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ability-to-pay principle  The idea that those who have greater income (or wealth) should pay a greater proportion of it as taxes than those who have less income (or wealth).
acreage allotment program  A pre-1996 government program that determined the total number of acres to be used in producing (reduced amounts of) various food and fiber products and allocated these acres among individual farmers. These farmers had to limit their plantings to the allotted number of acres to obtain price supports for their crops.
actual investment  The amount that firms invest; equal to planned investment plus unplanned investment.
actual reserves  The funds that a bank has on deposit at the Federal Reserve Bank of its district (plus its vault cash).
adjustable pegs  The device used in the Bretton Woods system to alter exchange rates in an orderly way to eliminate persistent payments deficits and surpluses. Each nation defined its monetary unit in terms of (pegged it to) gold or the dollar, kept the rate of exchange for its money stable in the short run, and adjusted its rate in the long run when faced with international payments disequilibrium.
adverse selection problem  A problem arising when information known to one party to a contract or agreement is not known to the other party, causing the latter to incur major costs. Example: Individuals who have the poorest health are most likely to buy health insurance.
advertising  A seller's activities in communicating its message about its product to potential buyers.
affirmative action  Policies and programs that establish targets of increased employment and promotion for women and minorities.
AFL-CIO  An acronym for the American Federation of Labor– Congress of Industrial Organizations; the largest federation of labor unions in the United States.
agency shop  A place of employment where the employer may hire either labor union members or nonmembers but where those who do not join the union must either pay union dues or donate an equivalent amount of money to a charity.
aggregate  A collection of specific economic units treated as if they were one. For example, all prices of individual goods and services are combined into a price level, or all units of output are aggregated into gross domestic product.
aggregate demand  A schedule or curve that shows the total quantity of goods and services demanded (purchased) at different price levels.
aggregate demand–aggregate supply (AD-AS) model  The macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output.
aggregate expenditures  The total amount spent for final goods and services in an economy.
aggregate expenditures–domestic output approach  Determination of the equilibrium gross domestic product by finding the real GDP at which aggregate expenditures equal domestic output.
aggregate expenditures schedule  A schedule or curve showing the total amount spent for final goods and services at different levels of real GDP.
aggregate supply  A schedule or curve showing the total quantity of goods and services supplied (produced) at different price levels.
aggregate supply shocks  Sudden, large changes in resource costs that shift an economy's aggregate supply curve.
Alcoa case  A 1945 case in which the courts ruled that the possession of monopoly power, no matter how reasonably that power had been used, was a violation of the antitrust laws; temporarily overturned the rule of reason applied in the U.S. Steel case.
allocative efficiency  The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal.
anticipated inflation  Increases in the price level (inflation) that occur at the expected rate.
antitrust laws  Legislation (including the Sherman Act and Clayton Act) that prohibits anticompetitive business activities such as price fixing, bid rigging, monopolization, and tying contracts.
antitrust policy  The use of the antitrust laws to promote competition and economic efficiency.
appreciation (of the dollar)  An increase in the value of the dollar relative to the currency of another nation, so a dollar buys a larger amount of the foreign currency and thus of foreign goods.
asset  Anything of monetary value owned by a firm or individual.
asset demand for money  The amount of money people want to hold as a store of value; this amount varies inversely with the interest rate.
asymmetric information  A situation where one party to a market transaction has much more information about a product or service than the other. The result may be an under- or over-allocation of resources.
average fixed cost (AFC)  A firm's total fixed cost divided by output (the quantity of product produced).
average product (AP)  The total output produced per unit of a resource employed (total product divided by the quantity of that employed resource).
average propensity to consume  Fraction (or percentage) of disposable income that households plan to spend for consumer goods and services; consumption divided by disposable income.
average propensity to save (APS)  Fraction (or percentage) of disposable income that households save; saving divided by disposable income.
average revenue  Total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price.
average tax rate  Total tax paid divided by total (taxable) income, as a percentage.
average total cost (ATC)  A firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost.
average variable cost (AVC)  A firm's total variable cost divided by output (the quantity of product produced).
backflows  The return of workers to the countries from which they originally migrated.
balance of payments  (See international balance of payments.)
balance-of-payments deficit  The amount by which inpayments from a nation's stock of official reserves are required to balance that nation's capital and financial account with its current account (in its balance of payments).
balance-of-payments surplus  The amount by which outpayments to a nation's stock of official reserves are required to balance that nation's capital and financial account with its current account (in its international balance of payments).
balance on current account  The exports of goods and services of a nation less its imports of goods and services plus its net investment income and net transfers in a year.
balance on goods and services  The exports of goods and services of a nation less its imports of goods and services in a year.
balance sheet  A statement of the assets, liabilities, and net worth of a firm or individual at some given time.
bank deposits  The deposits that individuals or firms have at banks (or thrifts) or that banks have at the Federal Reserve Banks.
bankers' bank  A bank that accepts the deposits of and makes loans to depository institutions; in the United States, a Federal Reserve Bank.
bank reserves  The deposits of commercial banks and thrifts at Federal Reserve Banks plus bank and thrift vault cash.
barrier to entry  Anything that artificially prevents the entry of firms into an industry.
barter  The exchange of one good or service for another good or service.
base year  The year with which other years are compared when an index is constructed; for example, the base year for a price index.
benefit-reduction rate  The percentage by which subsidy benefits in a public assistance program are reduced as earned income rises.
benefits-received principle  The idea that those who receive the benefits of goods and services provided by government should pay the taxes required to finance them.
bilateral monopoly  A market in which there is a single seller (monopoly) and a single buyer (monopsony).
Board of Governors  The seven-member group that supervises and controls the money and banking system of the United States; the Board of Governors of the Federal Reserve System; the Federal Reserve Board.
bond  A financial device through which a borrower (a firm or government) is obligated to pay the principal and interest on a loan at a specific date in the future.
break-even income  The level of disposable income at which households plan to consume (spend) all their income and to save none of it; also, in an income transfer program, the level of earned income at which subsidy payments become zero.
break-even output  Any output at which a (competitive) firm's total cost and total revenue are equal; an output at which a firm has neither an economic profit nor a loss, at which it earns only a normal profit.
break-even point  An output at which a firm makes a normal profit (total revenue = total cost) but not an economic profit.
Bretton Woods system  The international monetary system developed after the Second World War in which adjustable pegs were employed, the International Monetary Fund helped stabilize foreign exchange rates, and gold and the dollar were used as international monetary reserves.
budget constraint  The limit that the size of a consumer's income (and the prices that must be paid for goods and services) imposes on the ability of that consumer to obtain goods and services.
budget deficit  The amount by which the expenditures of the Federal government exceed its revenues in any year.
budget line  A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.
budget surplus  The amount by which the revenues of the Federal government exceed its expenditures in any year.
built-in stabilizer  A mechanism that increases government's budget deficit (or reduces its surplus) during a recession and increases government's budget surplus (or reduces its deficit) during an expansion without any action by policymakers. The tax system is one such mechanism.
