Glossary of Key Terms
Glossary of Key Terms
| Term | Definition |
| Absolute Advantage | When one entity has a lower production cost (monetary) than another entity in the production of a certain good or service. |
| Aggregate Demand Curve | A graphic illustrating the relationship between an economy’s output and the price level. |
| Aggregate Supply Curve | A graphic illustrating the relationship between the price level and output for an economy. |
| Allocative Efficiency | A condition in which firms are producing and distributing the exact amount of goods and services that consumers are willing and able to purchase. |
| Antitrust Policy | Government policies designed to promote competition and limit monopoly control to develop efficiency. |
| Barriers to Entry | Any variable that prevents a firm from entering an industry, such as price control or market share. |
| Budget Deficit | The gap that results when spending exceeds revenue. |
| Business Cycle | The normal fluctuation of GDP that includes contractions, expansions, peaks, and troughs. |
| Capital | Anything that is used to make another good or service. Education, machines, and building space are all considered capital. |
| Cartel | A formal organization formed of independent entities with the intention to control price and output in a specific market. |
| Ceteris Paribus | Latin phrase meaning all other things held equal or constant. |
| Circular Flow Diagram | An illustration that demonstrates the flow of output and income between the government, households, and firms. |
| Comparative Advantage | When one entity has a lower opportunity cost than another entity in the production of a good or service. |
| Complementary Goods | Goods that are used together (such as DVD movies and DVD players); when the price of one rises, the demand for the other shifts to the left. |
| Consumer Price Index | An index that has been created using a “market basket” of goods; its purpose is to measure the price level for consumer-bought goods and services in the economy. |
| Contractionary Fiscal Policy | Governmental action used to contract real GDP. Policy includes the raising of taxes and/or decreasing government spending. It is used to deal with inflation. |
| Cost-Push Inflation | Inflation caused by the increase in prices for business costs of production. |
| Cross-Price Elasticity of Demand | The percentage change in demand for one good that results from a percentage change in price from another good. |
| Cyclical Unemployment | Unemployment caused by fluctuations in GDP. |
| Deadweight Loss | The reduction of consumer surplus without a corresponding increase in monopoly profit when a perfectly competitive firm is monopolized. |
| Demand-Pull Inflation | Inflation caused by an increase in aggregate demand. |
| Diminishing Marginal Utility | The principle stating that the more a good or service is consumed by an individual, the less utility it yields with each consumption. |
| Discount Rate | The interest rate the Federal Reserve charges to banks. |
| Diseconomies of Scale | Occurs when an increase in production yields a higher average production cost. |
| Disposable Income | Household income after taxes. |
| Economies of Scale | The decrease of per-unit costs as production increases and all resources are adjustable. |
| Elasticity | A measure of how responsive quantity supplied or quantity demanded is to a change in price. |
| Equilibrium | The point of balance at which quantity demanded and quantity supplied intersect at a specific price. |
| Expansionary Fiscal Policy | Governmental policies that cause the economy to grow by increasing aggregate demand; lowering taxes and/or increasing spending help accomplish this. |
| Explicit Costs | Monetary payments made to resources owners with the goal of operating a business. |
| Externalities | Costs or benefits passed on outside the market transaction. |
| Factor Market | A market in which firms send monetary payments to households for a physical flow of land, labor, capital, and entrepreneurship. |
| Federal Reserve System | The central monetary authority that controls the money operations in the United States. |
| Fiscal Policy | The changing of government spending and taxes in order to control and stabilize economic activity. |
| Frictional Unemployment | Unemployment of people who are temporarily between jobs. |
| Game Theory | A tool for analyzing oligopoly behavior; predicts a firm’s pricing decisions based on its competitors’ decision to increase or decrease prices. |
| Gross Domestic Product (GDP) | The total value of all final goods and services produced on a nation’s soil within a specific year. |
| Implicit Costs | Trade-offs and opportunity costs that arise from a firm’s decision to pay for its own resources. |
| Inferior Goods | Goods for which demand decreases as income increases (the inverse relationship between income and demand). |
| Inflation | The economic condition in which the average level of prices rise. |
| Keynesian Economics | An economic perspective that states that the economy may be at equilibrium below full-employment. |
| Kinked Demand Curve | The demand curve that illustrates the behavior of competing oligopolistic firms; outlines a firm’s expectation that its competitor will match its price. |
| Law of Demand | The rule that as prices rise, the quantity demanded falls, and vice versa; there is an inverse relationship between price and quantity demanded. |
| Law of Supply | The idea that as prices increase, producers can increase their quantity supplied; there is a positive relationship between prices and quantity supplied. |
| Lorenz Curve | A graphic illustration showing the amount of income inequality that exists in society at any point in time. |
| Macroeconomics | The branch of economics that examines the behavior of the whole economy at once. |
| Marginal Cost | The additional cost experienced when one more unit is produced. |
| Marginal Revenue | The additional revenue realized when one more unit is produced. |
| Market Failure | The inability of a market to sufficiently allocate resources that best fit the needs and wants of a society. |
| Microeconomics | The branch of economics that examines the choices and interactions of individuals producing and consuming one product, in one firm or industry. |
| Monetary Policy | The changing amount of money in the economy in order to reduce employment, keep prices stable. and promote economic growth. |
| Monopolistic Competition | A market organization in which many firms produce products that are different but similar enough to be substitutes. |
| Monopoly | A form of market organization in which there is only one seller of a product. |
| Multiplier Effect | The concept that any change in fiscal policy affects total demand and total income by an amount larger than the amount of the change in policy. |
| Normal Goods | Goods for which demand increases as income increases. |
| Oligopoly | A form of market organization in which there are relatively few firms. |
| Open-Market Operations | The buying and selling of U.S. government securities by the Federal Reserve. |
| Opportunity Cost | The value of the next best alternative in a decision-making process. |
| Perfect Competition | A market organization in which a great many small firms produce a homogeneous product with no individual price control. |
| Phillips Curve | A graphic illustration that shows the relationship between the unemployment rate and the inflation rate. |
| Price Ceiling | A maximum price set by government that is below the market equilibrium price. |
| Price Discrimination | When a monopolist charges different prices for a product to different buyers even though the production and transaction costs remain unchanged. |
| Price Elasticity of Demand | The ratio or percentage change in quantity demanded relative to the change in price that caused the change in quantity demanded. |
| Price Floor | A minimum price set by the government that is above the market equilibrium price. |
| Production Possibilities Curve | A graphic illustration of the combination of output an economy can produce if all of its resources are utilized efficiently, given the state of technology. |
| Public Goods | Goods and services available to the whole society. |
| Quota | A limit on the amount of imports or exports. |
| Recession | The condition in which unemployment is high and GNP falls for two or more quarters. |
| Reserve Requirement | The dollar amount banks must keep on reserve. |
| Scarcity | The condition that occurs because people’s wants and needs are unlimited, and the resources needed to produce goods and services to meet these wants and needs are limited. |
| Stagflation | A period of high inflation and high unemployment. |
| Structural Unemployment | Unemployment resulting from skills that do not match what employers require or from being geographically separated from job opportunities. |
| Substitute Products | Products whose uses are similar enough that one can replace the other. |
| Supply | The quantities of a product or service that a firm is willing and able to make available for sale at different prices. |
| Tariff | A tax on imports. |
| Trade Deficit | The result when a country imports more than it exports. |
| Unemployment Rate | The percentage of the civilian labor force that is considered unemployed. |
| Utility | The satisfaction one receives from the consumption, use, or ownership of a good or service. |