Glossary

The ability of a person, firm, or nation to produce more of a good or service with a given amount of resources than another entity can. If one producer can make a product more efficiently (with fewer inputs) than another, it has an absolute advantage in that product.

Total revenue minus explicit costs (direct, out-of-pocket expenses), not accounting for implicit costs.

The total quantity of goods and services demanded across all levels of the economy at various price levels, during a given time period. It is the sum of consumption, investment, government spending, and net exports (AD = C + I + G + (X - M)).

The total output of goods and services that producers in an economy are willing and able to supply at different price levels. Short-run aggregate supply (SRAS) is upward sloping, whereas long-run aggregate supply (LRAS) is vertical at full-employment output.

A state in which the mix of goods and services produced reflects what society desires most, where marginal social benefit equals marginal social cost.

Built-in fiscal mechanisms that automatically adjust government spending or taxes in response to economic conditions without new policy action.

A comprehensive record of all economic transactions between a country and the rest of the world in a given period, including both the current account and the capital/financial account.

Obstacles that make it difficult for new firms to enter a market, such as high start-up costs, exclusive access to resources, legal protections, and economies of scale.

A fixed-income financial asset representing a loan made by an investor to a borrower (typically corporate or governmental) that pays interest at specified intervals and returns the principal at maturity.

The situation in which a government’s expenditures exceed its tax revenues in a given fiscal period, requiring the government to borrow money.

The situation in which a government’s revenues exceed its expenditures during a specific period, allowing it to pay down debt or save funds.

Man-made resources used to produce other goods and services, such as machinery, tools, equipment, and buildings.

The portion of the balance of payments that records cross-border investments and loans, including foreign purchases of domestic assets and domestic purchases of foreign assets.

A formal agreement among competing firms to collude by setting prices or output quotas in order to maximize joint profits.

A Latin phrase meaning 'other things being equal,' used to isolate the relationship between two variables by holding all else constant.

An arrangement between firms, explicit or implicit, to restrict competition by fixing prices, limiting production, or dividing markets.

A resource that is non-excludable but rival in consumption, where one person’s use reduces the amount available for others.

The ability of a person or nation to produce a good at a lower opportunity cost than another, enabling gains from trade even if one is less efficient overall.

An index measuring the average change in prices over time of a fixed basket of consumer goods and services.

The difference between the maximum price consumers are willing to pay for a good and the price they actually pay.

Fiscal policy actions intended to reduce aggregate demand—such as decreasing government spending or increasing taxes—to combat inflation.

A phenomenon where increased government spending and borrowing leads to higher interest rates that reduce private investment spending.

The part of the balance of payments that records a nation’s imports and exports of goods and services, net income from abroad, and net current transfers.

Unemployment caused by downturns in the business cycle when overall demand for goods and services falls.

The loss in total surplus that occurs when a market does not produce the socially optimal output, often due to market failures or interventions.

A sustained decrease in the general price level of goods and services, resulting in increased purchasing power of money.

In economics, the quantity of a good or service that consumers are willing and able to purchase at various prices, typically illustrated by a downward-sloping curve.

A graph showing the quantity of a good or service that consumers are willing to purchase at various prices, typically downward sloping.

A severe and prolonged economic downturn featuring a significant decline in output, very high unemployment, and often deflation.

The principle that as additional units of a variable input are added to fixed inputs, the extra output produced eventually declines.

A situation in which a firm’s long-run average total cost increases as its output increases, often due to inefficiencies from becoming too large.

A market condition where quantity supplied does not equal quantity demanded, leading to a surplus or shortage.

The increase in a nation’s output of goods and services (real GDP) over time, driven by factors like capital accumulation, labor force growth, and technological advances.

Total revenue minus total costs (including both explicit and implicit costs), where zero economic profit means covering all costs including opportunity costs.

A condition where a firm’s long-run average total cost decreases as its output increases due to factors like specialization and bulk buying.

The act of taking initiative, innovating, and bearing risk to combine resources into productive enterprises, driving economic growth.

The point at which the quantity demanded equals the quantity supplied, with no pressure for the price to change absent external shifts.

The price at which the quantity supplied equals the quantity demanded, ensuring that the market clears.

The quantity of a good bought and sold at the equilibrium price, where buyers’ and sellers’ intentions coincide.

In monopolistic competition, the situation where firms produce below the output level that minimizes average total cost due to insufficient demand.

