business cycle
fluctuations in economic activity, such as employment and production
economics
the study of how society manages its scarce resources
efficiency
the property of society getting the most it can from its scarce resources
equality
the property of distributing economic prosperity uniformly among the members of society
externality
the impact of one person's actions on the well-being of a bystander
incentive
something that induces (a person to act
inflation
an increase in the overall level of prices in the economy
marginal changes
small incremental adjustments to a plan of action
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
market failure
a situation in which a market left on its own fails to allocate resources efficiently
market power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
opportunity cost
whatever must be given up to obtain some item
productivity
the quantity of goods and services produced from each unit of labor input
property rights
the ability of an individual to own and exercise control over scarce resources
rational people
people who systematically and purposefully do the best they can to achieve their objectives
scarcity
the limited nature of society's resources
circular-flow diagram
a visual model of the economy that shows how dollars flow through markets among households and firms
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
microeconomics
the study of how households and firms make decisions and how they interact in markets
normative statements
claims that attempt to prescribe how the world should be
positive statements
claims that attempt to describe the world as it is
production possibilities frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
absolute advantage
the ability to produce a good using fewer inputs than another producer
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
exports
goods produced domestically and sold abroad
imports
goods produced abroad and sold domestically
opportunity cost
whatever must be given up to obtain some item
competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other
demand curve
a graph of the relationship between the price of a good and the quantity demanded
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
equilibrium
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
equilibrium price
the price that balances quantity supplied and quantity demanded
equilibrium quantity
the quantity supplied and the quantity demanded at the equilibrium price
inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand
law of demand
the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
law of supply and demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
market
a group of buyers and sellers of a particular good or service
normal good
a good for which, other things equal, an increase in income leads to an increase in demand
quantity demanded
the amount of a good that buyers are willing and able to purchase
quantity supplied
the amount of a good that sellers are willing and able to sell
shortage
a situation in which quantity demanded is greater than quantity supplied
substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
supply curve
a graph of the relationship between the price of a good and the quantity supplied
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
surplus
a situation in which quantity supplied is greater than quantity demanded
cross-price elasticity of demand
a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good
elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
price elasticity of demand
a measure of how much the quantity demanded 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
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
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
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
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
cost
the value of everything a seller must give up to produce a good
efficiency
the property of a resource allocation of maximizing the total surplus received by all members of society
equality
the property of distributing economic prosperity uniformly among the members of society
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it
welfare economics
the study of how the allocation of resources affects economic well-being
willingness to pay (WTP)
the maximum amount that a buyer will pay for a good
deadweight loss
the fall in total surplus that results from a market distortion, such as a tax
tariff
a tax on goods produced abroad and sold domestically
world price
the price of a good that prevails in the world market for that good
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
corrective tax
a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality
externality
the uncompensated impact of one person's actions on the well-being of a bystander
internalizing the externality
altering incentives so that people take account of the external effects of their actions
transaction costs
the costs that parties incur in the process of agreeing to and following through on a bargain
common resources
goods that are rival in consumption but not excludable
cost-benefit analysis
a study that compares the costs and benefits to society of providing a public good
excludability
the property of a good whereby a person can be prevented from using it
free rider
a person who receives the benefit of a good but avoids paying for it
private goods
goods that are both excludable and rival in consumption
public goods
goods that are neither excludable nor rival in consumption
rivalry in consumption
the property of a good whereby one person's use diminishes other people's use
Tragedy of the Commons
a parable that illustrates why common resources are used more than is desirable from the standpoint of society as a whole
ability-to-pay principle
the idea that taxes should be levied on a person according to how well that person can shoulder the burden
average tax rate
total taxes paid divided by total income
benefits principle
the idea that people should pay taxes based on the benefits they receive from government services
budget deficit
an excess of government spending over government receipts
budget surplus
an excess of government receipts over government spending
horizontal equity
the idea that taxpayers with similar abilities to pay taxes should pay the same amount
lump-sum tax
a tax that is the same amount for every person
marginal tax rate
the extra taxes paid on an additional dollar of income
progressive tax
a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers
proportional tax
a tax for which high-income and low-income taxpayers pay the same fraction of income
regressive tax
a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers
vertical equity
the idea that taxpayers with a greater ability to pay taxes should pay larger amounts
accounting profit
total revenue minus total explicit cost
average fixed cost
fixed cost divided by the quantity of output
average total cost
total cost divided by the quantity of output
average variable cost
variable cost divided by the quantity of output
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
diseconomies of scale
the property whereby long-run average total cost rises as the quantity of output increases
economic profit
total revenue minus total cost, including both explicit and implicit costs
economies of scale
the property whereby long-run average total cost falls as the quantity of output increases
efficient scale
the quantity of output that minimizes average total cost
explicit costs
input costs that require an outlay of money by the firm
fixed costs
costs that do not vary with the quantity of output produced
implicit costs
input costs that do not require an outlay of money by the firm
marginal cost
the increase in total cost that arises from an extra unit of production
marginal product
the increase in output that arises from an additional unit of input
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
profit
total revenue minus total cost
total cost
the market value of the inputs a firm uses in production
total revenue
the amount a firm receives for the sale of its output
variable costs
costs that vary with the quantity of output produced
average revenue
total revenue divided by the quantity sold
competitive market
a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
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
monopoly
a firm that is the sole seller of a product without close substitutes
natural monopoly
a monopoly that arises because a single firm can supply a good or 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
monopolistic competition
a market structure in which many firms sell products that are similar but not identical
oligopoly
a market structure in which only a few sellers offer similar or identical products
cartel
a group of firms acting in unison
collusion
an agreement among firms in a market about quantities to produce or prices to charge
dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
game theory
the study of how people behave in strategic situations
Nash equilibrium
a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
oligopoly
a market structure in which only a few sellers offer similar or identical products
prisoners' dilemma
a particular game between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
capital
the equipment and structures used to produce goods and services
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
factors of production
the inputs used to produce goods and services
marginal product of labor
the increase in the amount of output from an additional unit of labor
production function
the relationship between the quantity of inputs used to make a good and the quantity of output of that good
value of the marginal product
the marginal product of an input times the price of the output
compensating differential
a difference in wages that arises to offset the nonmonetary characteristics of different jobs
discrimination
the offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics
efficiency wages
above-equilibrium wages paid by firms to increase worker productivity
human capital
the accumulation of investments in people, such as education and on-the-job training
strike
the organized withdrawal of labor from a firm by a union
union
a worker association that bargains with employers over wages and working conditions