Economics Glossary
178 terms, each with a plain definition, the economics context, a concrete example and the confusion it usually causes.
A
Absolute Advantage
The ability of a country, firm, or person to produce more of a good using the same quantit…
Accounting Profit
Total revenue minus explicit (out-of-pocket) costs — the profit figure shown in financial …
Adverse Selection
Adverse selection is when hidden information before a deal causes the 'wrong' side to self…
Aggregate Demand (AD)
Aggregate demand is the total demand for all final goods and services in an economy at a g…
Aggregate Supply
The total quantity of goods and services that all producers in an economy are willing and …
Appreciation (Currency)
An increase in the value of a currency relative to another currency under a floating excha…
Asymmetric Information
Asymmetric information exists when one party in a transaction knows more than the other — …
Automatic Stabilizer
A government tax or spending program that automatically expands during downturns and contr…
Average Fixed Cost
Fixed cost divided by the quantity of output (AFC = FC ÷ Q) — fixed cost per unit.…
Average Product
Total output divided by the number of units of the variable input used — output per worker…
Average Revenue
Total revenue divided by the quantity sold — revenue per unit, which always equals the pri…
Average Total Cost
Total cost divided by the quantity of output — the cost per unit of everything the firm pr…
Average Variable Cost
Variable cost divided by the quantity of output (AVC = VC ÷ Q) — the variable cost per uni…
B
Balance of Payments
A country's accounting record of all economic transactions with the rest of the world over…
Barriers to Entry
Obstacles that make it hard for new firms to enter a market — economies of scale, patents,…
Budget Constraint
The budget constraint shows all the combinations of two goods a consumer can afford given …
Budget Deficit
The amount by which government spending exceeds tax revenue in a given year.…
Budget Surplus
The amount by which government tax revenue exceeds spending in a given year.…
Business Cycle
The business cycle is the recurring pattern of expansions and contractions in overall econ…
C
Cartel
A cartel is a formal agreement among competing firms to fix prices, limit output, or divid…
Central Bank
The government institution that controls a country's money supply, sets baseline interest …
Coase Theorem
The Coase theorem states that if property rights are well defined and transaction costs ar…
Collusion
Collusion occurs when competing firms secretly or openly cooperate to set prices, restrict…
Common Resource
A common resource is non-excludable but rival: anyone can use it, but one person's use lea…
Comparative Advantage
The ability of a country, firm, or person to produce a good at a lower opportunity cost th…
Consumer Price Index (CPI)
The Consumer Price Index is a measure of the average change over time in the prices paid b…
Consumer Surplus
Consumer surplus is the difference between what buyers were willing to pay and what they a…
Contractionary Fiscal Policy
Government policy that cuts spending, raises taxes, or both, to reduce aggregate demand an…
Contractionary Monetary Policy
Central bank actions that reduce the money supply and raise interest rates to cool an over…
Core Inflation
Core inflation is a measure of underlying inflation that excludes the volatile food and en…
Cross-Price Elasticity of Demand
Cross-price elasticity measures how the quantity demanded of one good responds to a price …
Crowding Out
The reduction in private investment caused when government borrowing raises interest rates…
Current Account
The part of the balance of payments recording trade in goods and services, primary income …
Cyclical Unemployment
Cyclical unemployment is joblessness caused by downturns in the business cycle — when rece…
D
Deadweight Loss
Deadweight loss is the value of mutually beneficial trades that do not happen because quan…
Deflation
Deflation is a sustained decrease in the general level of prices across an economy. As pri…
Demand
Demand is the full relationship between a good's price and the quantity buyers are willing…
Depreciation (Currency)
A decrease in the value of a currency relative to another currency under a floating exchan…
Depression
A depression is an exceptionally severe and prolonged economic downturn — essentially a re…
Derived Demand
Derived demand means the demand for a factor of production comes from the demand for the f…
Diminishing Marginal Utility
Diminishing marginal utility is the principle that as a person consumes more of a good wit…
Discount Rate
The interest rate the Federal Reserve charges commercial banks for short-term loans of res…
Diseconomies of Scale
