| Ability-to-pay principle of taxation | The concept that taxpayers with higher incomes should pay more taxes than those with lower incomes.
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| Aggregate demand | The total quantities of goods
and services demanded per unit of time by the
economy at various price levels, other things being
equal.
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| Aggregate supply | The total quantities of goods and
services supplied per unit of time in the economy at
various price levels, other things being equal.
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| Average cost | The ratio of total costs to units of
output of a good or service. Also known as per-unit
cost.
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| Average product of labor | The total output of labor
divided by the total number of labor units used in
production. The average product of labor is a measure
of labor productivity.
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| Backward tax shifting | Shifting the burden of a tax
to the owners of resources, usually in the form of
lower prices paid for their resources.
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| Balance of payments | The relationship between a
country's total monetary obligations per unit of time
to other countries and other countries' obligations to
the home country.
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| Balance of trade | The relationship of the value of a
country's imports to the value of its exports of goods
and services per unit of time. It is in deficit when more
is owed for imports than is earned by exports; it is in
surplus when less is owed for imports than is earned
by exports.
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| Balanced budget | A governmental budget is
balanced when its total receipts, mainly taxes, are
equal to its total expenditures.
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| Barriers to entry | The various impediments to the
entry of new firms into a market, usually classified as
(1) private barriers and (2) government barriers.
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| Benefits-received principle of taxation | The concept
that taxpayers should pay taxes in accordance with
the benefits they receive from the government.
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| Bequest effect | The increase in lifetime saving
experienced by people who wish to leave assets to
their children as compensation for losses incurred due
to the burden of Social Security taxes.
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| Budget deficit | The situation that exists when a
government's total receipts, mainly taxes, are less
than its total expenditures.
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| Budget surplus | The situation that exists when a
government's total receipts, mainly taxes, are greater
than its total expenditures.
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| Business cycles | Erratic short-run fluctuations in
economic activity around the long-run growth trend
of the economy. Every business cycle has four distinct
phases: expansion, peak, contraction, and trough.
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| Capital account transactions | International trade
transactions that are long-term in character, usually
investment types of transactions.
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| Capital resources | All nonhuman ingredients of
production. Capital resources can be further divided
into natural and man-made categories.
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| Capture theory of regulation | The belief that
regulatory agencies often come to serve the interests
of the firms they were established to regulate rather
than the interests of the general public.
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| Cartel | A group of firms which formally agree to
coordinate their production and pricing decisions in a
manner that maximizes joint profits.
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| Charter schools | Public schools created, controlled,
and managed by parents or other organizations
independent of the existing local school district.
Charter schools are essentially privately operated, but
publicly funded local schools.
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| Circular flow of production and income | The
concept that the expenditures of one group are the
incomes for others, who in turn spend and provide
income for still others.
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| Co-insurance | The percentage of the cost above the
deductible that an insured patient is required to pay.
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| Collectively consumed goods and services | Goods
and services that are consumed by a group or groups
as a whole and that yield benefits to the group or
groups. No individual can single out and value his or
her specific benefits.
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| Comparative advantage | The ability of a country to
produce a good or service with a smaller sacrifice of
alternative goods and services than can the rest of the
trading world.
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| Comparative disadvantage | The inability of a
country to produce a good or service except at greater
sacrifice of alternative goods and services than is
necessary for the rest of the trading world.
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| Concentration ratio | A measure of potential
monopoly power, defined as the percentage of an
industry's sales (or assets or output) controlled by the
four (or eight) largest firms in the industry.
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| Consumption possibilities curve | A curve showing
the maximum quantities of two goods or services that
may be consumed in an economy, given the
economy's resources and technology. In the absence
of international trade, the consumption possibilities
curve is identical to the production possibilities curve.
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| Corporations | Firms organized as legal entities
separate from their owners, the stockholders, who, by
law, have limited liability.
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| Cost-of-living allowances (COLAs) | Automatic
annual increases to insurance benefits or wages equal
to the amount of inflation experienced within the
economy during the previous year (usually as
measured by the Consumer Price Index (CPI)).
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| Cost-benefit analysis | A technique for determining
the optimal level of an economic activity. In general,
an activity should be expanded as long as the
expansion leads to greater benefits than costs.
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| Cost-push inflation | Increases in the average price
level initiated by increases in costs of production.
