| Absolute advantage | One person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person.
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| Accounting profit | The difference between a firm's total revenue and its explicit costs.
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| Adverse selection | The pattern in which insurance tends to be purchased disproportionately by those who are most costly for companies to insure.
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| Allocative function of price | Changes in prices direct resources away from overcrowded markets and toward markets that are underserved.
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| Asymmetric information | Situations in which buyers and sellers are not equally well informed about the characteristics of goods and services for sale in the marketplace.
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| Attainable point | Any combination of goods that can be produced using currently available resources.
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| Autarky | A situation in which a country is economically self-sufficient; that is, it does not trade with other nations.
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| Average benefit | Total benefit of undertaking n units of an activity divided by n.
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| Average cost | Total cost of undertaking n units of an activity divided by n.
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| Average total cost (ATC) | Total cost divided by total output.
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| Average variable cost (AVC) | Variable cost divided by total output.
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| Barrier to entry | Any force that prevents firms from entering a new market.
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| Basic elements of a game | The players, the strategies available to each player, and the payoffs each player receives for each possible combination of strategies.
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| Better-than-fair gamble | A gamble whose expected value is positive.
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| Breakeven income level | Under a negative income tax, the level of before-tax income at which a family's tax liability exactly offsets its initial tax credit.
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| Buyer's reservation price | The largest dollar amount the buyer would be willing to pay for a good.
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| Buyer's surplus | The difference between the buyer's reservation price and the price he or she actually pays.
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| Cartel | A coalition of firms that agree to restrict output for the purpose of earning an economic profit.
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| Cash on the table | Economic metaphor for unexploited gains from exchange.
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| Change in demand | A shift of the entire demand curve.
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| Change in supply | A shift of the entire supply curve.
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| Change in the quantity demanded | A movement along the demand curve that occurs in response to a change in price.
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| Change in the quantity supplied | A movement along the supply curve that occurs in response to a change in price.
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| Closed economy | An economy that does not trade with the rest of the world.
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| Coase theorem | If at no cost people can negotiate the purchase and sale of the right to perform activities that cause externalities, they can always arrive at efficient solutions to the problems caused by externalities.
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| Collective good | A good or service that, to at least some degree, is nonrival but excludable.
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| Commitment device | A way of changing incentives so as to make otherwise empty threats or promises credible.
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| Commitment problem | A situation in which people cannot achieve their goals because of an inability to make credible threats or promises.
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| Comparative advantage | One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost.
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| Compensating wage differential | A difference in the wage rate—negative or positive—that reflects the attractiveness of a job's working conditions.
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| Complements | Two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift).
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| Constant (or parameter) | A quantity that is fixed in value.
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| Constant returns to scale | A production process is said to have constant returns to scale if, when all inputs are changed by a given proportion, output changes by the same proportion.
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| Consumer surplus | The economic surplus gained by the buyers of a product as measured by the cumulative difference between their respective reservation prices and the price they actually paid.
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| Consumption possibilities | The combination of goods and services that a country's citizens might feasibly consume.
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| Cost-plus regulation | A method of regulation under which the regulated firm is permitted to charge a price equal to its explicit costs of production plus a markup to cover the opportunity cost of resources provided by the firm's owners.
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| Costly-to-fake principle | To communicate information credibly to a potential rival, a signal must be costly or difficult to fake.
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| Credible promise | A promise to take an action that is in the promiser's interest to keep.
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| Credible threat | A threat to take an action that is in the threatener's interest to carry out.
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| Cross-price elasticity of demand | The percentage by which the quantity demanded of the first good changes in response to a 1 percent change in the price of the second.
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| Crowding out | Government borrowing that leads private firms to cancel planned investment projects because of higher interest rates.
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| Customer discrimination | The willingness of consumers to pay more for a product produced by members of a favored group, even if the quality of the product is unaffected.
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| Deadweight loss | The deadweight loss caused by a policy is the reduction in economic surplus that results from adoption of that policy.