Bureau of Economic Analysis (BEA)  An agency of the U.S. Department of Commerce that compiles the national income and product accounts.
business cycle  Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.
business firm  (See firm.)
business unionism  Labor unionism that concerns itself with such practical and short-run objectives as higher wages, shorter hours, and improved working conditions.
capital  Human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants; also called capital goods.
capital and financial account  The section of a nation's international balance of payments that records (1) debt forgiveness by and to foreigners and (2) foreign purchases of assets in the United States and U.S. purchases of assets abroad.
capital and financial account deficit  A negative balance on its capital and financial account in a country's international balance of payments.
capital and financial account surplus  A positive balance on its capital and financial account in a country's international balance of payments.
capital gain  The gain realized when securities or properties are sold for a price greater than the price paid for them.
capital goods  (See capital.)
capital-intensive commodity  A product that requires a relatively large amount of capital to be produced.
capitalism  An economic system in which property resources are privately owned and markets and prices are used to direct and coordinate economic activities.
capital stock  The total available capital in a nation.
cartel  A formal agreement among firms (or countries) in an industry to set the price of a product and establish the outputs of the individual firms (or countries) or to divide the market for the product geographically.
causation  A relationship in which the occurrence of one or more events brings about another event.
CEA  (See Council of Economic Advisers.)
cease-and-desist order  An order from a court or government agency to a corporation or individual to stop engaging in a specified practice.
ceiling price  (See price ceiling.)
Celler-Kefauver Act  The Federal act of 1950 that amended the Clayton Act by prohibiting the acquisition of the assets of one firm by another firm when the effect would be less competition.
central bank  A bank whose chief function is the control of the nation's money supply; in the United States, the Federal Reserve System.
central economic planning  Government determination of the objectives of the economy and how resources will be directed to attain those goals.
ceteris paribus assumption  (See other-things-equal assumption.)
change in demand  A change in the quantity demanded of a good or service at every price; a shift of the demand curve to the left or right.
change in quantity demanded  A change in the amount of a product that consumers are willing and able to purchase because of a change in the product's price.
change in quantity supplied  A change in the amount of a product that producers offer for sale because of a change in the product's price.
change in supply  A change in the quantity supplied of a good or service at every price; a shift of the supply curve to the left or right.
checkable deposit  Any deposit in a commercial bank or thrift institution against which a check may be written.
checkable-deposit multiplier  (See monetary multiplier.)
check clearing  The process by which funds are transferred from the checking accounts of the writers of checks to the checking accounts of the recipients of the checks.
checking account  A checkable deposit in a commercial bank or thrift institution.
circular flow diagram  An illustration showing the flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.
Civil Rights Act of 1964  Federal law that, in Title VII, outlaws discrimination based on race, color, religion, gender, or national origin in hiring, promoting, and compensating workers.
classical economics  The macroeconomic generalizations accepted by most economists before the 1930s that led to the conclusion that a capitalistic economy was self-regulating and therefore would usually employ its resources fully.
Clayton Act  The Federal antitrust act of 1914 that strengthened the Sherman Act by making it illegal for firms to engage in certain specified practices.
closed economy  An economy that neither exports nor imports goods and services.
closed shop  A place of employment where only workers who are already members of a labor union may be hired.
Coase theorem  The idea, first stated by economist Ronald Coase, that externalities can be resolved through private negotiations of the affected parties.
coincidence of wants  A situation in which the good or service that one trader desires to obtain is the same as that which another trader desires to give up and an item that the second trader wishes to acquire is the same as that which the first trader desires to surrender.
COLA  (See cost-of-living adjustment.)
collective bargaining  The negotiation of labor contracts between labor unions and firms or government entities.
collective voice  The function a labor union performs for its members as a group when it communicates their problems and grievances to management and presses management for a satisfactory resolution.
collusion  A situation in which firms act together and in agreement (collude) to fix prices, divide a market, or otherwise restrict competition.
command system  A method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; command economy; communism.
commercial bank  A firm that engages in the business of banking (accepts deposits, offers checking accounts, and makes loans).
commercial banking system  All commercial banks and thrift institutions as a group.
communism  (See command system.)
comparative advantage  A lower relative opportunity cost than that of another producer or country.
compensating differences  Differences in the wages received by workers in different jobs to compensate for nonmonetary differences in the jobs.
compensation to employees  Wages and salaries plus wage and salary supplements paid by employers to workers.
competition  The presence in a market of independent buyers and sellers competing with one another along with the freedom of buyers and sellers to enter and leave the market.
competitive industry's short-run supply curve  The horizontal summation of the short-run supply curves of the firms in a purely competitive industry (see pure competition); a curve that shows the total quantities offered for sale at various prices by the firms in an industry in the short run.
competitive labor market  A resource market in which a large number of (noncolluding) employers demand a particular type of labor supplied by a large number of nonunion workers.
complementary goods  Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).
concentration ratio  The percentage of the total sales of an industry made by the four (or some other number) largest sellers in the industry.
conglomerate merger  The merger of a firm in one industry with a firm in another industry (with a firm that is not a supplier, customer, or competitor).
conglomerates  Firms that produce goods and services in two or more separate industries.
constant-cost industry  An industry in which expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources and thus no effect on production costs.
constant opportunity cost  An opportunity cost that remains the same for each additional unit as a consumer (or society) shifts purchases (production) from one product to another along a straight-line budget line (production possibilities curve).
constant returns to scale  Unchanging average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.
consumer goods  Products and services that satisfy human wants directly.
Consumer Price Index (CPI)  An index that measures the prices of a fixed "market basket" of some 300 goods and services bought by a "typical" consumer.
consumer sovereignty  Determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy; consumers' direction of production through their dollar votes.
consumer surplus  The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.
consumption of fixed capital  An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation.
consumption schedule  A schedule showing the amounts households plan to spend for consumer goods at different levels of disposable income.
contractionary fiscal policy  A decrease in government purchases for goods and services, an increase in net taxes, or some combination of the two, for the purpose of decreasing aggregate demand and thus controlling inflation.
coordination failure  A situation in which people do not reach a mutually beneficial outcome because they lack some way to jointly coordinate their actions; a possible cause of macroeconomic instability.
copayment  The percentage of (say, health care) costs that an insured individual pays while the insurer pays the remainder.
copyright  A legal protection provided to developers and publishers of books, computer software, videos, and musical compositions against the copying of their works by others.
corporate income tax  A tax levied on the net income (accounting profit) of corporations.
corporation  A legal entity ("person") chartered by a state or the Federal government that is distinct and separate from the individuals who own it.
correlation  A systematic and dependable association between two sets of data (two kinds of events); does not necessarily indicate causation.
cost-benefit analysis  A comparison of the marginal costs of a government project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent.
cost-of-living adjustment (COLA)  An automatic increase in the incomes (wages) of workers when inflation occurs; guaranteed by a collective bargaining contract between firms and workers.
cost-push inflation  Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply.
