulated
percentage of income is measured along the vertical axis

Capital
the equipment and structures used to produce goods and services

Monopoly
a firm that is the sole seller of a product without close substitutes

Marginal Product of Labor

the increase in the amount of output from an additional unit of labor