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| Customs union | A free trade alliance of nations that
share common external tariffs.
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| Cyclical unemployment | Unemployment caused by
economic fluctuations. It results from inadequate
levels of aggregate demand.
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| Deadweight welfare loss due to monopoly | The
reduction in social satisfaction, or welfare, due to the
tendency of monopolists to restrict output below the
socially optimal level.
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| Deductible | The portion of a health services bill that
is the responsibility of the patient, not the health
insurer.
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| Demand | The set of quantities of a good or service
per unit of time that buyers would be willing to
purchase at various alternative prices of the item,
other things being equal.
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| Demand, changes in | Shifts in the entire demand
schedule or curve for a good or service, resulting from
changes in one or more of the "other things being
equal." Should not be confused with a movement
along a given demand schedule or curve (change in
quantity demanded).
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| Demand, derived | The demand for labor is said to
be dependent on, or derived from, the demand for the
product being produced. In this sense, the demand for
labor is a derived demand.
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| Demand, law of | The general rule that at lower
prices, buyers will purchase larger amounts per unit
of time than they will at higher prices, other things
being equal; that is, demand curves slope downward
to the right.
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| Demand-pull inflation | Increases in the average
price level initiated and continued from increases in
aggregate demand.
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| Developed countries | Countries with relatively
higher labor quality, relatively larger accumulations of
capital, and relatively higher levels of technology, all
leading to relatively high living standards.
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| Diminishing returns, law of | The principle that
increments of a variable resource used with a fixed
resource will lead to smaller and smaller increments
in product output.
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| Discount rate | The rate of interest the Federal
Reserve Banks charge commercial banks when
commercial banks borrow from the Fed.
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| Discouraged workers | Those who have stopped
actively searching for work are not considered to be
part of the labor force. As such, they are classified as
discouraged workers rather than unemployed.
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| Discrimination | Treating equals unequally or
unequals equally.
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| Diseconomies of scale | A situation that occurs when
the average cost of producing a good or service rises
as output is increased.
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| Dumping | An "unfair" international trade practice
that occurs when a producer is selling abroad at a
price below cost or below its domestic price.
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| Economic growth | A long-run process of economic
expansion that results from a compounding of
economic events over time.
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| Economies of scale | A situation that occurs when the
average cost of producing a good or service falls as
output is increased.
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| Efficiency | The extraction of the greatest possible
value of product output from given inputs of
resources.
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| Efficiency effects of inflation | The effects of
inflation on the pattern of resource allocation.
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| Elasticity of demand, price | The responsiveness of
the quantity demanded of a product to changes in its
price. Measured by the percentage change in quantity
divided by the percentage change in price.
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| Elasticity of supply, price | The responsiveness of the
quantity offered of a product to changes in its price.
Measured by the percentage change in quantity
divided by the percentage change in price.
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| Embargo | Government provision formally
preventing one nation from trading goods and
services with another nation or group of nations.
The intent of an embargo is the elimination of
international trade between the countries in question.
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| Equal tax treatment doctrine | The concept that
taxpayers in equal economic circumstances should be
treated equally; that is, people in identical economic
positions should pay the same amounts of taxes.
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| Equation of exchange | The truism that the money
supply (M) times the velocity of circulation (V1)
equals quantities of goods and services sold in final
form (Q) times the average price level (P).
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| Equilibrium quantity purchased | The quantity of
the product that is actually exchanged at the
equilibrium price.
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| Equimarginal principle | The allocation of spending
among different inputs in such a way that the
marginal benefits of a dollar spent on any one input is
the same as for that spent on any other input.
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| Equity effects of inflation | The effects of inflation on
the distribution of income.
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| Excess tax burden | The distortionary effects of a tax
on relative prices and resource allocation.
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| Exchange rates | The costs of units of other countries'
currencies in terms of units of the home country's
currency.
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| Explicit costs | Costs of production incurred by the
purchase or hire of resources by the producing unit.
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| Exports | Goods and services that economic units in
one country sell to other countries.
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| Externalities | Benefits or costs incurred in the
production or consumption of goods and services that
do not accrue to the producing or consuming unit, but
rather accrue to the remainder of the society.
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| Fee-for-service system | A health care program in
which buyers pay the cost of what they receive.
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| Forward tax shifting | Taxes shifted to consumers in
the form of higher product prices.