Council of Economic Advisers (CEA)  A group of three persons that advises and assists the president of the United States on economic matters (including the preparation of the annual Economic Report of the President).
countercyclical payments (CCPs)  Cash subsidies paid to farmers when market prices for certain crops drop below targeted prices. Payments are based on previous production and are received regardless of the current crop grown.
craft union  A labor union that limits its membership to workers with a particular skill (craft).
creative destruction  The hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies.
credit  An accounting item that increases the value of an asset (such as the foreign money owned by the residents of a nation).
credit union  An association of persons who have a common tie (such as being employees of the same firm or members of the same labor union) that sells shares to (accepts deposits from) its members and makes loans to them.
cross elasticity of demand  The ratio of the percentage change in quantity demanded of one good to the percentage change in the price of some other good. A positive coefficient indicates the two products are substitute goods; a negative coefficient indicates they are complementary goods.
crowding model of occupational discrimination  A model of labor markets suggesting that occupational discrimination has kept many women and minorities out of high-paying occupations and forced them into a limited number of low-paying occupations.
crowding-out effect  A rise in interest rates and a resulting decrease in planned investment caused by the Federal government's increased borrowing to finance budget deficits and refinance debt.
currency  Coins and paper money.
currency appreciation  (See exchange-rate appreciation.)
currency depreciation  (See exchange-rate depreciation.)
currency intervention  A government's buying and selling of its own currency or foreign currencies to alter international exchange rates.
current account  The section in a nation's international balance of payments that records its exports and imports of goods and services, its net investment income, and its net transfers.
cyclical asymmetry  The idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession.
cyclical deficit  A Federal budget deficit that is caused by a recession and the consequent decline in tax revenues.
cyclical unemployment  A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand).
deadweight loss  (See efficiency loss.)
debit  An accounting item that decreases the value of an asset (such as the foreign money owned by the residents of a nation).
declining industry  An industry in which economic profits are negative (losses are incurred) and that will, therefore, decrease its output as firms leave it.
decreasing-cost industry  An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.
deductible  The dollar sum of (for example, health care) costs that an insured individual must pay before the insurer begins to pay.
defensive medicine  The recommendation by physicians of more tests and procedures than are warranted medically or economically as a way of protecting themselves against later malpractice suits.
deflating  Finding the real gross domestic product by decreasing the dollar value of the GDP for a year in which prices were higher than in the base year.
deflation  A decline in the economy's price level.
demand  A schedule showing the amounts of a good or service that buyers (or a buyer) wish to purchase at various prices during some time period.
demand curve  A curve illustrating demand.
demand factor (in growth)  The increase in the level of aggregate demand that brings about the economic growth made possible by an increase in the production potential of the economy.
demand management  The use of fiscal policy and monetary policy to increase or decrease aggregate demand.
demand-pull inflation  Increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand.
demand schedule  (See demand.)
dependent variable  A variable that changes as a consequence of a change in some other (independent) variable; the "effect" or outcome.
depository institutions  Firms that accept deposits of money from the public (businesses and persons); commercial banks, savings and loan associations, mutual savings banks, and credit unions.
depreciation  (See consumption of fixed capital.)
depreciation (of the dollar)  A decrease in the value of the dollar relative to another currency, so a dollar buys a smaller amount of the foreign currency and therefore of foreign goods.
derived demand  The demand for a resource that depends on the demand for the products it helps to produce.
determinants of aggregate demand  Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.
determinants of aggregate supply  Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
determinants of demand  Factors other than price that determine the quantities demanded of a good or service.
determinants of supply  Factors other than price that determine the quantities supplied of a good or service.
devaluation  A decrease in the governmentally defined value of a currency.
developing countries  Many countries of Africa, Asia, and Latin America that are characterized by lack of capital goods, use of nonadvanced technologies, low literacy rates, high unemployment, rapid population growth, and labor forces heavily committed to agriculture.
diagnosis-related group (DRG) system  Payments to doctors and hospitals under Medicare based on which of hundreds of carefully detailed diagnostic categories best characterize the patient's condition and needs.
differentiated oligopoly  An oligopoly in which the firms produce a differentiated product.
differentiated product  A product that differs physically or in some other way from the similar products produced by other firms; a product such that buyers are not indifferent to the seller when the price charged by all sellers is the same.
diffusion  The spread of an innovation through its widespread imitation.
dilemma of regulation  The tradeoff faced by a regulatory agency in setting the maximum legal price a monopolist may charge: The socially optimal price is below average total cost (and either bankrupts the firm or requires that it be subsidized), while the higher, fair-return price does not produce allocative efficiency.
diminishing marginal returns  (See law of diminishing returns.)
direct foreign investment  The building of new factories (or the purchase of existing capital) in a particular nation by corporations of other nations.
direct payments  Cash subsidies paid to farmers based on past production levels; unaffected by current crop prices and current production.
direct relationship  The relationship between two variables that change in the same direction, for example, product price and quantity supplied; positive relationship.
discount rate  The interest rate that the Federal Reserve Banks charge on the loans they make to commercial banks and thrift institutions .
discouraged workers  Employees who have left the labor force because they have not been able to find employment.
discretionary fiscal policy  Deliberate changes in taxes (tax rates) and government spending by Congress to promote full employment, price stability, and economic growth.
discrimination  The practice of according individuals or groups inferior treatment in hiring, occupational access, education and training, promotion, wage rates, or working conditions even though they have the same abilities, education, skills, and work experience as other workers.
discrimination coefficient  A measure of the cost or disutility of prejudice; the monetary amount an employer is willing to pay to hire a preferred worker rather than a nonpreferred worker.
diseconomies of scale  Increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run.
disinflation  A reduction in the rate of inflation.
disposable income (DI)  Personal income less personal taxes; income available for personal consumption expenditures and personal saving.
dissaving  Spending for consumer goods and services in excess of disposable income; the amount by which personal consumption expenditures exceed disposable income.
dividends  Payments by a corporation of all or part of its profit to its stockholders (the corporate owners).
division of labor  The separation of the work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers.