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| Decision tree (or game tree) | A diagram that describes the possible moves in a game in sequence and lists the payoffs that correspond to each possible combination of moves.
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| Demand curve | A schedule or graph showing the quantity of a good that buyers wish to buy at each price.
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| Dependent variable | A variable in an equation whose value is determined by the value taken by another variable in the equation.
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| Disappearing political discourse | The theory that people who support a position may remain silent, because speaking out would create a risk of being misunderstood.
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| Dominant strategy | One that yields a higher payoff no matter what the other players in a game choose.
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| Dominated strategy | Any other strategy available to a player who has a dominant strategy.
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| Earned-income tax credit (EITC) | A policy under which low-income workers receive credits on their federal income tax.
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| Economic efficiency | SeeEfficiency.
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| Economic loss | An economic profit that is less than zero.
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| Economic profit | The difference between a firm's total revenue and the sum of its explicit and implicit costs; also called excess profit.
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| Economic rent | That part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor.
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| Economic surplus | The economic surplus from taking any action is the benefit of taking the action minus its cost.
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| Economics | The study of how people make choices under conditions of scarcity and of the results of those choices for society.
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| Efficiency (or economic efficiency) | Condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels.
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| Efficient (or Pareto-efficient) | A situation is efficient if no change is possible that will help some people without harming others.
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| Efficient markets hypothesis | The theory that the current price of stock in a corporation reflects all relevant information about its current and future earnings prospects.
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| Efficient point | Any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other.
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| Efficient quantity | The efficient quantity of any good is the quantity that maximizes the economic surplus that results from producing and consuming the good.
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| Elastic | The demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1.
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| Employer discrimination | An arbitrary preference by an employer for one group of workers over another.
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| Equation | A mathematical expression that describes the relationship between two or more variables.
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| Equilibrium | A balanced or unchanging situation in which all forces at work within a system are canceled by others.
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| Equilibrium price and equilibrium quantity | The price and quantity of a good at the intersection of the supply and demand curves for the good.
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| Excess demand (or shortage) | The difference between the quantity supplied and the quantity demanded when the price of a good lies below the equilibrium price; buyers are dissatisfied when there is excess demand.
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| Excess supply (or surplus) | The difference between the quantity supplied and the quantity demanded when the price of a good exceeds the equilibrium price; sellers are dissatisfied when there is excess supply.
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| Expected value of a gamble | The sum of the possible outcomes of the gamble multiplied by their respective probabilities.
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| Explicit costs | The actual payments a firm makes to its factors of production and other suppliers.
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| External benefit (or positive externality) | A benefit of an activity received by people other than those who pursue the activity.
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| External cost (or negative externality) | A cost of an activity that falls on people other than those who pursue the activity.
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| Externality | An external cost or benefit of an activity.
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| Factor of production | An input used in the production of a good or service.
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| Fair gamble | A gamble whose expected value is zero.
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| First-dollar insurance coverage | Insurance that pays all expenses generated by the insured activity.
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| Fixed cost | A cost that does not vary with the level of an activity; the sum of all payments made to the firm's fixed factors of production.
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| Fixed factor of production | An input whose quantity cannot be altered in the short run.
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| Free-rider problem | An incentive problem in which too little of a good or service is produced because nonpayers cannot be excluded from using it.
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| Game tree | SeeDecision tree.
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| Head tax | A tax that collects the same amount from every taxpayer.
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| Health maintenance organization (HMO) | A group of physicians that provides health services to individuals and families for a fixed annual fee.
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| Human capital | An amalgam of factors such as education, training, experience, intelligence, energy, work habits, trustworthiness, initiative, and others that affect the value of a worker's marginal product.
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| Human capital theory | A theory of pay determination that says a worker's wage will be proportional to his or her stock of human capital.
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| Hurdle method of price discrimination | The practice by which a seller offers a discount to all buyers who overcome some obstacle.
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| Imperfectly competitive firm | A firm that has at least some control over the market price of its product.