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| Free-riders | Those who receive positive social
spillovers in consumption benefits without paying
the costs of producing the goods or services that
yield them.
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| Free trade area | An alliance of nations without trade
barriers between its members.
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| Frictional unemployment | Brief periods of
unemployment experienced by persons moving
between jobs or into the labor market; it is not related
to basic aggregate demand or aggregate supply
problems.
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| Full-employment unemployment rate | The rate that
exists when there is no cyclical unemployment. The full-employment rate of unemployment is consistent
with price stability.
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| Fully funded insurance scheme | An insurance
program designed to provide benefits financed
from the interest income earned on accumulated
payments.
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| Good, inferior | When an increase in income leads to
a fall in demand, other things being equal, the good in
question is said to be inferior.
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| Good, normal | When an increase in income leads to
an increase in demand, other things being equal, the
good in question is said to be normal.
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| Goods, complementary | Two goods or services are
complementary if an increase in the price of one leads
to a fall in the demand for the other, other things
being equal.
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| Goods, substitute | Two goods or services are
substitutes if an increase in the price of one leads to
an increase in the demand for the other, other things
being equal.
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| Government purchases | Government expenditures
for currently produced goods and services.
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| Gross domestic product, current | The market value
of all final goods and services produced within an
economy during one year. GDP ignores the issue of
whether the resources used for the production are
owned domestically or are foreign-owned.
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| Gross domestic product, per capita | Gross domestic
product, either current or real, divided by the
economy's population.
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| Gross domestic product, potential | The level of real
GDP the economy could produce at full employment.
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| Gross domestic product, real | Gross domestic
product corrected for changes in the price level
relative to a base year price level.
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| Horizontal equity | The notion that people in the
same economic circumstances should receive the
same economic treatment.
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| Human capital | That part of the productive power of
human or labor resources resulting from investment
in education and training.
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| Implicit costs | Costs of production incurred by the
use of self-owned, self-employed resources.
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| Imports | Goods and services purchased and brought
into a country from abroad.
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| Income effect | A measure of the change in the hours
of work that occurs when there is a change in income,
other things being equal.
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| Incomes policies | Governmental restraints placed on
wages and prices intended to reduce cost-push
inflation thought to result from the monopolies of
labor unions and business firms.
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| Increasing opportunity costs | As more of a
particular good or service is produced, the cost in
terms of other goods or services that are given up
grows.
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| Individually consumed goods and services | Goods
and services that benefit directly, and only, those
persons who consume them.
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| Inflation | A rising average price level of goods and
services.
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| Infrastructure | All of an economy's basic facilities,
such as its roads, power plants, telecommunication
systems, schools, and hospitals, necessary for
maintaining and promoting normal economic
activities.
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| Injections | New spending in the circular flow,
including new investment, new government
expenditures, and net exports.
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| Investment | The purchase by economic units of such
real assets as land, buildings, equipment, machinery,
and raw and semifinished materials.
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| Investment multiplier | The reciprocal of 1 minus the
marginal propensity to consume.
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| Labor force | All noninstitutionalized individuals
16 years of age and older who are employed for pay,
actively seeking employment, or awaiting recall from
a temporary layoff.
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| Labor resources | Human resources, all efforts of
mind and muscle, that are ingredients in production
processes. They range from unskilled common labor
to the highest levels of professional skills.
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| Labor union | A formal organization of workers
which bargains on behalf of its members over the
terms and conditions of employment.
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| Leakages | Withdrawals from spending in the
circular flow, including taxes, savings, and
imports.
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| Legal reserve ratio | Ratio of cash reserves to demand
deposits that banks are required to maintain.
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| Lesser developed countries | Countries with
relatively low living standards, usually the result of
relatively low labor quality, relatively scarce capital,
and relatively low levels of technology.
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| Living standards | The level of economic well-being
of a population, usually measured in terms of its per
capita real income.
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| Lockout | A work stoppage initiated by management.
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| Lorenz curve | This curve shows the cumulative
percentage of total family income that is going to the
lowest percentiles of families. It is a way of measuring
the degree of income inequality in a country.
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| Losses | The difference between a firm's total costs
and its total revenues when total revenues are less
than total costs, including as a part of total costs
returns to investors in the firm sufficient to yield an
average return on their investments.