Doha Round  The latest, uncompleted (as of fall 2006) sequence of trade negotiations by members of the World Trade Organization; named after Doha, Qatar, where the set of negotiations began.
dollar votes  The "votes" that consumers and entrepreneurs cast for the production of consumer and capital goods, respectively, when they purchase those goods in product and resource markets.
domestic capital formation  The process of adding to a nation's stock of capital by saving and investing part of its own domestic output.
domestic output  Gross (or net) domestic product; the total output of final goods and services produced in the economy.
domestic price  The price of a good or service within a country, determined by domestic demand and supply.
dumping  The sale of a product in a foreign country at prices either below cost or below the prices commonly charged at home.
DuPont cellophane case  The antitrust case brought against DuPont in which the U.S. Supreme Court ruled (in 1956) that while DuPont had a monopoly in the narrowly defined market for cellophane, it did not monopolize the more broadly defined market for flexible packaging materials. It was thus not guilty of violating the Sherman Act.
durable good  A consumer good with an expected life (use) of 3 or more years.
earned-income tax credit (EITC)  A refundable Federal tax credit for low-income working people designed to reduce poverty and encourage labor-force participation.
earnings  The money income received by a worker; equal to the wage (rate) multiplied by the amount of time worked.
economic concentration  A description or measure of the degree to which an industry is dominated by one or a handful of firms or is characterized by many firms. (See concentration ratio.)
economic cost  A payment that must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products that cannot be produced when resources are instead used to make a particular product.
economic efficiency  The use of the minimum necessary resources to obtain the socially optimal amounts of goods and services; entails both productive efficiency and allocative efficiency.
economic growth  (1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita.
economic law  An economic principle that has been tested and retested and has stood the test of time.
economic model  A simplified picture of economic reality; an abstract generalization.
economic perspective  A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions.
economic policy  A course of action intended to correct or avoid a problem.
economic principle  A widely accepted generalization about the economic behavior of individuals or institutions.
economic profit  The total revenue of a firm less its economic costs (which include both explicit costs and implicit costs); also called "pure profit" and "above-normal profit."
economic regulation  (See industrial regulation and social regulation.)
economic rent  The price paid for the use of land and other natural resources, the supply of which is fixed (perfectly inelastic).
economic resources  The land, labor, capital, and entrepreneurial ability that are used in the production of goods and services; productive agents; factors of production.
economics  The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.
economic system  A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem; a method of organizing an economy, of which the market system and the command system are the two general types.
economic theory  A statement of a cause-effect relationship; when accepted by all or nearly all economists, an economic principle.
economies of scale  Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run; the economies of mass production.
economizing problem  The choices necessitated because society's economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce).
efficiency factors (in growth)  The capacity of an economy to combine resources effectively to achieve growth of real output that the supply factors (of growth) make possible.
efficiency loss  Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. Also called deadweight loss.
efficiency loss of a tax  The loss of net benefits to society because a tax reduces the production and consumption of a taxed good below the level of allocative efficiency. Also called the deadweight loss of the tax.
efficiency wage  A wage that minimizes wage costs per unit of output by encouraging greater effort or reducing turnover.
efficient allocation of resources  That allocation of an economy's resources among the production of different products that leads to the maximum satisfaction of consumers' wants, thus producing the socially optimal mix of output with society's scarce resources.
elastic demand  Product or resource demand whose price elasticity is greater than 1. This means the resulting change in quantity demanded is greater than the percentage change in price.
elasticity coefficient  The number obtained when the percentage change in quantity demanded (or supplied) is divided by the percentage change in the price of the commodity.
elasticity formula  (See price elasticity of demand.)
elasticity of resource demand  A measure of the responsiveness of firms to a change in the price of a particular resource they employ or use; the percentage change in the quantity of the resource demanded divided by the percentage change in its price.
elastic supply  Product or resource supply whose price elasticity is greater than 1. This means the resulting change in quantity supplied is greater than the percentage change in price.
electronic payments  Purchases made by transferring funds electronically. Examples: Fedwire transfers, automated clearinghouse transactions (ACHs), payments via the PayPal system, and payments made through stored-value cards.
employment discrimination  Inferior treatment in hiring, promotions, work assignments, and such for a particular group of employees.
employment rate  The percentage of the labor force employed at any time.
entitlement programs  Government programs such as social insurance, food stamps, Medicare, and Medicaid that guarantee particular levels of transfer payments or noncash benefits to all who fit the programs' criteria.
entrepreneurial ability  The human resource that combines the other resources to produce a product, makes nonroutine decisions, innovates, and bears risks.
equality-efficiency tradeoff  The decrease in economic efficiency that may accompany a decrease in income inequality; the presumption that some income inequality is required to achieve economic efficiency.
Equal Pay Act of 1963  Federal government legislation making it illegal to pay men and women different wage rates if they do equal work on jobs that require equal skill, effort, and responsibility and that are performed under similar working conditions.
equation of exchange  MV = PQ, in which M is the supply of money, V is the velocity of money, P is the price level, and Q is the physical volume of final goods and services produced.
equilibrium GDP  (See equilibrium real domestic output.)
equilibrium position  In the indifference curve model, the combination of two goods at which a consumer maximizes his or her utility (reaches the highest attainable indifference curve), given a limited amount to spend (a budget constraint).
equilibrium price  The price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.
equilibrium price level  The price level at which the aggregate demand curve intersects the aggregate supply curve.
equilibrium quantity  (1) The quantity demanded and supplied at the equilibrium price in a competitive market; (2) the profit-maximizing output of a firm.
equilibrium real domestic output  The gross domestic product at which the total quantity of final goods and services purchased (aggregate expenditures) is equal to the total quantity of final goods and services produced (the real domestic output); the real domestic output at which the aggregate demand curve intersects the aggregate supply curve.
equilibrium real output  (See equilibrium real domestic output)
euro  The common currency unit used by 12 European nations (as of 2006) in the Euro zone, which consists of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.
