Aggregate
A collection of specific economic units treated as if they were one. For example, all prices of individual goods and services are combined into a price level, or all units of output are aggregated into gross domestic product.
Budget Line
A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products’ prices.
Capital or Capital Goods
Human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants; also called capital goods.
Consumer Goods
Products and services that satisfy human wants directly.
Economic Growth
An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology.

An increase of real output (gross domestic product) or real output per capita.

Economic Perspective
A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions.
Economic Principle
A widely accepted generalization about the economic behavior of individuals or institutions.
Economic Resources
The land, labor, capital, and entrepreneurial ability that are used in the production of goods and services; productive agents; factors of production.
Economics
The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.
Economizing Problem
The choices necessitated because society’s economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce).
Entrepreneurial Ability
The human resource that combines the other resources to produce a product, makes non-routine decisions, innovates, and bears risks.
Factors of Production
Economic resources: land, capital, labor, and entrepreneurial ability.

Investment
Spending for the production and accumulation of capital and additions to inventories.
Labor
People’s physical and mental talents and efforts that are used to help produce goods and services.
Land
Natural resources (“free gifts of nature”) used to produce goods and services.
Law of Increasing Opportunity Costs
The principle that as the production of a good increases, the opportunity cost of producing and additional unit rises.
Macroeconomics
The part of economics concerned with the economy as a whole; with such major aggregates as the household, business, and government sectors; and with measures of total economy.
Marginal Analysis
The comparison of marginal (“extra” or “additional”) benefits and marginal costs, usually for decisions making.

Microeconomics
The part of economics concerned with decision making by individual units such as a household, a firm, or and industry and with individual markets, specific goods and services, and product and resources prices.
Normative Economics
The part of economic involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.
Opportunity Cost
The amount of other products that must be forgone or sacrificed to produce a unit of a product.
Other-things-equal assumption
The assumption that factors other that those being considered are held constant; ceteris paribus assumption.
Positive Economics
The analysis of facts or data to establish scientific generalizations about economic behavior.
Production Possibilities Curve
A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.
Scientific Method
The procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation and testing of hypotheses to obtain theories, principles, and laws.

Utility
The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services.)
Allocative Efficiency
The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal.
Change in Demand
A change in the quantity demanded of a good or service at every price; a shift of the demand curve to the left or right.
Change in Quantity Demanded
A change in the amount of a product that consumers are willing and able to purchase because of a change in the product’s price.
Change in Quantity Supplied
A change in the amount of a product that produces offer for sale because of a change in the product’s price.
Change in Supply
A change in the quantity supplied of a good or service at every price; a shift of the supply curve to the left or right.

Complementary Good
Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).
Demand
A schedule showing the amounts of a good or service that buyers (or a buyer) wish to purchase at various prices during some time period.
Demand Curve
A curve illustration demand.
Demand Schedule
See demand.
Determinants of Demand
Factors other than price that determine the quantities demanded for a good or service.

Determinants of Supply
Factors other than price that determine the quantities supplied of a good or service.
Diminishing marginal utility
THe principle that as successive increments of a variale resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.
Equilibrium Price
The price in a competitive market at which the quantity demanded and the attainable supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.
Equilibrium Quantity
The quantity demanded and supplied at the equilibrium price in a competitive market.The profit-maximizing output of a firm.

Income Effect
A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.
Inferior Goods
A good or service whose consumption declines as income rises (and conversely), price remaining constant.
Law of Demand
The principle that, other things equal, and increase in a product’s price will reduce the quantity of it demanded, and conversely.
Law of Supply
The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely unit rises.
Normal Goods
A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.
Price Ceiling
A legally established maximum price for a good or service.
Price Floor
A legally determined minimum price above the equilibrium price.

Productive Efficiency
The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar’s worth of input is the same for all inputs.
Shortage
The amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price.
Substitute Goods
Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
Substitution Effect
A change in the quantity demanded of a consumer food that results from a change in its relative expensiveness caused by a change in the product’s price.The effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.
Supply
A schedule showing the amounts of a good or service that sellers (or a seller) will offer at various prices during some period.
Supply Curve
A curve illustrating supply.

Supply Schedule
See Supply.
Surplus
The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above equilibrium) price.
Bond
A financial device through which a borrower (a firm or government) is obligated to pay the principal and interest on a loan at a specific date in the future.
Corporation
A legal entity (“person”) chartered by a state or the Federal government that is distinct and separate from the individuals who own it.
Durable goods
A consume good with an expected life (use) of 3 or more years.
Firm
An organization that employs resources to produce a good or service for profit and owns and operates one or more plants.

