Absolute advantage: When one person or country can produce more total output of a commodity than another person or country. This is based on total resources available and is not related to comparative advantage or opportunity costs.
Accounting profit: Profit of a firm that is calculated by subtracting explicit costs from total revenue. This is the amount of profit that shows up on a company’s income statement. It differs from economic profit in that economic profit also takes into consideration implicit costs, or opportunity costs.
Activist government policy: Government’s use of discretionary fiscal and monetary policies in order to try to create a specific outcome in the economy.
Aggregate demand: Total of all planned expenditures in the economy. This is equal to the sum of consumption spending, gross private domestic investment, government purchases of goods and services, and net exports. In equilibrium, it is equal to real GDP.
Aggregate demand and aggregate supply equilibrium: In the aggregate demand & aggregate supply model, the point where the aggregate demand curve and the aggregate supply curve intersect. In equilibrium, no forces exist for changes in the price level or the level of real output (real GDP).
Aggregate demand and aggregate supply model: A diagram showing the aggregate demand curve and the aggregate supply curve, with the price level on the vertical axis and real GDP on the horizontal axis.
Aggregate demand curve: A graph of aggregate demand. This would be a downward sloping curve indicating a negative relationship between planned expenditures and the price level.
Aggregate supply: The amount of real GDP that firms are willing to supply at every price level.
Aggregate supply curve: A graph of aggregate supply. This would be an upward sloping curve indicating a positive relationship between the amount of real output supplied and the price level.
Allocative efficiency: Producing what the consumers want at a price equal to marginal cost.
Anticipated inflation: The inflation rate that is expected to occur in the future. This would be included in the nominal interest rate. Also called expected inflation.
Anti-competitive behavior: Actions by firms that are designed to limit the amount of competition in an industry.
Anti-dumping laws: A restriction on imports of goods that are sold on the world market at unfairly low prices.
Antitrust laws: Laws imposed by governments for the purpose of increasing competition.
Automatic stabilizers: Features of the economy or government policy that offset the effects of the business cycle, without any specific government action taken at the time.
Average fixed cost: Total fixed cost divided by the number of units of output.
Average physical product: Total physical product divided by the number of units of a variable input.
Average total cost: Total cost divided by the number of units of output.
Average variable cost: Total variable cost divided by the total number of units of output.
Balance of payments: A record of a country’s trade with the rest of the world. This includes all debit and credit transactions in both the current account and the financial account, and must always equal zero (total debits equal total credits).
Balance of trade: The balance in the current account or the merchandise account. A credit balance would be a trade surplus, and a debit balance would be a trade deficit.
Bank: Financial intermediary that accepts deposits and uses deposited funds to make loans.
Bank regulations: Laws that govern the operation of banks.
Bank reserves: Deposits at a bank that have not been loaned out.
Banking system: Collectively, all banks in an economy, including any central bank.
Barometric firm: Price leadership system in oligopoly in which one firm announces a price change, after which other firms in the industry match the price change.
Barriers to entry: Anything that makes it difficult for new firms to enter into a market. This could include high startup (fixed) costs, government regulations, or anti-competitive behavior of existing firms.
Barter economy: An economy in which goods and services are exchanged for other goods and services, without the use of money.
Base year: A year designated, sometimes arbitrarily, as the starting point for comparison of price changes over time. The base year has a price index equal to 100.
Black market: Economic activity that is not reported for tax purposes and is not included in official government statistics. Also called the underground economy, hidden economy, shadow economy, informal economy, and parallel economy.
Boom period: The portion of the business cycle that represents economic expansion, or growth in real GDP.
Bounded rationality: The assumption in economics that the choices people make are done rationally, based on the information known at the time, in an attempt to maximize their satisfaction. This is also known as rational self-interest.
Break Even Price: The price at which total revenue will equal total cost. At this price, the resulting quantity sold will fetch a revenue that will equal the total cost of producing that quantity.
Budget: The amount of spending for specific purposes available to individuals, firms, or governments.
Budget constraint: The maximum amount that can be spent due to a limited budget.
Budget line: A graph of a budget constraint.
Bundle of goods: A set of specific goods and quantities used to compare price changes over time.
Business: A private/public organization that produces goods and / or services. The term as used here is
interchangeable with firm, business firm, company, enterprise, and producer.
Business cycle: The idea that economic growth is not constant, but has periods of growth and
contraction. The four stages of the business cycle are expansion, peak, contraction, and trough. Macroeconomics is largely concerned with the business cycle.
Business firm: A private organization that produces goods and / or services. The term as used here is interchangeable with firm, company, enterprise, business, and producer.
Business sector: The sector of the economy that offers goods and services for sale. This would include all business firms.
Cap and trade: A policy of using marketable permits as a means of reducing a negative externality.
Capacity: The maximum output of a firm with a given level of fixed inputs.
Capital: In economics, the term capital generally refers to physical capital, or manufactured products such as machinery and equipment that are used in production. This is different from financial capital, which refers to forms of financing.
Capital consumption allowance: The replacement cost of worn-out or damaged machinery and equipment. This mostly consists of depreciation, and the terms are often used interchangeably.
