1erms re|ated w|th Lconom|cs

O ,|cro Lconom|cs

Command economy An economy ln whlch a cenLral governmenL elLher dlrecLly or
lndlrecLly seLs ouLpuL LargeLs lncomes and prlces
Comparat|ve advantage 1he ablllLy Lo produce a good aL a lower opporLunlLy cosL Lhan
anoLher producer
Consumer sovere|gnty 1he ldea LhaL consumers ulLlmaLely dlcLaLe whaL wlll be produced
(or noL produced) by chooslng whaL Lo purchase (and whaL noL Lo purchase)
Cross pr|ce e|ast|c|ty of demand Measures Lhe responslveness of Lhe quanLlLy demand of a
good Lo a change ln Lhe prlce of anoLher good
D|seconom|es of sca|e 1he properLy whereby longrun average LoLal cosL rlses as Lhe
quanLlLy of ouLpuL lncreases (rlghLmosL upward sloplng parL of Lhe longrun A1C)
Comp|ements 1wo goods for whlch an lncrease ln Lhe prlce of one leads Lo a decrease ln
Lhe demand for Lhe oLher and vlce versa
D|m|n|sh|ng marg|na| ut|||ty 1he polnL reached when an addlLlonal unlL of a producL
consumed ls less saLlsfylng Lhan Lhe one before
L|ast|c|ty A measure of responslveness LhaL Lells us how a dependenL varlable such as
quanLlLy responds Lo a change ln an lndependenL varlable such as prlce
Lqu|||br|um 1he polnL aL whlch quanLlLy demanded and quanLlLy supplled are equal
Lntrepreneur A person who organlzes manages and Lakes on Lhe rlsks of a buslness
Lqu|ty (n) 1he sLaLe of belng [usL falr or lmparLlal falr and equal LreaLmenL someLhlng
LhaL ls falr Lhe money value of a properLy above and beyond any morLgage or oLher clalm
Ia||acy of compos|t|on 1he lncorrecL bellef LhaL whaL ls Lrue for Lhe lndlvldual or parL
musL necessarlly be Lrue for Lhe group or whole
Iree enterpr|se 1he freedom of lndlvlduals Lo sLarL and operaLe prlvaLe buslnesses ln
search of proflLs
neckscherCh||n theorem A counLry has a comparaLlve advanLage ln Lhe producLlon of a
producL lf LhaL counLry ls relaLlvely well endowed wlLh lnpuLs used lnLenslvely ln Lhe
producLlon of LhaL producL
Income e|ast|c|ty of demand Measures Lhe responslveness of Lhe quanLlLy demanded of a
good Lo Lhe change ln Lhe lncome of Lhe people demandlng Lhe good lormula (change ln
quanLlLy demanded) / (change ln lncome)
Lconom|es of sca|e As a company produces larger numbers of a parLlcular producL Lhe
cosL of each of Lhese producLs goes down aka lncreaslng reLurns Lo scale
Ind|fference curve A curve showlng Lhe comblnaLlons of Lwo goods LhaL leave Lhe
consumer wlLh Lhe same level of uLlllLy
,onopo||st|c compet|t|on MarkeL sLrucLure of an lndusLry ln whlch Lhere are many flrms
and freedom of enLry and exlL buL ln whlch each flrm has a producL somewhaL dlfferenLlaLed
from Lhe oLhers glvlng lL some conLrol over lLs prlce
,onopo|y one flrm LhaL produces a producL whlch Lhere are no close subsLlLuLes for and ln
whlch slgnlflcanL barrlers exlsL Lo prevenL new flrms from enLerlng Lhe lndusLry
Lorenz curve A wldely used graph of Lhe dlsLrlbuLlon of lncome wlLh cumulaLlve
percenLage of famllles ploLLed along Lhe horlzonLal axls and cumulaLlve percenLage of
lncome ploLLed along Lhe verLlcal axls
,arg|na| cost (mc) Lhe lncrease ln LoLal cosL LhaL resulLs form produclng one more unlL of
ouLpuL
