Chapter 1: Ten Principles of Economics
Key Terms
business cycle
Fluctations in economic activity, such as employment and production.
economics
The study of how society manages its scarce resources
efficiency
The property of society getting the most it can from its scarce resources
equity
The property of distributing economic prosperity fairly among the members of society.
externality
The impact of one person's actions on the well-being of a bystander.
inflation
An increase in the overall level of prices in the economy.
marginal changes
Small incremental adjustments to a plan of action.
market economy
An economy that allows resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
market failure
A situation in which a market left on its own fails to allocate resources efficienty.
market power
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.
opportunity cost
Whatever must be given up to obtain some item.
Phillips curve
A curve that shows the short-run tradeoff betwen inflation and unemployment.
productivity
The quantity of goods and services produced from each hour of a worker's time.
scarcity
The limited nature of society's resources.
Chapter 2: Thinking Like an Economist
Key Terms
circular-flow diagram
A visual model of the economy that shows how dollars flow through markets among households and firms.
production possibilities frontier
A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
microeconomics
The study of how households and firms make decisions and how they interact in markets.
macroeconomics
The study of economy-wide phenomena, including inflation, unemployment, and economic growth.
positive statements
Claims that attempt to describe the world as it is.
normative statements
Claims that attempt to prescribe how the world should be.
Chapter 3: Interdependence and the Gains from Trade
Key Terms
absolute advantage
The comparison among producers of a good according to their productivity.
comparative advantage
The comparison among producers of a good according to their opportunity cost.
opportunity cost
Whatever must be given up to obtain some item.
imports
goods and services that are produced abroad and sold domestically
exports
goods and services that are produced domestically and sold abroad
Chapter 4: The Market Forces of Supply and Demand
Key Terms
market
A group of buyers and sellers of a particular good or service.
competitive market
A market in which there are many buyers and many sellers so that each has a negligible impact on the market price.
quantity demanded
The amount of a good that buyers are willing and able to purchase.
law of demand
The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.
demand schedule
A table that shows the relationship between the price of a good and the quantity demanded.
demand curve
A graph of the relationship between the price of a good and the quantity demanded.
normal good
A good for which, other things equal, an increase in income leads to an increase in demand.
inferior good
A good for which, other things equal, an increase in income leads to a decrease in demand.
substitutes
Two goods for which an increase in the price of one leads to an increase in the demand for the other.
complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other.
quantity supplied
The amount of a good that sellers are willing and able to sell.
law of supply
The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.
supply schedule
A table that shows the relationship between the price of a good and the quantity supplied.
supply curve
A graph of the relationship between the price of a good and the quantity supplied.
equilibrium
A situation in which the price has reached the level where quantity supplied equals quantity demanded.
equilibrium price
The price that balances quantity supplied and quantity demanded.
equilibrium quantity
The quantity supplied and the quantity demanded at the equilibrium price.
surplus
A situation in which quantity supplied is greater than quantity demanded.
shortage
A situation in which quantity demanded is greater than quantity supplied.
law of supply and demand
The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.
Chapter 5: Elasticity and Its Application
Key Terms
elasticity
A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.
price elasticity of demand
A measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.
total revenue
The amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold.
income elasticity of demand
A measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income.
cross-price elasticity of demand
A measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.
price elasticity of supply
A measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price.
Chapter 6 : Supply, Demand, and Government Policies
Key Terms price ceiling
A legal maximum on the price at which a good can be sold.
price floor
A legal minimum on the price at which a good can be sold.
tax incidence
The manner in which the burden of a tax is shared among participants in a market.
Chapter 7: Consumers, Producers, and the Efficiency of Markets
Key Terms
welfare economics
The study of how the allocation of resources affects economic well-being.
willingness to pay
The maximum amount that a buyer will pay for a good.
consumer surplus
A buyer's willingness to pay minus the amount the buyer actually pays.
cost
The value of everything a seller must give up to produce a good.
producer surplus
The amount a seller is paid for a good minus the seller's cost.
efficiency
The property of a resource allocation of maximizing the total surplus received by all members of society.
equity
The fairness of the distribution of well-being among the members of society.
Chapter 8: Applications: The Costs of Taxation
Key Terms
deadweight loss
The fall in total surplus that results from a market distortion, such as a tax.
Chapter 9: Application: International Trade
Key Terms
world price
The price of a good that prevails in the world market for that good.
tariff
A tax on goods produced abroad and sold domestically.
import quota
A limit on the quantity of a good that can be produced abroad and sold domestically.
Chapter 10: Externalities
Key Terms
internalizing an externality
Altering incentives so that people take account of the external effects of their actions.
Coase theorem
The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own.
transaction costs
The costs that parties incur in the process of agreeing and following through on a bargain.
Pigovian tax
A tax enacted to correct the effects of a negative externality.