European Union (EU)  An association of 25 European nations that has eliminated tariffs and quotas among them, established common tariffs for imported goods from outside the member nations, eliminated barriers to the free movement of capital, and created other common economic policies.
excess capacity  Plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost.
excess reserves  The amount by which a bank's or thrift's actual reserves exceed its required reserves; actual reserves minus required reserves.
exchange control  (See foreign exchange control.)
exchange rate  The rate of exchange of one nation's currency for another nation's currency.
exchange-rate appreciation  An increase in the value of a nation's currency in foreign exchange markets; an increase in the rate of exchange for foreign currencies.
exchange-rate depreciation  A decrease in the value of a nation's currency in foreign exchange markets; a decrease in the rate of exchange for foreign currencies.
exchange-rate determinant  Any factor other than the rate of exchange that determines a currency's demand and supply in the foreign exchange market.
excise tax  A tax levied on the production of a specific product or on the quantity of the product purchased.
exclusive unionism  The practice of a labor union of restricting the supply of skilled union labor to increase the wages received by union members; the policies typically employed by a craft union.
exhaustive expenditure  An expenditure by government resulting directly in the employment of economic resources and in the absorption by government of the goods and services those resources produce; a government purchase.
exit mechanism  The process of leaving a job and searching for another one as a means of improving one's working conditions.
expanding industry  An industry whose firms earn economic profits and for which an increase in output occurs as new firms enter the industry.
expansion  A phase of the business cycle in which real GDP,income, and employment rise.
expansionary fiscal policy  An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output.
expansionary monetary policy  Federal Reserve system actions to increase the money supply, lower interest rates, and expand real GDP ; an easy money policy.
expectations  The anticipations of consumers, firms, and others about future economic conditions.
expected rate of return  The increase in profit a firm anticipates it will obtain by purchasing capital (or engaging in research and development); expressed as a percentage of the total cost of the investment (or R&D) activity.
expected-rate-of return curve  As it relates to research and development (R&D), a curve showing the anticipated gain in profit, as a percentage of R&D expenditure, from an additional dollar spent on R&D.
expenditures approach  The method that adds all expenditures made for final goods and services to measure the gross domestic product.
expenditures-output approach  (See aggregate expenditures– domestic output approach.)
explicit cost  The monetary payment a firm must make to an outsider to obtain a resource.
exports  Goods and services produced in a nation and sold to buyers in other nations.
export subsidies  Government payments to domestic producers to enable them to reduce the price of a good or service to foreign buyers.
export supply curve  An upward-sloping curve that shows the amount of a product that domestic firms will export at each world price that is above the domestic price.
export transaction  A sale of a good or service that increases the amount of foreign currency flowing to a nation's citizens, firms, and government.
external benefit  (See positive externality.)
external cost  (See negative externality.)
external debt  Private or public debt owed to foreign citizens, firms, and institutions.
externality  A cost or benefit from production or consumption, accruing without compensation to someone other than the buyers and sellers of the product (see negative externality and positive externality).
external public debt  The portion of the public debt owed to foreign citizens, firms, and institutions.
face value  The dollar or cents value placed on a U.S. coin or piece of paper money.
factors of production  Economic resources: land, capital, labor, and entrepreneurial ability.
fair-return price  The price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it.
fallacy of composition  The false notion that what is true for the individual (or part) is necessarily true for the group (or whole).
Farm Act of 2002  Farm legislation that continued the "freedom to plant" and direct subsidies of the Freedom to Farm Act of 1996 but added an automatic, countercyclical system of emergency farm aid.
farm commodities  Agricultural products such as grains, milk, cattle, fruits, and vegetables that are usually sold to processors, who use the products as inputs in creating food products.
fast-second strategy  An approach by a dominant firm in which it allows other firms in its industry to bear the risk of innovation and then quickly becomes the second firm to offer any successful new product or adopt any improved production process.
FDIC  (See Federal Deposit Insurance Corporation.)
Federal Deposit Insurance Corporation (FDIC)  The federally chartered corporation that insures deposit liabilities (up to $100,000 per account) of commercial banks and thrift institutions (excluding credit unions, whose deposits are insured by the National Credit Union Administration).
Federal funds rate  The interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves.
Federal government  The government of the United States, as distinct from the state and local governments.
Federal Open Market Committee (FOMC)  The 12-member group that determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. government securities.
Federal Reserve Banks  The 12 banks chartered by the U.S. government to control the money supply and perform other functions. (See central bank, quasi-public bank, and bankers' bank.)
Federal Reserve Note  Paper money issued by the Federal Reserve Banks.
Federal Reserve System  The U.S. central bank, consisting of the Board of Governors of the Federal Reserve and the 12 Federal Reserve Banks, which controls the lending activity of the nation's banks and thrifts and thus the money supply ; commonly referred to as the "Fed."
Federal Trade Commission (FTC)  The commission of five members established by the Federal Trade Commission Act of 1914 to investigate unfair competitive practices of firms, to hold hearings on the complaints of such practices, and to issue cease-and-desist orders when firms were found to engage in such practices.
Federal Trade Commission Act  The Federal act of 1914 that established the Federal Trade Commission.
fee for service  In the health care industry, payment to physicians for each visit made or procedure performed rather than payment as an annual salary.
fiat money  Anything that is money because government has decreed it to be money.
final goods and services  Goods and services that have been purchased for final use and not for resale or further processing or manufacturing.
financial capital  (See money capital.)
financial services industry  The broad category of firms that provide financial products and services to help households and businesses earn interest, receive dividends, obtain capital gains, insure against losses, and plan for retirement. The industry includes commercial banks, thrift institutions, insurance companies, mutual fund companies, pension funds, and securities firms.
firm  An organization that employs resources to produce a good or service for profit and owns and operates one or more plants.
fiscal policy  Changes in government spending and tax collections designed to achieve a full-employment and noninflationary domestic output; also called discretionary fiscal policy.
fixed cost  Any cost that in total does not change when the firm changes its output; the cost of fixed resources.
fixed exchange rate  A rate of exchange that is set in some way and therefore prevented from rising or falling with changes in currency supply and demand.
fixed resource  Any resource whose quantity cannot be changed by a firm in the short run.
flexible exchange rate  A rate of exchange determined by the international demand for and supply of a nation's money; a rate free to rise or fall (to float).
floating exchange rate  (See flexible exchange rate.)
food products  Processed agricultural commodities sold through grocery stores and restaurants. Examples: bread, meat, fish, chicken, pork, lettuce, peanut butter, and breakfast cereal.
food-stamp program  A program permitting low-income persons to purchase for less than their retail value, or to obtain without cost, coupons that can be exchanged for food items at retail stores.
foreign competition  (See import competition.)
foreign exchange control  The control a government may exercise over the quantity of foreign currency demanded by its citizens and firms and over the rates of exchange in order to limit its outpayments to its inpayments (to eliminate a payments deficit).
foreign exchange market  A market in which the money (currency) of one nation can be used to purchase (can be exchanged for) the money of another nation; currency market.
foreign exchange rate  (See rate of exchange.)
foreign purchase effect  The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.
45° line  A line along which the value of GDP (measured horizontally) is equal to the value of aggregate expenditures (measured vertically).
fractional reserve banking system  A reserve requirement that is less than 100 percent of the checkable-deposit liabilities of a commercial bank or thrift institution.
freedom of choice  The freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate.
freedom of enterprise  The freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice.