Marglnal uLlllLy (mu) addlLlonal saLlsfacLlon galned by Lhe consumpLlon or use of one more
unlL of a good or servlce
,arket A group of buyers and sellers of a good or servlce and Lhe lnsLlLuLlon or
arrangemenL by whlch Lhey come LogeLher Lo Lrade
,arket demand sum of all Lhe quanLlLles of a good or servlce demanded per perlod by all
Lhe households buylng ln Lhe markeL for LhaL good or servlce
,ora| hazard 1he rlsk LhaL Lhe behavlor of one parLy may change Lo Lhe deLrlmenL of
anoLher afLer a conLracL has been agreed upon Lxample 1hose wlLh lnsurance may be less
llkely Lo guard agalnsL loss Lhan Lhose wlLhouL lnsurance
Natura| monopo|y A monopoly LhaL arlses because a slngle flrm can supply a good or
servlce Lo an enLlre markeL aL a smaller cosL Lhan could Lwo or more flrms
Negat|ve re|at|onsh|p A relaLlonshlp beLween Lwo varlables whlch a decrease ln one ls
assoclaLed wlLh an lncrease ln anoLher or vlce versa
Normat|ve econom|cs 1he parL of economlcs lnvolvlng value [udgmenLs abouL whaL Lhe
economy should be llke focused on whlch economlc goals and pollcles should be
lmplemenLed pollcy economlcs
C||gopo|y A markeL ln whlch conLrol over Lhe supply of a commodlLy ls ln Lhe hands of a
small number of producers and each one can lnfluence prlces and affecL compeLlLors
Cpportun|ty cost 1he nexL besL alLernaLlve glven up when maklng a cholce
ayoff An advanLage or proflL LhaL you geL as a resulL of dolng someLhlng
erfect compet|t|on A markeL sLrucLure LhaL ls characLerlzed by a large number of small
flrms a homogeneous producLfreedom of enLry and exlL
erfect|y e|ast|c demand uemand ln whlch quanLlLy drops Lo zero aL Lhe sllghLesL lncrease
ln prlce
os|t|ve re|at|onsh|p A relaLlonshlp beLween Lwo varlables whlch a decrease ln one ls
assoclaLed wlLh a decrease ln anoLher and a lncrease ln one ls assoclaLed wlLh an lncrease
ln anoLher
roduct d|fferent|at|on A poslLlonlng sLraLegy LhaL many flrms use Lo dlsLlngulsh Lhelr
producLs from Lhose of compeLlLors
r|ce d|scr|m|nat|on Charglng dlfferenL prlces Lo dlfferenL buyers
r|ce e|ast|c|ty of demand A measure of how much Lhe quanLlLy demanded of a good
responds Lo a Change ln Lhe prlce of LhaL good compuLed as Lhe percenLage change ln
quanLlLy demanded dlvlded by Lhe percenLage change ln prlce
r|ce f|oor A mlnlmum prlce below whlch exchange ls noL permlLLed
Var|ab|e cost A cosL LhaL depends on Lhe level of producLlon chosen
uant|ty demanded Pow much people are wllllng Lo buy aL a glven prlce only changes
when prlce changes (move along curve)
uant|ty supp||ed 1he amounL of a parLlcular producL LhaL a flrm would be wllllng and able
Lo offer for sale aL a parLlcular prlce durlng a glven Llme perlod
Sh|ft of a demand curve 1he change LhaL Lakes place ln a demand curve correspondlng Lo a
new relaLlonshlp beLween quanLlLles demanded of a good and prlce of LhaL good 1he shlfL
ls broughL abouL by a change ln Lhe orlglnal condlLlons
Sh|ft of a supp|y curve 1he change LhaL Lakes place ln a supply curve correspondlng Lo a
new relaLlonshlp beLween quanLlLy supplled of a good and Lhe prlce of LhaL good 1he shlfL
ls broughL abouL by a change ln Lhe orlglnal condlLlons