Chapter 11: Public Goods and Common Resources
Key Terms
common resources
goods that are rival but not excludable
cost-benefit analysis
a study that compares the costs and benefits to society of providing a public good
excludability
the property of a good whereby a person can be prevented from using it
free rider
a person who receives the benefit of a good but avoids paying for it
private goods
goods that are both excludable and rival
public goods
goods that are neither excludable nor rival
rivalry
the property of a good whereby one person's use diminishes other people's use
Tragedy of the Commons
a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole
Chapter 12: The Design of the Tax System
Key Terms
ability-to-pay principle
the idea that taxes should be levied on a person according to how well that person can shoulder the burden
average tax rate
total taxes paid divided by total income
benefits principle
the idea that people should pay taxes based on the benefits they receive from government services
budget deficit
an excess of government spending over government receipts
budget surplus
an excess of government receipts over government spending
horizontal equity
the idea that taxpayers with similar abilities to pay taxes should pay the same amount
lump-sum tax
a tax that is the same amount for every person
marginal tax rate
the extra taxes paid on an additional dollar of income
progressive tax
a tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers
proportional tax
a tax for which high-income and low-income taxpayers pay the same fraction of income
regressive tax
a tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers
vertical equity
the idea that taxpayers with a greater ability to pay taxes should pay larger amounts
Chapter 13: The Costs of Production
Key Terms
accounting profit
total revenue minus total explicit cost
average fixed cost
fixed costs divided by the quantity of output
average total cost
total cost divided by the quantity of output
average variable cost
variable costs divided by the quantity of output
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
diseconomies of scale
the property whereby long-run average total cost rises as the quantity of output increases
economic profit
total revenue minus total cost, including both explicit and implicit costs
economies of scale
the property whereby long-run average total cost falls as the quantity of output increases
efficient scale
the quantity of output that minimizes average total cost
fixed costs
costs that do not vary with the quantity of output produced
implicit costs
input costs that do not require an outlay of money by the firm
marginal cost
the increase in total cost that arises from an extra unit of production
marginal product
the increase in output that arises from an additional unit of input
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
profit
total revenue minus total cost
total cost
the market value of the inputs a firm uses in production
total revenue
the amount a firm receives for the sale of its output
variable costs
costs that do vary with the quantity of output produced
Chapter 14: Firms in Competitive Markets
Key Terms
average revenue
total revenue divided by the quantity sold
competitive market
a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
marginal revenue
the change in total revenue from an additional unit sold
sunk cost
a cost that has already been committed and cannot be recovered
Chapter 15: Monopoly
Key Terms
monopoly
a firm that is the sole seller of a product without close substitutes
natural monopoly
a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
price discrimination
the business practice of selling the same good at different prices to different customers
Chapter 16: Oligopoly
Key Terms
cartel
a group of firms acting in unison
collusion
an agreement among firms in a market about quantities to produce or prices to charge
dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players
game theory
the study of how people behave in strategic situations
monopolistic competition
a market structure in which many firms sell products that are similar but not identical
Nash equilibrium
a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen
oligopoly
a market structure in which only a few sellers offer similar or identical products
prisoners' dilemma
a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
Chapter 17: Monopolistic Competition
Key Terms
monopolistic competition
a market structure in which many firms sell products that are similar but not identical
Chapter 18: The Markets for the Factors of Production
Key Terms
capital
the equipment and structures used to produce goods and services diminishing marginal product the property whereby the marginal product of an input declines as the quantity of the input increases
factors of production
the inputs used to produce goods and services
marginal product of labor
the increase in the amount of output from an additional unit of labor
production function
the relationship between the quantity of inputs used to make a good and the quantity of output of that good
value of the marginal product
the marginal product of an input times the price of the output
Chapter 19: Earnings and Discrimination
Key Terms
compensating differential
a difference in wages that arises to offset the nonmonetary characteristics of different jobs
discrimination
the offering of different opportunities to similar individuals who differ only by race, ethnic group, sex, age, or other personal characteristics
efficiency wages
above-equilibrium wages paid by firms in order to increase worker productivity
human capital
the accumulation of investments in people, such as education and on-the-job training
strike
the organized withdrawal of labor from a firm by a union
union
a worker association that bargains with employers over wages and working conditions
Chapter 20: Income Inequality and Poverty
Key Terms
in-kind transfers
transfers to the poor given in the form of goods and services rather than cash
liberalism
the political philosophy according to which the government should choose policies deemed to be just, as evaluated by an impartial observer behind a "veil of ignorance"
libertarianism