The price of one currency in terms of another, which can affect the cost of exports and imports.

A direct, out-of-pocket payment for inputs to production, such as wages, rent, or materials.

A cost or benefit incurred by a third party as a result of an economic decision, which is not reflected in market prices.

The resources used to produce goods and services, typically categorized as land, labor, capital, and entrepreneurship.

Money that has no intrinsic value and is declared legal tender by a government, with its value based on trust and acceptance.

A non-physical asset whose value derives from a contractual claim, such as cash, stocks, bonds, or bank deposits.

Government decisions about spending and taxation aimed at influencing economic conditions, especially aggregate demand.

A cost that does not change with the level of output in the short run, such as rent or salaries of permanent staff.

A person who benefits from a good or service without paying for it, often occurring with non-excludable public goods.

Short-term unemployment occurring when people are in between jobs or entering the labor force.

The total market value of all final goods and services produced within a country’s borders during a given period.

A price index that measures the overall level of prices for all goods and services included in GDP, used to convert nominal GDP into real GDP.

The increased output and consumption achieved when parties specialize in activities where they have a comparative advantage and then trade.

The study of strategic decision making in situations where the outcome for each participant depends on the actions of all.

A numerical measure of income or wealth inequality ranging from 0 (perfect equality) to 1 (perfect inequality), derived from the Lorenz curve.

The skills, knowledge, experience, and education possessed by individuals that enhance their productivity and economic value.

An extremely high and typically accelerating rate of inflation—often exceeding 50% per month—that drastically erodes the value of currency.

The responsiveness of the quantity demanded of a good to a change in consumer income, indicating whether a good is normal or inferior.

The uneven distribution of income among a population, often illustrated by the Lorenz curve and measured by the Gini coefficient.

A good for which demand decreases as consumer income rises, with demand increasing when income falls.

A sustained increase in the general price level of goods and services, which reduces the purchasing power of money.

A situation where actual real GDP exceeds potential GDP, often leading to upward pressure on wages and prices.

The cost of borrowing money or the return on lending money, usually expressed as an annual percentage of the principal.

Spending on goods that will be used to produce other goods and services in the future, thereby increasing productive capacity.

A factor of production referring to human effort (both physical and mental) used in the production process.

The portion of the adult population that is either employed or actively seeking employment.

The principle that, ceteris paribus, as the price of a good falls, the quantity demanded rises, and vice versa.

The principle that, ceteris paribus, as the price of a good rises, the quantity supplied rises, and vice versa.

A time period in which all inputs can be varied and there are no fixed factors, allowing firms to adjust all aspects of production.

The aggregate supply when wages and input costs have fully adjusted, showing that long-run output is determined by resources, technology, and productivity.

A vertical line at the natural rate of unemployment, indicating that in the long run there is no trade-off between inflation and unemployment.

A graphical representation showing the cumulative share of income earned by the cumulative percentage of the population, used to illustrate income inequality.

The change in total cost that arises when the quantity produced changes by one unit.

The additional output produced by employing one more unit of an input.

The fraction of an additional dollar of disposable income that is spent on consumption.

The fraction of an additional dollar of disposable income that is saved rather than spent.

The additional cost to a firm of hiring or using one more unit of a resource.

The additional revenue generated by selling one more unit of a good.

The additional revenue a firm earns by employing one more unit of a factor, calculated as marginal product times the price of the output.

The additional satisfaction or utility a consumer derives from consuming one more unit of a good or service.

The point at which the quantity demanded equals the quantity supplied, with no tendency for the price to change.

A situation in which the allocation of goods and services by a free market is not efficient.

The ability of a firm to influence or alter the market price of a good or service.

The smallest level of output at which a firm’s long-run average total cost is minimized.

Central bank actions that manage the money supply and interest rates to achieve macroeconomic objectives such as price stability and full employment.

Any asset widely accepted as payment for goods and services, serving as a medium of exchange, a unit of account, and a store of value.

A model showing the supply and demand for money (liquid cash and deposits) at different interest rates, determining the short-term interest rate.

The factor by which an initial change in bank reserves can lead to a greater change in the total money supply.

A market structure in which many firms sell differentiated products that are close substitutes.

A market structure where many buyers exist but only one seller controls the entire market.

A market situation in which a single buyer dominates the market.

The rate of unemployment that prevails when the economy is at full employment, including only frictional and structural unemployment.