Short run A perlod of Llme sufflclenLly shorL LhaL aL leasL one of Lhe flrms facLors of
producLlon cannoL be varled
S|ope A measuremenL LhaL lndlcaLes weaLher Lhe relaLlonshlp beLween varlables ls poslLlve
or negaLlve and how much of a response Lhere ls
Subst|tutes Coods LhaL can serve as replacemenLs for one anoLher wen Lhe prlce of one
lncreases demand for Lhe oLher lncreases
Soc|a| cap|ta| CaplLal LhaL provldes servlces Lo Lhe publlc
Un|tary e|ast|c|ty A slLuaLlon ln whlch LoLal revenue remalns Lhe same when prlces change
Var|ab|e A measure LhaL can change from Llme Lo Llme or form observaLlon Lo observaLlon
Isoquant A graph LhaL shows all Lhe comblnaLlons of caplLal and labor LhaL can be used Lo
produce a glven amounL of ouLpuL









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O ,acro Lconom|cs


8us|ness cyc|e IlucLuaLlons ln economlc acLlvlLy such as employmenL and producLlon
Lff|c|ency 1he properLy of socleLy geLLlng Lhe mosL lL can from lLs scarce resources
Lqua||ty 1he properLy of dlsLrlbuLlng economlc prosperlLy unlformly among Lhe members
of socleLy

Inf|at|on An lncrease ln Lhe overall level of prlces ln Lhe economy

,arket economy An economy LhaL allocaLes resources Lhrough Lhe decenLrallzed declslons
of many flrms and households as Lhey lnLeracL ln markeLs for goods and servlces

,arket power 1he ablllLy of a slngle economlc acLor (or small group of acLors) Lo have a
subsLanLlal lnfluence on markeL prlces

roduct|v|ty 1he quanLlLy of goods and servlces produced from each unlL of labor lnpuL

kat|ona| peop|e eople who sysLemaLlcally and purposefully do Lhe besL Lhey can Lo
achleve Lhelr ob[ecLlves

C|rcu|arf|ow d|agram A vlsual model of Lhe economy LhaL shows how dollars flow Lhrough
markeLs among households and flrms

Normat|ve statements Clalms LhaL aLLempL Lo prescrlbe how Lhe world should be

roduct|on poss|b|||t|es front|er A graph LhaL shows Lhe comblnaLlons of ouLpuL LhaL Lhe
economy can posslbly produce glven Lhe avallable facLors of producLlon and Lhe avallable
producLlon Lechnology

Abso|ute advantage 1he ablllLy Lo produce a good uslng fewer lnpuLs Lhan anoLher
producer
Lxports Coods produced domesLlcally and sold abroad
Imports Coods produced abroad and sold domesLlcally
Demand schedu|e A Lable LhaL shows Lhe relaLlonshlp beLween Lhe prlce of a good and Lhe
quanLlLy demanded
Lqu|||br|um A slLuaLlon ln whlch Lhe markeL prlce has reached Lhe level aL whlch quanLlLy
supplled equals quanLlLy demanded
Infer|or good A good for whlch oLher Lhlngs equal an lncrease ln lncome leads Lo a
decrease ln demand
GD def|ator A measure of Lhe prlce level calculaLed as Lhe raLlo of nomlnal Cu Lo real
Cu Llmes 100
Gross domest|c product (GD) 1he markeL value of all flnal goods and servlces produced
wlLhln a counLry ln a glven perlod of Llme
Investment Spendlng on caplLal equlpmenL lnvenLorles and sLrucLures lncludlng
household purchases of new houslng
Consumer pr|ce |ndex (CI) A measure of Lhe overall cosL of Lhe goods and servlces boughL
by a Lyplcal consumer
Indexat|on 1he auLomaLlc correcLlon by law or conLracL of a dollar amounL for Lhe effecLs
of lnflaLlon
Natura| resources 1he lnpuLs lnLo Lhe producLlon of goods and servlces LhaL are provlded
by naLure such as land rlvers and mlneral deposlLs
I|nanc|a| |ntermed|ar|es llnanclal lnsLlLuLlons Lhrough whlch savers can lndlrecLly provlde
funds Lo borrowers
,utua| fund An lnsLlLuLlon LhaL sells shares Lo Lhe publlc and uses Lhe proceeds Lo buy a
porLfollo of sLocks and bonds
D|vers|f|cat|on 1he reducLlon of rlsk achleved by replaclng a slngle rlsk wlLh a large number
of smaller unrelaLed rlsks
Lff|c|ent markets hypothes|s 1he Lheory LhaL asseL prlces reflecL all publlcly avallable
lnformaLlon abouL Lhe value of an asseL