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| Implicit costs | All the firm's opportunity costs of the resources supplied by the firm's owners.
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| Income effect | The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power.
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| Income elasticity of demand | The percentage by which a good's quantity demanded changes in response to a 1 percent change in income.
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| Increasing returns to scale | A production process is said to have increasing returns to scale if, when all inputs are changed by a given proportion, output changes by more than that proportion; also called economies of scale.
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| Independent variable | A variable in an equation whose value determines the value taken by another variable in the equation.
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| Inefficient point | Any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other.
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| Inelastic | The demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1.
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| Inferior good | A good whose demand curve shifts leftward when the incomes of buyers increase.
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| In-kind transfer | A payment made not in the form of cash but in the form of a good or service.
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| Invisible hand theory | Adam Smith's theory stating that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources.
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| Labor union | A group of workers who bargain collectively with employers for better wages and working conditions.
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| Law of diminishing marginal utility | The tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point.
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| Law of diminishing returns | A property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it; the law says that when some factors of production are fixed, increased production of the good eventually requires ever larger increases in the variable factor.
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| Lemons model | George Akerlof's explanation of how asymmetric information tends to reduce the average quality of goods offered for sale.
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| Logrolling | The practice whereby legislators support one another's legislative proposals.
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| Long run | A period of time of sufficient length that all the firm's factors of production are variable.
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| Macroeconomics | The study of the performance of national economies and the policies that governments use to try to improve that performance.
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| Marginal benefit | The marginal benefit of an activity is the increase in total benefit that results from carrying out one additional unit of the activity.
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| Marginal cost | The marginal cost of an activity is the increase in total cost that results from carrying out one additional unit of the activity; as output changes from one level to another, the change in total cost divided by the corresponding change in output.
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| Marginal labor cost | The amount by which a monopsonist's total wage bill goes up if it hires an extra worker.
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| Marginal product of labor (MP) | The additional output a firm gets by employing one additional unit of labor.
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| Marginal revenue | The change in a firm's total revenue that results from a one-unit change in output.
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| Marginal utility | The additional utility gained from consuming an additional unit of a good.
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| Market | The market for any good consists of all buyers or sellers of that good.
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| Market equilibrium | Occurs when all buyers and sellers are satisfied with their respective quantities at the market price.
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| Market power | A firm's ability to raise the price of a good without losing all its sales.
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| Means-tested | A benefit program is means-tested if its benefit level declines as the recipient earns additional income.
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| Microeconomics | The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets.
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| Monopolistic competition | Industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another.
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| Monopsony | A market with only a single buyer.
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| Moral hazard | The tendency of people to expend less effort protecting those goods that are insured against theft or damage.
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| Nash equilibrium | Any combination of strategies in which each player's strategy is his or her best choice, given the other players' strategies.
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| Natural monopoly | A monopoly that results from economies of scale (increasing returns to scale).
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| Negative externality | SeeExternal cost.
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| Negative income tax (NIT) | A system under which the government would grant every citizen a cash payment each year, financed by an additional tax on earned income.
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| Nominal price | Absolute price of a good in dollar terms.
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| Nonexcludable good | A good that is difficult, or costly, to exclude nonpayers from consuming.
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| Nonrival good | A good whose consumption by one person does not diminish its availability for others.
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| Normal good | A good whose demand curve shifts rightward when the incomes of buyers increase.
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| Normal profit | The opportunity cost of the resources supplied by the firm's owners; Normal profit = Accounting profit - Economic profit.
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| Normative economic principle | One that says how people should behave.
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| Oligopoly | An industry structure in which a small number of large firms produce products that are either close or perfect substitutes.
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| Open economy | An economy that trades with other countries.
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| Opportunity cost | The opportunity cost of an activity is the value of the next-best alternative that must be forgone to undertake the activity.
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| Optimal combination of goods | The affordable combination that yields the highest total utility.