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| M1 | All currency and coins in circulation, nonbank
traveler's checks, demand deposits, and other
checkable accounts, such as NOW accounts.
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| M2 | M1 plus savings and time deposits of small
denomination and money-market mutual funds.
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| Managed care system | Health care system
whereby payments to health care providers are
based on a prearranged schedule of fixed fees that has
been negotiated between the insurer and the
providers.
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| Marginal benefits | The increase or decrease in the
total benefits yielded by an activity from a one-unit
change in the amount of the activity carried on.
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| Marginal cost of labor (MCL) | Change that occurs in
a firm's total labor costs due to hiring an additional
worker, per unit of time.
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| Marginal costs | The change in total costs resulting
from a one-unit change in the output of a good or
service.
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| Marginal private benefit (MPB) | The benefit that
accrues to the direct consumers of a good or service
resulting from a one-unit increase in consumption.
The MPB is reflected in the demand curve for the
good or service.
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| Marginal private cost (MPC) | The increase in total
cost that producers incur when output is increased by
one unit. The MPC is reflected in the supply curve for
the good or service.
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| Marginal product of labor | The change in
production that occurs in response to hiring one
additional worker.
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| Marginal propensity to consume (MPC) | The
change in consumption divided by the change in
income.
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| Marginal propensity to save (MPS) | The change in
saving divided by the change in income.
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| Marginal revenue (MR) | The change in the total
revenue of a seller resulting from a one-unit change in
the quantity sold of a good or service.
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| Marginal revenue product of labor | The change in
revenue that occurs in response to hiring one
additional worker. Serves as the firm's demand curve
for labor.
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| Marginal social benefit (MSB) | The true benefit to
society of a one-unit increase in the production of a
good or service.
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| Marginal social cost (MSC) | The true, or
opportunity, cost borne by society when the
production of a good or service is increased by one
unit.
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| Market | The area within which buyers and sellers of
a good or service can interact and engage in exchange.
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| Market, competitive | A market in which there are
many sellers and many buyers of a good or service.
No one buyer or seller is large enough to be able to
affect the price of the product.
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| Market, imperfect competition | A market that falls
between the limits of a competitive market on the one hand and a monopolistic market on the other. It
contains elements of both.
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| Market, monopolistic | A market in which there is a
single seller of a good, service, or resource.
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| Market, product | Buyers and sellers engage in the
exchange of final goods and services.
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| Market, purely competitive | A market with a
large number of mobile buyers and sellers of
a standardized product. Further, the price of the
product is free to move up and down, and there are
no obstacles preventing firms from entering or
leaving the market.
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| Market, resource | Buyers and sellers engage in the
exchange of the factors of production.
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| Market failure | Occurs when markets, operating on
their own, do not lead to a socially optimal allocation
of resources.
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| Measure of value function of money | The use of
money to measure the value of goods and services.
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| Medium of exchange | The use of money for the
payment of goods and services and for the payment
of debt.
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| Minimum wages | Wage rate floors set for specific
occupations or groups of workers by governmental
units or by labor unions.
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| Mixed systems | Economies that combine elements of
both the pure market and pure command economies.
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| Money creation | The expansion of demand deposits
when banks and other financial institutions, as a
group, expand loans.
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| Money multiplier | A numerical coefficient equal to
the reciprocal of the legal reserve ratio.
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| Money supply (M) | Currency held by the public
plus checkable accounts.
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| Monopoly power | The degree to which sellers can
control the supply and hence the price of what they
sell.
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| Monopsonistic profit | The difference between the
workers' contribution to a monopsonistic firm's
receipts and their wages.
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| Monopsony | A market with only one buyer or
employer of a factor of production.
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| Monopsony power | The degree to which buyers can
control the demand and hence the price of what they
purchase.
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| Natural monopoly | When the average cost of
producing a product is minimized by having only one
firm produce the product, the industry is said to be a
natural monopoly.
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| Near-money | Assets that are easily convertible to
cash; they are similar to money because they are very
liquid.
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| Negative income tax | A government subsidy or cash
payment to households that qualify because of having
income below a minimum or guaranteed level.
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| Network economies | Network economies exist
when the value of a product to a consumer is
enhanced when others also choose to consume the
same product.
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| Nonexclusion | For public goods, means it may not
be feasible or desirable to exclude people from
consuming the good.