I|nance 1he fleld LhaL sLudles how people make declslons regardlng Lhe allocaLlon of
resources over Llme and Lhe handllng of rlsk

Informat|ona| eff|c|ency 1he descrlpLlon of asseL prlces LhaL raLlonally reflecL all avallable
lnformaLlon

Ir|ct|ona| unemp|oyment unemploymenL LhaL resulLs because lL Lakes Llme for workers Lo
search for Lhe [obs LhaL besL sulL Lhelr LasLes and skllls

Structura| unemp|oyment unemploymenL LhaL resulLs because Lhe number of [obs
avallable ln some labor markeLs ls lnsufflclenL Lo provlde a [ob for everyone who wanLs one

L|qu|d|ty 1he ease wlLh whlch an asseL can be converLed lnLo Lhe economys medlum of
exchange

,onetary po||cy 1he seLLlng of Lhe money supply by pollcymakers ln Lhe cenLral bank

uant|ty theory of money A Lheory asserLlng LhaL Lhe quanLlLy of money avallable
deLermlnes Lhe prlce level and LhaL Lhe growLh raLe ln Lhe quanLlLy of money avallable
deLermlnes Lhe lnflaLlon raLe

Ve|oc|ty of money 1he raLe aL whlch money changes hands

C|osed economy An economy LhaL does noL lnLeracL wlLh oLher economles ln Lhe world

Net cap|ta| outf|ow 1he purchase of forelgn asseLs by domesLlc resldenLs mlnus Lhe
purchase of domesLlc asseLs by forelgners

Nom|na| exchange rate 1he raLe aL whlch a person can Lrade Lhe currency of one counLry
for Lhe currency of anoLher

urchas|ngpower par|ty A Lheory of exchange raLes whereby a unlL of any glven currency
should be able Lo buy Lhe same quanLlLy of goods ln all counLrles

1rade ba|ance 1he value of a naLlons exporLs mlnus Lhe value of lLs lmporLs also called
neL exporLs

Cap|ta| f||ght A large and sudden reducLlon ln Lhe demand for asseLs locaLed ln a counLry

kecess|on A perlod of decllnlng real lncomes and rlslng unemploymenL

Automat|c stab|||zers Changes ln flscal pollcy LhaL sLlmulaLe aggregaLe demand when Lhe
economy goes lnLo a recesslon wlLhouL pollcymakers havlng Lo Lake any dellberaLe acLlon

Crowd|ngout effect 1he offseL ln aggregaLe demand LhaL resulLs when expanslonary flscal
pollcy ralses Lhe lnLeresL raLe and Lhereby reduces lnvesLmenL spendlng

I|sca| po||cy 1he seLLlng of Lhe level of governmenL spendlng and LaxaLlon by governmenL
pollcymakers

Natura|rate hypothes|s 1he clalm LhaL unemploymenL evenLually reLurns Lo lLs normal or
naLural raLe regardless of Lhe raLe of lnflaLlon

kat|ona| expectat|ons 1he Lheory LhaL people opLlmally use all Lhe lnformaLlon Lhey have
lncludlng lnformaLlon abouL governmenL pollcles when forecasLlng Lhe fuLure
sacrlflce raLlo Lhe number of percenLage polnLs of annual ouLpuL losL ln Lhe process of
reduclng lnflaLlon by 1 percenLage polnL

Supp|y shock An evenL LhaL dlrecLly alLers flrms cosLs and prlces shlfLlng Lhe economys
aggregaLesupply curve and Lhus Lhe hllllps curve

h||||ps curve A curve LhaL shows Lhe shorLrun Lradeoff beLween lnflaLlon and
unemploymenL

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