Cost disadvantages that arise when a firm grows so large that long-run average cost per un…
Disinflation
Disinflation is a slowdown in the rate of inflation — prices are still rising, just more s…
Dominant Strategy
A dominant strategy is a strategy that gives a player the highest payoff no matter what st…
E
Economic Growth
Economic growth is a sustained increase in a country's productive capacity and output over…
Economic Profit
Total revenue minus total opportunity cost — that is, minus both explicit and implicit cos…
Economies of Scale
Cost advantages that arise when expanding production lowers the long-run average cost per …
Elasticity
Elasticity measures how responsive one economic variable is to a change in another, expres…
Exchange Rate
The price of one currency in terms of another -- how much of a foreign currency one unit o…
Expansion
An expansion is the phase of the business cycle in which real economic activity rises: out…
Expansionary Fiscal Policy
Government policy that increases spending, cuts taxes, or both, to raise aggregate demand …
Expansionary Monetary Policy
Central bank actions that increase the money supply and lower interest rates to stimulate …
Explicit Cost
Out-of-pocket payments a firm actually makes to outsiders for inputs: wages, rent, materia…
Externality
An externality is a cost or benefit of an economic activity that falls on third parties wh…
F
Factor Market
A factor market is a market where the services of factors of production — labor, land, cap…
Federal Funds Rate
The interest rate at which banks lend reserve balances to each other overnight; the Federa…
Federal Reserve
The central bank of the United States, created in 1913, charged with conducting monetary p…
Fiscal Policy
Government decisions about taxation and spending used to influence aggregate demand, outpu…
Fixed Cost
A cost that does not change with the quantity of output produced in the short run, such as…
Fixed Exchange Rate
An exchange-rate system in which a government or central bank pegs its currency to another…
Floating Exchange Rate
An exchange-rate system in which a currency's value is set by supply and demand in the for…
Fractional Reserve Banking
The banking system in which banks keep only a fraction of their deposits as reserves and l…
Free Rider
A free rider is someone who benefits from a good or service without paying for it, which i…
Free Trade
A policy of removing government barriers to trade -- no tariffs, quotas, or discriminatory…
Frictional Unemployment
Frictional unemployment is short-term joblessness that occurs as workers move between jobs…
Full Employment
Full employment is the economic condition in which everyone who wants a job at prevailing …
G
Game Theory
Game theory is the mathematical study of strategic interaction: how decision-makers choose…
GDP (Gross Domestic Product)
GDP is the total market value of all final goods and services produced within a country's …
GDP Deflator
The GDP deflator is a price index that converts nominal GDP into real GDP. It equals (nomi…
GDP per Capita
GDP per capita is a country's gross domestic product divided by its population. It convert…
Government Spending
All purchases of goods and services by the government plus transfer payments, counted as t…
Gross National Product (GNP)
Gross National Product is the total market value of all final goods and services produced …
Growth Rate
The growth rate is the percentage change in an economic variable — most commonly real GDP …
H
I
Implicit Cost
The opportunity cost of inputs a firm already owns or supplies itself — no cash changes ha…
Import Quota
A government-imposed limit on the quantity (or value) of a good that may be imported over …
Import Quota
A quota is a quantitative limit on how much of a good may be produced, imported, or sold —…
Income Elasticity of Demand
Income elasticity of demand measures how quantity demanded responds to a change in consume…
Indifference Curve
An indifference curve connects all the bundles of two goods that give a consumer exactly t…
Inelastic Demand
Demand is inelastic when quantity demanded responds proportionally less than price changes…
Inflation
Inflation is a sustained increase in the general level of prices across an economy over ti…
Interest
Interest is the price of borrowing money — the payment made to a lender for the use of fun…
L
Labor Force
The labor force is the total number of people who are either employed or unemployed but ac…
Law of Diminishing Returns
As more and more of one input is added while other inputs stay fixed, the extra output fro…
Liquidity
How quickly and cheaply an asset can be converted into cash (or used as cash) without losi…
Long Run (Production)
The period in which all inputs, including capital, can be varied — the firm can change pla…
LRAS (Long-Run Aggregate Supply)