Freedom to Farm Act  A law passed in 1996 that revamped 60 years of U.S. farm policy by ending price supports and acreage allotments for wheat, corn, barley, oats, sorghum, rye, cotton, and rice.
free-rider problem  The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability.
free trade  The absence of artificial (government-imposed) barriers to trade among individuals and firms in different nations.
frictional unemployment  A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
fringe benefits  The rewards other than wages that employees receive from their employers and that include pensions, medical and dental insurance, paid vacations, and sick leaves.
full employment  (1) The use of all available resources to produce want-satisfying goods and services; (2) the situation in which the unemployment rate is equal to the full-employment unemployment rate and there is frictional and structural but no cyclical unemployment (and the real GDP of the economy equals potential output).
full-employment unemployment rate  The unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 4 and 5 percent in the United States because some frictional and structural unemployment is unavoidable.
functional distribution of income  The manner in which national income is divided among the functions performed to earn it (or the kinds of resources provided to earn it); the division of national income into wages and salaries, proprietors' income, corporate profits, interest, and rent.
gains from trade  The extra output that trading partners obtain through specialization of production and exchange of goods and services.
game theory  A means of analyzing the pricing behavior of oligopolists that uses the theory of strategy associated with games such as chess and bridge.
GDP  (See gross domestic product.)
GDP gap  Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap).
GDP price index  A price index for all the goods and services that make up the gross domestic product; the price index used to adjust nominal gross domestic product to real gross domestic product.
G8 nations  A group of eight major nations (Canada, France, Germany, Italy, Japan, Russia, United Kingdom, and United States) whose leaders meet regularly to discuss common economic problems and try to coordinate economic policies.
General Agreement on Tariffs and Trade (GATT)  The international agreement reached in 1947 in which 23 nations agreed to give equal and nondiscriminatory treatment to one another, to reduce tariff rates by multinational negotiations, and to eliminate import quotas. It now includes most nations and has become the World Trade Organization.
generalization  Statement of the nature of the relationship between two or more sets of facts.
Gini ratio  A numerical measure of the overall dispersion of income among households, families, or individuals; found graphically by dividing the area between the diagonal line and the Lorenz curve by the entire area below the diagonal line.
gold standard  A historical system of fixed exchange rates in which nations defined their currencies in terms of gold, maintained a fixed relationship between their stocks of gold and their money supplies, and allowed gold to be freely exported and imported.
government failure  Inefficiencies in resource allocation caused by problems in the operation of the public sector (government), specifically, rent-seeking pressure by special-interest groups, shortsighted political behavior, limited and bundled choices, and bureaucratic inefficiencies.
government purchases  (G) >Expenditures by government for goods and services that government consumes in providing public goods and for public (or social) capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and services.
government transfer payment  The disbursement of money (or goods and services) by government for which government receives no currently produced good or service in return.
grievance procedure  The method used by a labor union and a firm to settle disputes that arise during the life of the collective bargaining agreement between them.
gross domestic product (GDP)  The total market value of all final goods and services produced annually within the boundaries of the United States, whether by U.S.- or foreign-supplied resources.
gross private domestic investment  (Ig) Expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories.
growth accounting  The bookkeeping of the supply-side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period.
guiding function of prices  The ability of price changes to bring about changes in the quantities of products and resources demanded and supplied.
health maintenance organizations (HMOs)  Health care providers that contract with employers, insurance companies, labor unions, or government units to provide health care for their workers or others who are insured.
health savings accounts (HSAs)  Accounts into which people with high-deductible health insurance plans can place tax-free funds each year and then draw on these funds to pay out-of- pocket medical expenses such as deductibles and copayments. Unused funds accumulate from year to year and later can be used to supplement Medicare.
Herfindahl index  A measure of the concentration and competitiveness of an industry; calculated as the sum of the squared percentage market shares of the individual firms in the industry.
homogeneous oligopoly  An oligopoly in which the firms produce a standardized product.
horizontal axis  The "left-right" or "west-east" measurement line on graph or grid.
horizontal merger  The merger into a single firm of two firms producing the same product and selling it in the same geographic market.
household  An economic unit (of one or more persons) that provides the economy with resources and uses the income received to purchase goods and services that satisfy economic wants.
human capital  The knowledge and skills that make a person productive.
human capital discrimination  The denial of equal access to productivity-enhancing education and training to members of particular groups.
human capital investment  Any expenditure undertaken to improve the education, skills, health, or mobility of workers, with an expectation of greater productivity and thus a positive return on the investment.
hyperinflation  A very rapid rise in the price level; an extremely high rate of inflation.
hypothesis  A tentative explanation of cause and effect that requires testing.
illegal immigrant  (See unauthorized immigrant.)
IMF  (See International Monetary Fund.)
imitation problem  The potential for a firm's rivals to produce a close variation of (imitate) a firm's new product or process, greatly reducing the originator's profit from R&D and innovation.
immobility  The inability or unwillingness of a worker to move from one geographic area or occupation to another or from a lower-paying job to a higher-paying job.
imperfect competition  All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly.
implicit cost  The monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit.
import competition  The competition that domestic firms encounter from the products and services of foreign producers.
import demand curve  A downsloping curve showing the amount of a product that an economy will import at each world price below the domestic price.
import quota  A limit imposed by a nation on the quantity (or total value) of a good that may be imported during some period of time.
imports  Spending by individuals, firms, and governments for goods and services produced in foreign nations.
import transaction  The purchase of a good or service that decreases the amount of foreign money held by citizens, firms, and governments of a nation.
incentive function of price  The inducement that an increase in the price of a commodity gives to sellers to make more of it available (and conversely for a decrease in price), and the inducement that an increase in price offers to buyers to purchase smaller quantities (and conversely for a decrease in price).
incentive pay plan  A compensation structure that ties worker pay directly to performance. Such plans include piece rates, bonuses, stock options, commissions, and profit sharing.
inclusive unionism  The practice of a labor union of including as members all workers employed in an industry.
income  A flow of dollars (or purchasing power) per unit of time derived from the use of human or property resources.
income approach  The method that adds all the income generated by the production of final goods and services to measure the gross domestic product.
income effect  A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.
income elasticity of demand  The ratio of the percentage change in the quantity demanded of a good to a percentage change in consumer income; measures the responsiveness of consumer purchases to income changes.
income inequality  The unequal distribution of an economy's total income among households or families.
income-maintenance system  A group of government programs designed to eliminate poverty and reduce inequality in the distribution of income.
income mobility  The extent to which income receivers move from one part of the income distribution to another over some period of time.
increase in demand  An increase in the quantity demanded of a good or service at every price; a shift of the demand curve to the right.
increase in supply  An increase in the quantity supplied of a good or service at every price; a shift of the supply curve to the right.
increasing-cost industry  An industry in which expansion through the entry of new firms raises the prices firms in the industry must pay for resources and therefore increases their production costs.