Free-rider problem
The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of non-excludability.
Functional distribution of income
The manner in which national income is divided among the functions performed to earn it (or the kinds of resource provided to earn it); the division of national income into wages and salaries, proprietors’ income, corporate profits, interest, and rent.
Government purchases
Expenditures by government for goods and services that government consumes in providing public goods and for public (or social) capital that ahs a long lifetime; the expenditures of all governments in the economy for those final goods and services.
Industry
A group of (one or more) firms that produce identical or similar products.
Limited liability
Restriction of the maximum loss to a predetermined amount for the owners (stockholders) of a corporation.

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The maximum loss is the amount they paid for their shares of stock.

Market Intervention
Government also alters distribution of income by acting to modify the prices that are or would be established by market forces. Providing farmers with above-market prices for their output and requiring that firms pay minimum wages are illustrations of government interventions designed to raise the income of specific groups.
Monopoly
A market structure in which the number of sellers is so small the each seller is able to influence the total supply and the price of the good or service.
Externalities
A cost or benefit from production or consumption, accruing without compensation to someone other than the buyers and sellers of the product.
Negative externalities
A cost imposed without compensation on third parties by the production of consumption of sellers of buyers.Correcting Negative Externalities.Legislation.

The idea of forcing potential offenders, under the threat of legal action, to bear all the costs associated with producing the illegal product. Specific Taxes

Positive externalities
A benefit obtained without compensation by third parties from the production or consumption of sellers or buyers.Correcting Positive Externalities
Non-durable goods
A consumer good with an expected life (use) of less than 3 years.

Partnership
An unincorporated firm owned and operated by two or more persons.
Personal distribution of income
The manner in which the economy’s personal or disposable income is divided among different income classes or different households or families.
Plant
A physical establishment – a factory, farm, mine, store, or warehouse – that performs one or more functions in fabricating, producing, and distributing goods and services.

Principal-agent problem
A conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals’ (stockholders’) goals.
Public goods
A good or service that is characterized by non-rivalry and non-excludability; a good or service with these characterized provided by government.
Quasi-public goods
A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an under-allocation of resources.

Services
An (intangible) act or use for which a consumer, firm, or government is willing to pay.
Sole proprietorship
An unincorporated firm owned and operated by one person.
Stock
An ownership share in a corporation.
Taxation
It is when the government taxes the personal income of the rich and the poor, making the gap of income between the rich and poor smaller.
Sale taxes
A tax levied on the cost (at retail) of a broad group of products.
Property taxes
A tax on the value of property (capital, and, stocks and bonds, and other assets) owned b firms and households.
Personal income tax
A tax levied on the taxable income of individuals, households, and unincorporated firms.
Payroll taxes
A tax levied on employers of labor equal to a percentage of all or part of the wages and salaries paid by them and on employees equal to a percentage of all or part of the wages and salaries received by them.

Corporate income tax
A tax levied on the net income (accounting profit) of corporations.
Excise Tax
A tax levied on the production of a specific product or on the quantity of the product purchased.
Tax Rate
Average tax rate.
Marginal tax rate
The tax rate paid on each additional dollar of income.
Transfer payments
A payment of money (or goods and services) by a government to a household or firm for which the payer re-buying no goods or service directly in return. They provide relief to the destitute, the dependent the disabled, and older citizens; unemployment compensation payments provide aid to the unemployed.
Appreciation
An increase in the value of the dollar relative to the currency of another nation, so a dollar buys a larger amount of the foreign currency and thus of foreign goods.

Comparative Advantage
A lower relative opportunity cost than that of another producer or country.
Depreciation
A decrease in the value of the dollar relative to another currency, so a dollar buys a smaller amount of the foreign currency and therefore of foreign goods.
Doha Round
The latest, uncompleted (as of All 2006) sequence of trade negotiations by members of the World Trade Organization; named after Doha, Qatar, where the set of negotiations began.

Euro
The common currency unit used by 12 European nations (as of 2006) in the Euro zone, which consists of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.
European Union (EU)
An association of 25 European nations that has eliminated tariffs and quotas among them, established common tariffs for imported goods from outside the member nations, eliminated barriers to the free movement of capital, and created other common economic policies.
Exchange Rates
The rate of exchange of one nation’s currency for another nation’s currency.
Export Subsidies
Government payments to domestic producers to enable them to reduce the price of a good or service to foreign buyers.

Foreign Exchange Market
A market in which the money (currency) of one nation can be used to purchase (can be exchanged for) the money of another nation; currency market.
General Agreement on Tariffs and Trade (GATT)
The international agreement reached in 1947 in which 23 nations agreed to give equal and nondiscriminatory treatment to another, to reduce tariff rates by multinational negotiations, and to eliminate import quotas. It now includes most nations and has become the World Trade Organization.
Import Quotas
A limit imposed by a nation on the quantity (or total value) of a good that may be imported during some period of time.
Most-Favored-Nation Clauses
An agreement by the United States to allow some other nation’s exports into the United States at the lowest tariff level levied by the United States, then or at any later time.