The vertical curve showing that in the long run, the economy produces its potential (full-…
M
M1 Money Supply
The narrowest common measure of the money supply: physical currency in circulation plus ch…
M2 Money Supply
A broader measure of the money supply than M1: M1 plus savings deposits, small time deposi…
Macroeconomic Equilibrium
The combination of price level and real GDP where aggregate demand equals short-run aggreg…
Marginal Cost
The additional cost of producing one more unit of output — the change in total cost divide…
Marginal Product
The extra output a firm gets from adding one more unit of an input (usually labor), while …
Marginal Rate of Substitution (MRS)
The marginal rate of substitution is the rate at which a consumer is willing to trade one …
Marginal Revenue
The extra revenue a firm earns from selling one additional unit of output.…
Marginal Revenue Product (MRP)
Marginal revenue product is the extra revenue a firm gains from hiring one more unit of a …
Marginal Utility
Marginal utility is the extra satisfaction gained from consuming one additional unit of a …
Market Equilibrium
Market equilibrium is the price at which quantity demanded equals quantity supplied. At th…
Market Power
The ability of a firm to profitably raise its price above marginal cost — the opposite of …
Monetary Policy
Actions by a central bank to influence the money supply, interest rates, and credit condit…
Money
Any asset that is widely accepted as a medium of exchange, a unit of account, and a store …
Money Multiplier
The maximum amount by which the money supply can expand from each dollar of new bank reser…
Monopolistic Competition
A market with many sellers offering differentiated products and easy entry — combining mon…
Monopoly
A market with a single seller of a product with no close substitutes, protected by barrier…
Moral Hazard
Moral hazard is the tendency for people to take greater risks when they are protected from…
MPC (Marginal Propensity to Consume)
The fraction of each additional dollar of disposable income that a household spends on con…
MPS (Marginal Propensity to Save)
The fraction of each additional dollar of disposable income that a household saves rather …
Multiplier (Keynesian)
The ratio showing how much total GDP changes in response to a one-dollar change in autonom…
N
Nash Equilibrium
A Nash equilibrium is a set of strategies, one for each player, such that no player can im…
National Debt
The total accumulated amount a government owes from all past budget deficits minus surplus…
Natural Monopoly
A market where one firm can serve the entire market at lower average cost than two or more…
Natural Rate of Unemployment
The natural rate of unemployment is the unemployment rate that prevails when the economy i…
Negative Externality
A negative externality is a cost of an economic activity imposed on third parties who did …
Net National Product (NNP)
Net National Product is gross national product minus depreciation — the wear and tear on m…
Nominal GDP
Nominal GDP is the value of all final goods and services produced in a country measured at…
Normal Profit
The minimum profit needed to keep an entrepreneur in the current business — equal to the t…
O
Okun's Law
The empirical relationship that for each percentage point unemployment rises above its nat…
Oligopoly
A market dominated by a small number of large firms whose decisions depend on each other's…
Open Market Operations
The buying and selling of government securities by a central bank to change bank reserves,…
Opportunity Cost
The opportunity cost of any choice is the value of the best alternative you give up when y…
P
Payoff Matrix
A payoff matrix is a table showing the payoffs each player receives for every combination …
Peak
A peak is the highest point of the business cycle — the moment when expanding economic act…
Perfect Competition
A market structure with many small sellers, identical products, free entry and exit, and f…
Phillips Curve
The curve showing the short-run inverse relationship between inflation and unemployment: l…
Positive Externality
A positive externality is a benefit of an economic activity enjoyed by third parties who d…
Price Ceiling
A price ceiling is a legal maximum price set by the government — sellers may not charge ab…
Price Discrimination
Charging different customers different prices for the same good, not based on cost differe…
Price Elasticity of Demand
Price elasticity of demand measures how much quantity demanded responds to a price change:…
Price Floor
A price floor is a legal minimum price — sellers may not charge below it. It only matters …
Private Cost
Private cost is the cost of an economic activity borne directly by the producer or decisio…
Producer Price Index (PPI)