increasing marginal returns  An increase in the marginal product of a resource as successive units of the resource are employed.
increasing returns  An increase in a firm's output by a larger percentage than the percentage increase in its inputs.
independent goods  Products or services for which there is little or no relationship between the price of one and the demand for the other. When the price of one rises or falls, the demand for the other tends to remain constant.
independent unions  U.S. unions that are not affiliated with the AFL-CIO.
independent variable  The variable causing a change in some other (dependent) variable.
indifference curve  A curve showing the different combinations of two products that yield the same satisfaction or utility to a consumer.
indifference map  A set of indifference curves, each representing a different level of utility, that together show the preferences of a consumer.
individual demand  The demand schedule or demand curve of a single buyer.
individual supply  The supply schedule or supply curve of a single seller.
industrially advanced countries  High-income countries such as the United States, Canada, Japan, and the nations of western Europe that have highly developed market economies based on large stocks of technologically advanced capital goods and skilled labor forces.
industrial regulation  The older and more traditional type of regulation in which government is concerned with the prices charged and the services provided to the public in specific industries, in contrast to social regulation.
industrial union  A labor union that accepts as members all workers employed in a particular industry (or by a particular firm).
industry  A group of (one or more) firms that produce identical or similar products.
inelastic demand  Product or resource demand for which the elasticity coefficient for price is less than 1. This means the resulting percentage change in quantity demanded is less than the percentage change in price.
inelastic supply  Product or resource supply for which the price elasticity coefficient is less than 1. The percentage change in quantity supplied is less than the percentage change in price.
inferior good  A good or service whose consumption declines as income rises (and conversely), price remaining constant.
inflating  Determining real gross domestic product by increasing the dollar value of the nominal gross domestic product produced in a year in which prices are lower than those in a base year.
inflation  A rise in the general level of prices in an economy.
inflationary expectations  The belief of workers, firms, and consumers that substantial inflation will occur in the future.
inflationary expenditure gap  The amount by which the aggregate expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary level.
inflation premium  The component of the nominal interest rate that reflects anticipated inflation.
inflation targeting  The annual statement by a central bank of a goal for a specific range of inflation in a future year, coupled with monetary policy designed to achieve the goal.
information technology  New and more efficient methods of delivering and receiving information through use of computers, fax machines, wireless phones, and the Internet.
infrastructure  The capital goods usually provided by the public sector for the use of its citizens and firms (for example, highways, bridges, transit systems, wastewater treatment facilities, municipal water systems, and airports).
injection  An addition of spending to the income-expenditure stream: investment, government purchases, and net exports.
injunction  A court order directing a person or organization not to perform a certain act because the act would do irreparable damage to some other person or persons; a restraining order.
in-kind transfer  The distribution by government of goods and services to individuals for which the government receives no currently produced good or service in return; a government transfer payment made in goods or services rather than in money; also called a noncash transfer.
innovation  The first commercially successful introduction of a new product, the use of a new method of production, or the creation of a new form of business organization.
inpayments  The receipts of domestic or foreign money that individuals, firms, and governments of one nation obtain from the sale of goods and services abroad, as investment income and remittances, and from foreign purchases of its assets.
insider-outsider theory  The hypothesis that nominal wages are inflexible downward because firms are aware that workers ("insiders") who retain employment during recession may refuse to work cooperatively with previously unemployed workers ("outsiders") who offer to work for less than the current wage.
insurable risk  An event that would result in a loss but whose frequency of occurrence can be estimated with considerable accuracy. Insurance companies are willing to sell insurance against such losses.
interest  The payment made for the use of money (of borrowed funds).
interest income  Payments of income to those who supply the economy with capital.
interest rate  The annual rate at which interest is paid; a percentage of the borrowed amount.
interest-rate-cost-of-funds curve  As it relates to research and development (R&D), a curve showing the interest rate the firm must pay to obtain any particular amount of funds to finance R&D.
interest-rate effect  The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).
interindustry competition  The competition for sales between the products of one industry and the products of another industry.
interlocking directorate  A situation where one or more members of the board of directors of a corporation are also on the board of directors of a competing corporation; illegal under the Clayton Act.
intermediate goods  Products that are purchased for resale or further processing or manufacturing.
internally held public debt  Public debt owed to citizens, firms, and institutions of the same nation that issued the debt.
international balance of payments  A summary of all the transactions that took place between the individuals, firms, and government units of one nation and those of all other nations during a year.
international balance-of-payments deficit  (See balance-of-payments deficit.)
international balance-of-payments surplus  (See balance-of-payments surplus.)
international gold standard  (See gold standard.)
International Monetary Fund (IMF)  The international association of nations that was formed after the Second World War to make loans of foreign monies to nations with temporary payments deficits and, until the early 1970s, to administer the adjustable pegs. It now mainly makes loans to nations facing possible defaults on private and government loans.
international monetary reserves  The foreign currencies and other assets such as gold that a nation can use to settle a balance-of-payments deficit.
international value of the dollar  The price that must be paid in foreign currency (money) to obtain one U.S. dollar.
intrinsic value  The market value of the metal within a coin.
invention  The first discovery of a product or process through the use of imagination, ingenious thinking, and experimentation and the first proof that it will work.
inventories  Goods that have been produced but remain unsold.
inverse relationship  The relationship between two variables that change in opposite directions, for example, product price and quantity demanded; negative relationship.
inverted-U theory  A theory saying that, other things equal, R&D expenditures as a percentage of sales rise with industry concentration, reach a peak at a four-firm concentration ratio of about 50 percent, and then fall as concentration further increases.
investment  Spending for the production and accumulation of capital and additions to inventories.
investment demand curve  A curve that shows the amounts of investment demanded by an economy at a series of real interest rates.
investment goods  Same as capital or capital goods.
investment in human capital  (See human capital investment.)
investment schedule  A curve or schedule that shows the amounts firms plan to invest at various possible values of real gross domestic product.
"invisible hand"  The tendency of firms and resource suppliers that seek to further their own self-interests in competitive markets to also promote the interest of society.
Joint Economic Committee (JEC)  Committee of senators and representatives that investigates economic problems of national interest.
Keynesian economics  The macroeconomic generalizations that lead to the conclusion that a capitalistic economy is characterized by macroeconomic instability and that fiscal policy and monetary policy can be used to promote full employment, price-level stability, and economic growth.
Keynesianism  The philosophical, ideological, and analytical views pertaining to Keynesian economics.
kinked-demand curve  The demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will match a price decrease and will ignore a price increase.
labor  People's physical and mental talents and efforts that are used to help produce goods and services.
labor force  Persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work.
labor-force participation rate  The percentage of the working-age population that is actually in the labor force.
labor-intensive commodity  A product requiring a relatively large amount of labor to be produced.
labor market discrimination  (See discrimination.)
labor productivity  Total output divided by the quantity of labor employed to produce it; the average product of labor or output per hour of work.
labor union  A group of workers organized to advance the interests of the group (to increase wages, shorten the hours worked, improve working conditions, and so on).