Multinational Corporations
Firms that own productions facilities in two or more countries and produce and sell their products globally.
Nontariff Barriers
All barriers other than protective tariffs that nations erect to impede international trade, including import quotas, licensing requirements, unreasonable product quality standards, and unnecessary bureaucratic detail in customs procedures, and so on.
North American Free Trade Agreement (NAFTA)
A 1993 agreement establishing, over a 15-year period, a free-trade zone composed of Canada, Mexico, and the United States.
Protective Tariffs
A tariff designed to shield domestic procedures of a good or service from the competition of foreign procedures.
Reciprocal Trade Agreements Act
A 1934 Federal law that authorized the president to negotiate up to 50% lower tariffs with foreign nations that agreed to reduce tariffs on U.S.

goods. (Such agreements incorporated the most-favored-nation clause.)

Smoot-Hawley Tariff Act
Legislation passed n 1930 that established very high tariffs Its objective was to reduce imports and stimulate the domestic economy, but it resulted only in retaliatory tariffs by other nations.
Terms of Trade
The rate at which units of one product can be exchanged for units of another product; the price of a good or service; the amount of one good or service that must be given up to obtain 1 unit of another good or service.
Trade Bloc
A group of nations that lower or abolish trade barriers among members. Examples include the European Union and the nations of the North American Free Trade Agreement.

World Trade Organization (WTO)
An organization of 149 nations (as of fall 2006) that oversees the provisions of the current world trade agreement, resolves trade disputes stemming from it, and holds forums for further rounds of trade negotiations.
Consumer Surplus
The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.
Cross Elasticity of Demand
The ratio of the percentage change in quantity demanded of one good to the percentage change in the price of some other good. A positive coefficient indicates the two products are substitute goods; a negative coefficient indicates they are complementary goods.
Efficiency Losses (or deadweight losses)
Reductions in combined consumer and producer surplus caused by an under-allocation or over-allocation of resources to the production of a good or service.
Elastic Demand
Product or resource demand whose price elasticity is greater than 1.

This means the resulting change in quantity demanded is greater than the percentage change in price.

Income Elasticity of Demand
The ratio of the percentage change in the quantity demanded of a good to a percentage change in consumer income; measures the responsiveness of consumer purchases to income changes.
Inelastic Demand
Product or resource demand for which the elasticity coefficient for price is less than 1. This means the resulting percentage change in quantity demanded is less than the percentage change in price.
Long Run
In microeconomics, a period of time long enough to enable producers of a product to change the quantities of all the resources they employ; period in which all resources and costs are variable and no resources or costs are fixed. In macroeconomics, a period sufficiently long for nominal wages and other input prices to change in response to a change in the nation’s price level.

Market Period
A period in which producers of a product are unable to change the quantity produced in response to a change in its price and in which there is a perfectly inelastic supply.
Midpoint Formula
A method for calculating price elasticity of demand or price elasticity of supply that averages the two prices and two quantities as the reference points for computing percentages.
Perfectly Elastic Demand
Product or resource demand in which quantity demanded can be of any amount at a particular product price; graphs as a horizontal demand curve.

Perfectly Inelastic Demand
Product resource demand in which price can be of any amount at a particular quantity of the product or resource demanded; quantity demanded does not respond to a change in price; graphs as a vertical demand curve.
Price Elasticity of Demand
The ratio of the percentage change in quantity demanded of a product or resource to the percentage change in this price; a measure of the responsiveness of buyers to a change in the price of a product or resource.
Price Elasticity of Supply
The ratio of the percentage change in quantity demanded of a product or resource to the percentage change in its price; a measure of the responsiveness of producers to a change in the price of a product or resource.
Producer Surplus
The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.
Short Run
In microeconomics, a period of time in which producers are able to change the quantities of some but not all the resources they employ; a period in which some resources (usually plant) are fixed and some are variable. In macroeconomics, a period in which nominal wages and other input prices do not change in response to change in the price level.
Total Revenue (TR)
The total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product by the firm (or firms); equal to the quantities sold (demanded) multiplied by the price at which it is sold.
Total-Revenue Test
Test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it does change when price changes.
Unit Elasticity
Demand or supply for which the elasticity coefficient is equal to 1; means that the percentage change in the quantity demanded or supplied is equal to the percentage change in price.
Budget Constraint
The limit that the size of a consumer’s income (and the prices that must be paid for goods and services) imposes on the ability of that consumer to obtain goods and services.
Income Effect
A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.
Law of Diminishing Marginal Utility
The principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of a good or service decreases.
Marginal Utility
The extra utility a consumer obtains from the consumption of 1 additional unit of a good or services; equal to the change in total utility divided by the change in the quantity consumed.
Rational Behavior
Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility.
Substitution Effect
A change in the quantity demanded of a consumer good that results form a change in its relative expensiveness caused by a change in the product’s price.The effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.
Total Utility
The total amount of satisfaction derived from the consumption of a single product or a combination of products.
Utility
The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).
Utility-Maximizing Rule
The principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.