the political philosophy according to which the government should punish crimes and enforce voluntary agreements but not redistribute income
life cycle
the regular pattern of income variation over a person's life
maximin criterion
the claim that the government should aim to maximize the well-being of the worst-off person in society
negative income tax
a tax system that collects revenue from high-income households and gives transfers to low-income households
permanent income
a person's normal income
poverty line
an absolute level of income set by the federal government for each family size below which a family is deemed to be in poverty
poverty rate
the percentage of the population whose family income falls below an absolute level called the poverty line
utilitarianism
the political philosophy according to which the government should choose policies to maximize the total utility of everyone in society
utility
a measure of happiness or satisfaction
welfare
government programs that supplement the incomes of the needy
Chapter 21: The Theory of Consumer Choice
Key Terms
budget constraint
the limit on the consumption bundles that a consumer can afford
Giffen good
a good for which an increase in the price raises the quantity demanded
income effect
the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve
indifference curve
a curve that shows consumption bundles that give the consumer the same level of satisfaction
inferior good
a good for which an increase in income reduces the quantity demanded
marginal rate of substitution
the rate at which a consumer is willing to trade one good for another
normal good
a good for which an increase in income raises the quantity demanded
perfect complements
two goods with right-angle indifference curves
perfect substitutes
two goods with straight-line indifference curves
substitution effect
the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution
Chapter 22: Frontiers in Microeconomics
Key Terms
adverse selection
the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party
agent
a person who is performing an act for another person, called the principal
Arrow's impossibility theorem
a mathematical result showing that, under certain assumed conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences
Condorcet paradox
the failure of majority rule to produce transitive preferences for society
median voter theorem
a mathematical result showing that if voters are choosing a point along a line and each voter wants the point closest to his most preferred point, then majority rule will pick the most preferred point of the median voter
moral hazard
the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior
principal
a person for whom another person, called the agent, is performing some act
screening
an action taken by an uninformed party to induce an informed party to reveal information
signaling
an action taken by an informed party to reveal private information to an uninformed party
Chapter 23: Measuring a Nation's Income
Key Terms
consumption
spending by households on goods and services, with the exception of purchases of new housing
GDP deflator
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
government purchases
spending on goods and services by local, state, and federal governments
gross domestic product (GDP)
the market value of all final goods and services produced within a country in a given period of time
investment
spending on capital equipment, inventories, and structures, including household purchases of new housing
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
microeconomics
the study of how households and firms make decisions and how they interact in markets
net exports
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
nominal GDP
the production of goods and services valued at current prices
real GDP
the production of goods and services valued at constant prices
Chapter 24: Measuring the Cost of Living
Key Terms
consumer price index (CPI)
a measure of the overall cost of the goods and services bought by a typical consumer
indexation
the automatic correction of a dollar amount for the effects of inflation by law or contract
inflation rate
the percentage change in the price index from the preceding period
nominal interest rate
the interest rate as usually reported without a correction for the effects of inflation
producer price index
a measure of the cost of a basket of goods and services bought by firms
real interest rate
the interest rate corrected for the effects of inflation
Chapter 25: Production and Growth
Key Terms
catch-up effect
the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
diminishing returns
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
human capital
the knowledge and skills that workers acquire through education, training, and experience
natural resources
the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
physical capital
the stock of equipment and structures that are used to produce goods and services
productivity
the amount of goods and services produced from each hour of a worker's time
technological knowledge
society's understanding of the best ways to produce goods and services
Chapter 26: Saving, Investment, and the Financial System
Key Terms
bond
a certificate of indebtedness
budget deficit
a shortfall of tax revenue from government spending
budget surplus
an excess of tax revenue over government spending
crowding out
a decrease in investment that results from government borrowing
financial intermediaries
financial institutions through which savers can indirectly provide funds to borrowers
financial markets
financial institutions through which savers can directly provide funds to borrowers
financial system
the group of institutions in the economy that help to match one person's saving with another person's investment
market for loanable funds
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
mutual fund
an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
national saving (saving)
the total income in the economy that remains after paying for consumption and government purchases
private saving
the income that households have left after paying for taxes and consumption
public saving
the tax revenue that the government has left after paying for its spending
stock
A claim to partial ownership in a firm.