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| Outsourcing | A term increasingly used to connote having services performed by low-wage workers overseas.
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| Parameter | SeeConstant.
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| Pareto-efficient | SeeEfficient.
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| Payoff matrix | A table that describes the payoffs in a game for each possible combination of strategies.
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| Perfect hurdle | One that completely segregates buyers whose reservation prices lie above some threshold from others whose reservation prices lie below it, imposing no cost on those who jump the hurdle.
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| Perfectly competitive market | A market in which no individual supplier has significant influence on the market price of the product.
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| Perfectly discriminating monopolist | A firm that charges each buyer exactly his or her reservation price.
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| Perfectly elastic demand | The demand for a good is perfectly elastic with respect to price if its price elasticity of demand is infinite.
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| Perfectly elastic supply curve | A supply curve whose elasticity with respect to price is infinite.
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| Perfectly inelastic demand | The demand for a good is perfectly inelastic with respect to price if its price elasticity of demand is zero.
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| Perfectly inelastic supply curve | A supply curve whose elasticity with respect to price is zero.
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| Personal Responsibility Act | The 1996 federal law that transferred responsibility for welfare programs from the federal level to the state level and placed a five-year lifetime limit on payment of AFDC benefits to any given recipient.
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| Pork barrel spending | A public expenditure that is larger than the total benefit it creates but that is favored by a legislator because his or her constituents benefit from the expenditure by more than their share of the resulting extra taxes.
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| Positional arms control agreement | An agreement in which contestants attempt to limit mutually offsetting investments in performance enhancement.
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| Positional arms race | A series of mutually offsetting investments in performance enhancement that is stimulated by a positional externality.
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| Positional externality | Occurs when an increase in one person's performance reduces the expected reward of another's in situations in which reward depends on relative performance.
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| Positive economic principle | One that predicts how people will behave.
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| Positive externality | SeeExternal benefit.
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| Poverty threshold | The level of income below which the federal government classifies a family as poor.
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| Present value of a perpetual annual payment | For an annual interest rate r, the present value (PV) of a perpetual annual payment (M) is the amount that would have to be deposited today at that interest rate to generate annual interest earnings of M: PV = M/r.
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| Price ceiling | A maximum allowable price, specified by law.
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| Price discrimination | The practice of charging different buyers different prices for essentially the same good or service.
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| Price elasticity of demand | The percentage change in the quantity demanded of a good or service that results from a 1 percent change in its price.
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| Price elasticity of supply | The percentage change in the quantity supplied that will occur in response to a 1 percent change in the price of a good or service.
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| Price floor | A law or regulation that guarantees that suppliers will receive at least a specified amount for their product.
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| Price setter | A firm with at least some latitude to set its own price.
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| Price taker | A firm that has no influence over the price at which it sells its product.
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| Prisoner's dilemma | A game in which each player has a dominant strategy, and when each plays it, the resulting payoffs are smaller than if each had played a dominated strategy.
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| Producer surplus | The economic surplus gained by the sellers of a product as measured by the cumulative difference between the price received and their respective reservation prices.
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| Production possibilities curve | A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.
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| Profit | The total revenue a firm receives from the sale of its product minus all costs—explicit and implicit—incurred in producing it.
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| Profit-maximizing firm | A firm whose primary goal is to maximize the difference between its total revenues and total costs.
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| Profitable firm | A firm whose total revenue exceeds its total cost.
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| Progressive tax | One in which the proportion of income paid in taxes rises as income rises.
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| Proportional income tax | One under which all taxpayers pay the same proportion of their incomes in taxes.
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| Protectionism | The view that free trade is injurious and should be restricted.
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| Public good | A good or service that, to at least some degree, is both nonrival and nonexcludable.
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| Pure commons good | One for which nonpayers cannot easily be excluded and for which each unit consumed by one person means one less unit available for others.
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| Pure monopoly | The only supplier of a unique product with no close substitutes.
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| Pure private good | One for which nonpayers can easily be excluded and for which each unit consumed by one person means one less unit available for others.