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| Nonprice competition | Competition among firms in
matters other than product price. It usually takes the
form of (1) advertising and (2) changes in design and
quality of the product.
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| Nonrival in consumption | For public goods, means
a given amount of the good can be consumed by a
person without another person having to decrease his
or her consumption of the good.
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| Open-market operations | Federal Reserve purchases
and sales of government securities for the purpose of
increasing or decreasing commercial bank reserves.
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| Opportunity cost principle | The true cost of
producing an additional unit of a good or service is
the value of other goods or services that must be
given up to obtain it.
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| Output effects of inflation | The effects of inflation
on the level of production.
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| Pay-as-you-go insurance scheme | An insurance
program designed to provide benefits financed from
current payments.
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| Pollution rights market | When firms are allowed to
buy and sell government-issued licenses granting the
holder the right to create a certain amount of
pollution, the resulting market is called a pollution
rights market.
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| Positive externality in consumption | An increase
in the satisfaction of one person caused by the
consumption of a good or service by another person.
Education, especially K–12, is said to create such
externalities.
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| Price, equilibrium | The price of a product at which
buyers are willing to purchase exactly the quantities
per unit of time that sellers want to sell.
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| Price ceiling | A maximum price set for a product,
usually by a governmental unit. Sellers of the product
are not permitted to charge higher prices.
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| Price discrimination | The sale of the same product
to different persons or groups of persons at different
prices.
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| Price elasticity of demand | The responsiveness of
quantity demanded of a product to changes in price.
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| Price floor | A minimum price set for a product,
usually by a governmental unit or a group of sellers.
Sellers are not permitted to resell at lower prices.
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| Price index numbers | A set of numbers showing
price level changes relative to some base year.
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| Private insurance | A contract whereby individuals
agree to make payments, often called premiums, to a
company in return for a guarantee of financial
benefits in the event that some undesired
circumstance occurs.
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| Production | The process of using technology to
combine and transform resources to make goods and
services.
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| Production possibilities curve | A graphical
representation of the maximum quantities of two
goods and/or services that an economy can produce
when its resources are used in the most efficient way
possible.
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| Productivity | The average amount of output that can
be produced with a given set of inputs. The
productivity of any resource can be calculated as the
ratio of the units of output to the units of input.
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| Profit-maximizing output | The output per unit of
time at which a firm's total revenue exceeds its total
cost by the greatest possible amount. It is the output at which the firm's marginal cost equals its marginal
revenue.
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| Profits | The difference between a firm's total
revenue and its total cost when total revenue exceeds
total cost, including as a part of total cost returns to
investors in the firm sufficient to yield an average rate
of return on their investments.
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| Progressive tax rates | A tax rate schedule that results
in an increase in the ratio of tax collections to income
as income increases.
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| Proportional tax rates | A tax rate schedule that
results in a constant ratio of tax collections to income
as income changes.
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| Prospective payment system | A health care program
whereby the prices of services are fixed in advance by
the insurer at a given amount for a given treatment.
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| Psychic costs | Costs in the form of negative personal
satisfaction, rather than monetary loss, that an
individual incurs from pursuing an endeavor.
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| Psychic income | Benefits in the form of personal
satisfaction, rather than monetary gain, that an
individual receives from pursuing an endeavor.
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| Psychological law of consumption | A law stating
that when income changes, consumption changes but
by less than the change in income.
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| Public goods | Goods and services of a collectively
consumed nature, usually provided by governmental
units.
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| Public investments | Government spending for
capital goods such as roads, bridges, dams, schools,
and hospitals.
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| Pure command economy | The pure command
economy is characterized by state ownership and/or
control of resources and centralized resource-use
decision making.
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| Pure market economy | The pure market economy is
based on private ownership and control of resources,
known as private property rights, and on
coordination of resource-use decisions through
markets.
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| Quantity theory of money | The theory that changes
in the money supply (M) will tend to cause changes in the same direction of total output (Q) and price
level (P).
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| Quota | A regulation that limits by law the quantity
of specific foreign goods or services that may be
imported during a period of time.
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| Relative tax treatment doctrine | The theory that
taxpayers in different economic circumstances should
pay different amounts of taxes.
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| Retirement effect | The increase in a worker's
lifetime saving because Social Security tends to
extend the length of retirement.
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| Reserve ratio, legal (or required) | The ratio of
reserves to deposits that banks are required by law to
maintain.