The value of a country’s exports minus its imports, a component of aggregate demand and GDP.

Gross Domestic Product measured in current prices, not adjusted for inflation.

The interest rate in money terms, not adjusted for inflation.

The buying or selling of government securities by a central bank to control the money supply and influence short-term interest rates.

The value of the next best alternative that is foregone when a decision is made.

A graphical representation of the short-run relationship between inflation and unemployment, suggesting an inverse relationship.

A payment made to encourage activities that produce positive externalities, aiming for a socially optimal outcome.

A tax imposed on activities that generate negative externalities to correct an inefficient market outcome.

The practice of charging different prices for the same good or service to different buyers by the same provider.

A measure of how responsive the quantity demanded of a good is to a change in its price.

A measure of the responsiveness of the quantity supplied of a good to a change in its price.

A government-imposed minimum price that must be paid for a product, effective only if set above the equilibrium price.

A firm that has the power to influence the market price of a good or service.

A firm or individual who must accept the prevailing market price because their actions do not affect the market.

The difference between the amount producers are willing to accept for a good and the higher market price they actually receive.

A marketing strategy where businesses distinguish their products from similar offerings in the market.

A function that specifies the output of a firm, industry, or entire economy for all combinations of inputs.

A curve that shows the maximum attainable combinations of two types of goods that an economy can produce with available resources and technology.

The condition in which resources are used in such a way as to maximize the production of goods and services at the lowest possible cost.

The principle that profit is maximized when a firm’s marginal revenue equals its marginal cost (MR = MC).

A tax system in which the tax rate increases as the taxable amount increases.

A tax system in which the tax rate is fixed regardless of the amount subject to taxation.

A good that is non-rivalrous and non-excludable, meaning one person’s consumption does not reduce availability for others and no one can be effectively excluded from using it.

The amount of a product that consumers wish to purchase during a specified period at a given price.

The specific number of units of a product that producers are willing to supply at a given price level.

A period of significant decline in economic activity spread across the economy, typically lasting more than a few months.

A situation where an economy’s actual output is below its potential output, indicating unused resources and higher unemployment.

A tax system in which the tax rate decreases as the amount subject to taxation increases.

The fraction of deposits that banks must hold in reserve rather than lend out, influencing the money supply.

The fundamental economic problem that resources are limited while human wants are virtually unlimited, necessitating choices about allocation.

The aggregate supply when some costs, particularly nominal wages, are sticky and do not adjust immediately to changes in the price level.

The inverse relationship between inflation and unemployment observed in the short run when expected inflation is held constant.

A condition in which the quantity demanded exceeds the quantity supplied at the current price.

The guideline that a firm should continue operating in the short run if the price covers average variable costs, but shut down if it falls below them.

The process of concentrating production on a limited variety of goods or activities in which an entity has a comparative advantage.

An economic condition characterized by stagnant growth, high unemployment, and high inflation occurring simultaneously.

A government-imposed limit on how high a price can be charged for a product, intended to protect consumers.

Unemployment resulting from a mismatch between the skills or location of workers and the requirements of available jobs.

Different goods that satisfy similar needs, such that an increase in the price of one leads to an increase in demand for the other.

The tendency for consumers to substitute toward cheaper goods when relative prices change.

The quantity of a good or service that producers are willing and able to sell at various prices, generally rising as price increases.

A graph that shows the relationship between the quantity supplied of a good and its price, typically upward sloping.

A table showing the quantity of a product that producers are willing to supply at various prices.

An event that suddenly changes the cost or availability of a key input, directly affecting production capacity.

A condition where quantity supplied exceeds quantity demanded at a given price, often putting downward pressure on prices.

A system of government-imposed duties levied on imported or exported goods.

The analysis of how the burden of a tax is distributed among buyers and sellers.

The factor by which a change in taxes affects aggregate demand and output, calculated as –MPC/MPS.

The overall cost of production, consisting of both variable costs (which change with output) and fixed costs.

The total quantity of output produced by a given amount of inputs.

The total amount of money received from the sale of goods or services.

A dilemma in which individuals, acting independently and in their own self-interest, ultimately deplete a shared limited resource.

A measure of satisfaction or happiness that a consumer derives from consuming goods and services.

Costs that change in proportion to the level of production or business activity.

The price of a good as determined in the global market.

The situation in which a firm’s total revenue is exactly equal to its total costs, including opportunity costs, resulting in no excess profit.