Chapter 27: The Basic Tools of Finance
Key Terms
aggregate risk
risk that affects all economic actors at once
compounding
the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future
diversification
the reduction of risk achieved by replacing a single risk with a large number of smaller unrelated risks
efficient markets hypothesis
the theory that asset prices reflect all publicly available information about the value of an asset
finance
the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk
fundamental analysis
the study of a company's accounting statements and future prospects to determine its value
future value
the amount of money in the future that an amount of money today will yield, given prevailing interest rates
idiosyncratic risk
risk that affects only a single economic actor
informationally efficient
reflecting all available information in a rational way
present value
the amount of money today that would be needed to produce, using prevailing interest rates, a given future amount of money
random walk
the path of a variable whose changes are impossible to predict
risk averse
exhibiting a dislike of uncertainty
Chapter 28: Unemployment and Its Natural Rate
Key Terms
collective bargaining
the process by which unions and firms agree on the terms of employment
cyclical unemployment
the deviation of unemployment from its natural rate
discouraged workers
individuals who would like to work but have given up looking for a job
efficiency wages
above-equilibrium wages paid by firms in order to increase worker productivity
frictional unemployment
unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
job search
the process by which workers find appropriate jobs given their tastes and skills
labor force
the total number of workers, including both the employed and the unemployed
labor-force participation rate
the percentage of the adult population that is in the labor force
natural rate of unemployment
the normal rate of unemployment around which the unemployment rate fluctuates
strike
the organized withdrawal of labor from a firm by a union
structural unemployment
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
unemployment insurance
a government program that partially protects workers' incomes when they become unemployed
unemployment rate
the percentage of the labor force that is unemployed
union
a worker association that bargains with employers over wages and working conditions
Chapter 29: The Monetary System
Key Terms
central bank
an institution designed to oversee the banking system and regulate the quantity of money in the economy
commodity money
money that takes the form of a commodity with intrinsic value
currency
the paper bills and coins in the hands of the public
demand deposits
balances in bank accounts that depositors can access on demand by writing a check
discount rate
the interest rate on the loans that the Fed makes to banks
Federal Reserve (Fed)
the central bank of the United States
fiat money
money without intrinsic value that is used as money because of government decree
fractional-reserve banking
a banking system in which banks hold only a fraction of deposits as reserves
liquidity
the ease with which an asset can be converted into the economy's medium of exchange
medium of exchange
an item that buyers give to sellers when they want to purchase goods and services
money
the set of assets in an economy that people regularly use to buy goods and services from other people
money multiplier
the amount of money the banking system generates with each dollar of reserves
money supply
the quantity of money available in the economy
open-market operations
the purchase and sale of . government bonds by the Fed
reserve ration
the fraction of deposits that banks hold as reserves
reserve requirements
regulations on the minimum amount of reserves that banks must hold against deposits
reserves
deposits that banks have received but have not loaned out
store of value
an item that people can use to transfer purchasing power from the present to the future
unit of account
the yardstick people use to post prices and record debts
Chapter 30: Money Growth and Inflation
Key Terms
classical dichotomy
the theoretical separation of nominal and real variables
Fisher effect
the one-for-one adjustment of the nominal interest rate to the inflation rate
inflation tax
the revenue the government raises by creating money
menu costs
the costs of changing prices
monetary neutrality
the proposition that changes in the money supply do not affect real variables
nominal variables
variables measured in monetary units
quantity equation
the equation M 3 V 5 P 3 Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
quantity theory of money
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
real variables
variables measured in physical units
shoeleather costs
the resources wasted when inflation encourages people to reduce their money holdings
velocity of money
the rate at which money changes hands
Chapter 31: Open-Economy Macroeconomics: Basic Concepts
Key Terms
appreciation
an increase in the value of a currency as measured by the amount of foreign currency it can buy
balanced trade
a situation in which exports equal imports
closed economy
an economy that does not interact with other economies in the world
depreciation
a decrease in the value of a currency as measured by the amount of foreign currency it can buy
exports
goods and services that are produced domestically and sold abroad
imports
goods and services that are produced abroad and sold domestically
net capital outflow
the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
net exports
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
nominal exchange rate
the rate at which a person can trade the currency of one country for the currency of another
open economy
an economy that interacts freely with other economies around the world
purchasing-power parity
a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries
real exchange rate
the rate at which a person can trade the goods and services of one country for the goods and services of another
trade balance
the value of a nation's exports minus the value of its imports; also called net exports
trade deficit
an excess of imports over exports
trade surplus
an excess of exports over imports
Chapter 32: A Macroeconomic Theory of the Open Economy
Key Terms
capital flight
a large and sudden reduction in the demand for assets located in a country
trade policy
a government policy that directly influences the quantity of goods and services that a country imports or exports
Chapter 33: Aggregate Demand and Aggregate Supply
Key Terms
aggregate-demand curve
a curve that shows the quantity of goods and services that households, firms, and the government want to buy at each price level
aggregate-supply curve
a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level
depression
a severe recession
model of aggregate demand and aggregate supply
the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend
recession
a period of declining real incomes and rising unemployment
stagflation
a period of falling output and rising prices
Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
Key Terms
automatic stabilizers
changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action
crowding-out effect
the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending
multiplier effect
the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending
theory of liquidity preference
Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance
Chapter 35: The Short-Run Tradeoff between Inflation and Unemployment
Key Terms
natural-rate hypothesis
the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation
Phillips curve
A curve that shows the short-run tradeoff betwen inflation and unemployment.
rational expectations
the theory according to which people optimally use all the information they have, including information about government policies, when forecasting the future
sacrifice ratio
the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point
supply shock
an event that directly alters firms' costs and prices, shifting the economy's aggregate-supply curve and thus the Phillips curve