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| Resources | The ingredients that go into the
production of goods and services. They consist of
labor resources and capital resources.
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| Semicollectively consumed goods and services | Goods and services that yield direct benefits to the
consumers of them but that also yield social spillover
benefits to others.
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| Shortage | A situation in which buyers of a product
want larger quantities per unit of time than sellers
will place on the market. It may be caused by the
existence of an effective price ceiling.
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| Social insurance | Government programs, financed
through tax revenues, that guarantee citizens financial
benefits against events which are beyond an
individual's control, such as old age, disability, and
poor health.
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| Social overhead capital | Capital used by the
economy as a whole rather than being limited to use
by specific firms. Examples include transportation
and communications networks as well as energy and
power systems.
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| Stock options | Guarantees issued by a corporation
which allow the holder to purchase a set number of
shares at a fixed price, often called the strike price.
Stock options are often used as a form of managerial
compensation.
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| Store of value function of money | The use of money as an asset to hold.
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| Strike | A work stoppage initiated by labor.
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| Structural unemployment | Unemployment caused
by a mismatch between the skills (or locations) of job
seekers and the requirements (or locations) of
available jobs.
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| Substitution effects | The effects of a price change of
a good or service on the quantity of it purchased
because of the substitution of relatively lower priced
goods for it when its price increases and the
substitution of the item for now relatively higher
priced other goods when its price decreases.
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| Supply | The set of quantities of a good or service per
unit of time that sellers would be willing to place on
the market at various alternative prices of the item,
other things being equal.
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| Supply, changes in | Shifts in the entire supply
schedule or curve for a good or service, resulting from
changes in one or more of the "other things being
equal." They should not be confused with movements
along a given supply schedule or curve (changes in
the quantity supplied).
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| Supply, law of | The higher the price of the product,
the larger will be the quantity supplied, and the lower
the price, the smaller will be the quantity supplied,
other things being equal.
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| Surplus | A situation in which sellers of a product
place larger quantities per unit of time on the market
than buyers will take. It may be caused by the
existence of a price floor.
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| Tariff | A tax placed on internationally traded goods,
usually imports.
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| Tastes and preferences | Buyers' psychological
desires for goods and services—one of the
determinants of demand for any one product. A
change in consumers' tastes and preferences for a
product will shift the demand curve for it.
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| Tax efficiency | The extent to which a tax has a
neutral impact on resource allocation and is
economical to collect and enforce, thus minimizing
the total tax burden.
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| Tax incidence | The final resting place or burden of
any given tax—who actually pays it.
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| Technology | The know-how and the means and
methods available for combining resources to
produce goods and services.
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| Terms of trade | The cost, in terms of the home
country's goods and services, of importing a unit of
goods or services from other countries.
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| Trade deficit | Occurs when the value of a nation's
imports exceeds the value of the nation's exports.
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| Trade surplus | Occurs when the value of a nation's
exports exceeds the value of the nation's imports.
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| Transfer payments | Payments made to persons or
economic units that are not for services currently
performed. They do not result in new output but
simply transfer purchasing power from some persons
or units to others.
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| Transformation curve | See Production possibilities
curve.
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| Transitional economy | A nation which is in the
process of replacing an economic system of command
and control with one based on market principles.
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| Tuition subsidy | A payment made to families or
schools by the government to encourage additional
investments in education. When externalities are
present, a tuition subsidy equal in value to the gap
between marginal private benefits and marginal social
benefits should result in the optimal level of
enrollment.
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| Turnover tax | In a command economy, excess
demand for goods and services is siphoned off
through the addition of, or increase in, a sales tax.
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| Vertical equity | The notion that persons in different
economic circumstances should receive different
rewards from the economic system.
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| Voluntary restraint agreement | An international
treaty whereby one nation volunteers to restrict the
exports of a product that it sells to another nation.
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| Voucher programs | Programs designed to provide
students in poor-performing public schools the
opportunity to attend other schools and carry with
them the state funding that the poor-performing
school would have received for those students.
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| Wage discrimination | Payment of unequal wage
rates to persons with equal values of marginal
product.
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| Wants | The unlimited or insatiable desires of
humans that generate economic activity.
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| Wealth substitution effect | The reduction in lifetime
saving by workers who substitute the wealth
accumulated through participation in Social Security
for other forms of private wealth.
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