The Producer Price Index measures the average change in the selling prices received by dom…
Producer Surplus
Producer surplus is the difference between the price sellers receive and the minimum price…
Production Function
A production function shows the maximum output a firm can produce from each combination of…
Production Possibilities Curve (PPC)
The production possibilities curve (also called the frontier, PPF) shows the maximum combi…
Profit (Economic)
Economic profit is total revenue minus all opportunity costs, including both explicit acco…
Progressive Tax
A tax system in which the average tax rate rises as income rises, so higher earners pay a …
Proportional Tax (Flat Tax)
A tax system in which everyone pays the same percentage of income, regardless of how much …
Protectionism
Government policies that shield domestic industries from foreign competition -- including …
Public Good
A public good is non-excludable (nobody can be stopped from using it) and non-rival (one p…
Purchasing Power Parity (PPP)
The theory that exchange rates should adjust so identical baskets of goods cost the same i…
Q
R
Real GDP
Real GDP is the total market value of all final goods and services produced within a count…
Recession
A recession is a significant, widespread decline in economic activity lasting more than a …
Recovery
A recovery is the early stage of an economic expansion immediately following a trough, whe…
Regressive Tax
A tax that takes a larger percentage of income from low-income earners than from high-inco…
Rent (Economic)
In economics, rent is the payment to a factor of production in excess of what is needed to…
Reserve Ratio
The fraction of a bank's deposits that it must hold as reserves (vault cash or deposits at…
Revenue (Total Revenue)
The total money a firm receives from selling its output: price × quantity sold (TR = P × Q…
S
Scarcity
Scarcity is the condition in which people want more goods and services than available reso…
Screening
Screening is when the less-informed party designs a test or menu of options that gets the …
Short Run (Production)
The period in which at least one input — typically capital like buildings and machinery — …
Shortage
A shortage exists when quantity demanded exceeds quantity supplied at the prevailing price…
Signaling
Signaling is when the better-informed party takes a costly action to credibly reveal their…
Social Cost
Social cost is the total cost of an economic activity to society: the private cost borne b…
Spending Multiplier
The number by which an initial change in government spending (or any autonomous spending) …
SRAS (Short-Run Aggregate Supply)
The upward-sloping curve showing the positive relationship between the overall price level…
Stagflation
Stagflation is the painful combination of stagnant economic growth, high unemployment, and…
Structural Unemployment
Structural unemployment is long-term joblessness caused by a mismatch between workers' ski…
Subsidy
A subsidy is a government payment that lowers the effective cost of producing or consuming…
Supply
Supply is the full relationship between a good's price and the quantity sellers are willin…
Surplus (Market)
A market surplus exists when quantity supplied exceeds quantity demanded at the prevailing…
T
Tariff
A tax levied by a government on imported goods. A tariff raises the domestic price of impo…
Tax Incidence
Tax incidence is the actual division of a tax's economic burden between buyers and sellers…
Tax Multiplier
The number by which a change in taxes is multiplied to give the total change in GDP; equal…
Taxation
Compulsory payments levied by governments on income, consumption, wealth, or transactions …
Taylor Rule
A monetary-policy guideline stating how a central bank should set its short-term interest …
Terms of Trade
The ratio of a country's export prices to its import prices, usually expressed as an index…
Total Cost
The sum of all costs of production: fixed costs plus variable costs (TC = FC + VC).…
Total Product
Total product is the total quantity of output produced from a given quantity of inputs — f…
Trade Deficit
The amount by which a country's imports of goods and services exceed its exports over a pe…
Trade Surplus
The amount by which a country's exports of goods and services exceed its imports over a pe…
Tragedy of the Commons
The tragedy of the commons describes how a shared resource gets overused and depleted when…
Trough
A trough is the lowest point of the business cycle — the moment when declining economic ac…
U
Unemployment
Unemployment is the state of being without a job while actively seeking work. The unemploy…
Unit-Elastic Demand
Demand is unit-elastic when quantity demanded changes by exactly the same percentage as pr…
Utility
Utility is the satisfaction or benefit a consumer gets from consuming goods and services. …