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| Pure public good | A good or service that, to a high degree, is both nonrival and nonexcludable.
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| Quota | A legal limit on the quantity of a good that may be imported.
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| Rational person | Someone with well-defined goals who tries to fulfill those goals as best he or she can.
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| Rationing function of price | Changes in prices that distribute scarce goods to those consumers who value them most highly.
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| Real price | Dollar price of a good relative to the average dollar price of all other goods and services.
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| Regressive tax | A tax under which the proportion of income paid in taxes declines as income rises.
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| Rent-seeking | The socially unproductive efforts of people or firms to win a prize.
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| Repeated prisoner's dilemma | A standard prisoner's dilemma that confronts the same players repeatedly.
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| Reservation price | The highest price someone is willing to pay to obtain any good or service, or the lowest payment someone would accept for giving up a good or performing a service.
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| Rise | SeeSlope.
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| Risk-averse person | Someone who would refuse any fair gamble.
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| Risk-neutral person | Someone who would accept any gamble that is fair or better.
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| Run | SeeSlope.
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| Seller's reservation price | The smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost.
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| Seller's surplus | The difference between the price received by the seller and his or her reservation price.
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| Short run | A period of time sufficiently short that at least some of the firm's factors of production are fixed.
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| Shortage | SeeExcess demand.
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| Slope | In a straight line, the ratio of the vertical distance the straight line travels between any two points (rise) to the corresponding horizontal distance (run).
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| Socially optimal quantity | The quantity of a good that results in the maximum possible economic surplus from producing and consuming the good.
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| Statistical discrimination | The practice of making judgments about the quality of people, goods, or services based on the characteristics of the groups to which they belong.
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| Substitutes | Two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift).
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| Substitution effect | The change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes.
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| Sunk cost | A cost that is beyond recovery at the moment a decision must be made.
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| Supply curve | A graph or schedule showing the quantity of a good that sellers wish to sell at each price.
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| Surplus | SeeExcess supply.
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| Tariff | A tax imposed on an imported good.
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| Time value of money | The fact that a given dollar amount today is equivalent to a larger dollar amount in the future, because the money can be invested in an interest-bearing account in the meantime.
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| Tit-for-tat | A strategy for the repeated prisoner's dilemma in which players cooperate on the first move, then mimic their partner's last move on each successive move.
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| Total cost | The sum of all payments made to the firm's fixed and variable factors of production.
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| Total economic surplus | The sum of all the individual economic surpluses gained by buyers and sellers who participate in the market.
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| Total expenditure = Total revenue | The dollar amount consumers spend on a product is equal to the dollar amount sellers receive.
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| Total revenue | SeeTotal expenditure.
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| Total surplus | The difference between the buyer's reservation price and the seller's reservation price.
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| Tragedy of the commons | The tendency for a resource that has no price to be used until its marginal benefit falls to zero.
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| Ultimatum bargaining game | One in which the first player has the power to confront the second player with a take-it- or-leave-it offer.
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| Unattainable point | Any combination of goods that cannot be produced using currently available resources.
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| Unit elastic | The demand for a good is unit elastic with respect to price if its price elasticity of demand is equal to 1.
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| Utilitarianism | A moral theory in which the right course of action is the one that results in the highest total utility.
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| Value of marginal product of labor (VMP) | The dollar value of the additional output a firm gets by employing one additional unit of labor.
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| Variable | A quantity that is free to take a range of different values.
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| Variable cost | A cost that varies with the level of an activity; the sum of all payment made to the firm's variable factors of production.
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| Variable factor of production | An input whose quantity can be altered in the short run.
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| Vertical intercept | The value taken by the dependent variable when the independent variable equals zero.
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| Winner-take-all labor market | One in which small differences in human capital translate into large differences in pay.
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| Workers' compensation | A government insurance system that provides benefits to workers who are injured on the job.
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| World price | The price at which a good or service is traded on international markets.
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