Cartel: An organization of suppliers that agrees formally or informally to restrict competition among themselves in order to maximize the profits of the entire cartel instead of maximizing the profits of individual firms.
Causes of inflation: The causes of inflation are categorized as those that relate to aggregate demand, called demand-pull inflation, and those that relate to aggregate supply, called cost-push inflation.
Centralized decision making: Economic decisions that are made by a central government.
Ceteris paribus: Latin for “other things being equal”. A tool of economic analysis that assumes other factors remain constant in order to focus on the relationship between the factors being considered at any point in time.
Chained Consumer Price Index (Chained CPI): An alternative to the CPI index designed to decrease upward bias involving the substitution effect.
Change in demand: A change in a determinant of demand which would change the quantity demanded at every potential price. A change in demand would shift the entire demand curve.
The determinants of demand are: consumer income, consumer tastes, the prices of related goods
(substitutes and complements), consumer expectations, and the number of potential buyers.
Change in quantity demanded: A change in the quantity of a good or service that consumers would be willing and able to purchase, due to a change in the price of the good or service in question. This would be shown as a movement along an existing demand curve as opposed to a shift in the demand curve.
Change in quantity supplied: A change in the quantity of a good or service that producers are willing and able to offer for sale due to a change in the price of the good or service in question. This would be shown as a movement along an existing supply curve as opposed to a shift in the supply curve.
Change in supply: A change in a determinant of supply which would change the quantity supplied at every potential price. A change in supply would shift the entire supply curve. The determinants of supply are: the prices of resources, technology and productivity, expectations of producers, the number of suppliers, and the prices of alternative goods and services that a firm could produce.
Circular flow model: A model in economics showing the inter-relationships between different sectors of an economy. These inter-relationships include flows of inputs and output; physical products and financial assets; leakages and injections. The sectors of the economy are:
households; firms; the government sector; the international sector; and financial intermediaries.
Classical economics: The traditional economic school of thought associated with zero government activist policies. This school of thought involves the assumption that the business cycle and economy are self-correcting.
Coincident indicators: Variables that tend to change at the same time that the business cycle changes stages.
Collusion: Cooperation among firms in an oligopoly industry based on secret agreements.
Command economy: An economic system in which economic decisions are made by a central authority.
Communism: A political philosophy in which utopia can be reached through a series of stages in the economy. First, a market economy is replaced by a command economy. Eventually the government sector will disappear, leaving the people to make economic decisions for the common good, without the aid of market forces. Since the last stage only exists in theory, and all governments that are based on the communist philosophy have succeeded in only advancing as far as the command economy, communism is closely associated with socialism.
Company: A private organization that produces goods and / or services. The term as used here is interchangeable with firm, business firm, enterprise, business, and producer.
Comparative advantage: The advantage one person or country has because of a lower opportunity cost in one specific activity, such as production of a specific good.
Complements: Goods that tend to be purchased together, as if they form a unit. A change in the price of one good would cause the demand for a complement to change in the opposite direction.
Consumer: The purchaser of a final good or service. Collectively, consumers comprise the household sector of the economy.
Consumer equilibrium: A situation in which a consumer has maximized utility, at the point where the marginal utility per cost for every consumption choice is equal. Also known as the Equimarginal Principle.
Consumer Price Index: CPI. A measurement of price changes for a “typical” bundle of goods purchased by consumers.
Consumer sector: The sector of the economy that purchases final goods and services.
Consumer surplus: The difference between what consumers are willing to pay and the amount that they actually pay. On a supply and demand diagram, consumer surplus would be the area that lies below the demand curve and above the market price.
Consumption: Overall spending in the economy by the household sector.
Contraction: The portion of the business cycle in which real GDP is falling. This would be associated with a recession and high unemployment.
Cost of living adjustment: An automatic adjustment to wages or prices based on the rate of inflation. Commonly referred to as COLA.
Cost-push inflation: Inflation caused by a decrease in aggregate supply. A decrease in aggregate supply is also associated with an increase in unemployment. The combination of an increase in inflation and an increase in unemployment is called stagflation. If the cause of the decrease in aggregate supply is a sudden increase in the price of a key product or resource in the economy, it is called a supply shock.
CPI: Consumer Price Index. A measurement of price changes for a “typical” bundle of goods purchased by consumers.
Cross elasticity of demand: A measure of the amount that the demand for one good changes due to a change in the price of another good. A cross elasticity of demand that is not equal to zero will indicate that the goods are related. A positive elasticity indicates substitutes. A negative elasticity indicates complements. Same as cross-price elasticity of demand.
Cross-price elasticity of demand: A measure of the amount that the demand for one good changes due to a change in the price of another good. A cross elasticity of demand that is not equal to zero will indicate that the goods are related. A positive elasticity indicates substitutes. A negative elasticity indicates complements. Same as cross elasticity of demand.
Crowding out: A reduction in consumption or investment caused by government deficit spending.
Current account: The combination of the merchandise account, services account, income account, and unilateral transfers account. Associated with net exports and a trade deficit or surplus.
Cyclical unemployment: The portion of unemployment associated with a downturn in the economy, which would be the contraction stage of the business cycle.

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