Laffer Curve  A curve relating government tax rates and tax revenues and on which a particular tax rate (between zero and 100 percent) maximizes tax revenues.
laissez-faire capitalism  (See capitalism.)
land  Natural resources ("free gifts of nature") used to produce goods and services.
land-intensive commodity  A product requiring a relatively large amount of land to be produced.
law of demand  The principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price.
law of diminishing marginal utility  The principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases.
law of diminishing returns  The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.
law of increasing opportunity costs  The principle that as the production of a good increases, the opportunity cost of producing an additional unit rises.
law of supply  The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease.
leakage  (1) A withdrawal of potential spending from the income- expenditures stream via saving, tax payments, or imports; (2) a withdrawal that reduces the lending potential of the banking system.
learning by doing  Achieving greater productivity and lower average total cost through gains in knowledge and skill that accompany repetition of a task; a source of economies of scale.
least-cost combination of resources  The quantity of each resource a firm must employ in order to produce a particular output at the lowest total cost; the combination at which the ratio of the marginal product of a resource to its marginal resource cost (to its price if the resource is employed in a competitive market) is the same for the last dollar spent on each of the resources employed.
legal cartel theory of regulation  The hypothesis that some industries seek regulation or want to maintain regulation so that they may form or maintain a legal cartel.
legal immigrant  A person who lawfully enters a country for the purpose of residing there.
legal tender  A legal designation of a nation's official currency (bills and coins). Payment of debts must be accepted in this monetary unit, but creditors can specify the form of payment, for example, "cash only" or "check or credit card only."
lending potential of an individual commercial bank  The amount by which a single bank can safely increase the money supply by making new loans to (or buying securities from) the public; equal to the bank's excess reserves.
lending potential of the banking system  The amount by which the banking system can increase the money supply by making new loans to (or buying securities from) the public; equal to the excess reserves of the banking system multiplied by the monetary multiplier.
liability  A debt with a monetary value; an amount owed by a firm or an individual.
limited liability  Restriction of the maximum loss to a predetermined amount for the owners (stockholders) of a corporation. The maximum loss is the amount they paid for their shares of stock.
liquidity  The ease with which an asset can be converted quickly into cash with little or no loss of purchasing power. Money is said to be perfectly liquid, whereas other assets have a lesser degree of liquidity.
loanable funds  Money available for lending and borrowing.
loanable funds theory of interest  The concept that the supply of and demand for loanable funds determine the equilibrium rate of interest.
lockout  An action by a firm that forbids workers to return to work until a new collective bargaining contract is signed; a means of imposing costs (lost wages) on union workers in a collective bargaining dispute.
logrolling  The trading of votes by legislators to secure favorable outcomes on decisions concerning the provision of public goods and quasi-public goods.
long run  (1) In microeconomics, a period of time long enough to enable producers of a product to change the quantities of all the resources they employ; period in which all resources and costs are variable and no resources or costs are fixed. (2) In macroeconomics, a period sufficiently long for nominal wages and other input prices to change in response to a change in the nation's price level.
long-run aggregate supply curve  The aggregate supply curve associated with a time period in which input prices (especially nominal wages) are fully responsive to changes in the price level.
long-run competitive equilibrium  The price at which firms in pure competition neither obtain economic profit nor suffer losses in the long run and the total quantity demanded and supplied are equal; a price equal to the marginal cost and the minimum long-run average total cost of producing the product.
long-run supply  A schedule or curve showing the prices at which a purely competitive industry will make various quantities of the product available in the long run.
long-run vertical Phillips Curve  The Phillips Curve after all nominal wages have adjusted to changes in the rate of inflation; a line emanating straight upward at the economy's natural rate of unemployment.
Lorenz curve  A curve showing the distribution of income in an economy. The cumulated percentage of families (income receivers) is measured along the horizontal axis and cumulated percentage of income is measured along the vertical axis.
lump-sum tax  A tax that is a constant amount (the tax revenue of government is the same) at all levels of GDP.
M1  The most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions.
M2  A more broadly defined money supply, equal to M1 plus noncheckable savings accounts (including money market deposit accounts), small time deposits (deposits of less than $100,000), and individual money market mutual fund balances.
macroeconomics  The part of economics concerned with the economy as a whole; with such major aggregates as the household, business, and government sectors; and with measures of the total economy.
managed floating exchange rate  An exchange rate that is allowed to change (float) as a result of changes in currency supply and demand but at times is altered (managed) by governments via their buying and selling of particular currencies.
managerial-opposition hypothesis  An explanation that attributes the relative decline of unionism in the United States to the increased and more aggressive opposition of management to unions.
managerial prerogatives  The decisions that management of the firm has the sole right to make; often enumerated in the labor contract (work agreement) between a labor union and a firm.
marginal analysis  The comparison of marginal ("extra" or "additional") benefits and marginal costs, usually for decision making.
marginal benefit  The extra (additional) benefit of consuming 1 more unit of some good or service; the change in total benefit when 1 more unit is consumed.
marginal cost (MC)  The extra (additional) cost of producing 1 more unit of output; equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output).
marginal cost-marginal benefit rule  As it applies to cost-benefit analysis, the tenet that a government project or program should be expanded to the point where the marginal cost and marginal benefit of additional expenditures are equal.
marginal product  The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed.
marginal productivity theory of income distribution  The contention that the distribution of income is equitable when each unit of each resource receives a money payment equal to its marginal contribution to the firm's revenue (its marginal revenue product).
marginal propensity to consume (MPC)  The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income.
marginal propensity to save (MPS)  The fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income.
marginal rate of substitution (MRS)  The rate at which a consumer is willing to substitute one good for another (from a given combination of goods) and remain equally satisfied (have the same total utility); equal to the slope of a consumer's indifference curve at each point on the curve.
marginal resource cost (MRC)  The amount the total cost of employing a resource increases when a firm employs 1 additional unit of the resource (the quantity of all other resources employed remaining constant); equal to the change in the total cost of the resource divided by the change in the quantity of the resource employed.
marginal revenue  The change in total revenue that results from the sale of 1 additional unit of a firm's product; equal to the change in total revenue divided by the change in the quantity of the product sold.
marginal-revenue–marginal-cost approach  A method of determining the total output where economic profit is a maximum (or losses are a minimum) by comparing the marginal revenue and the marginal cost of each additional unit of output.
marginal revenue product (MRP)  The change in a firm's total revenue when it employs 1 additional unit of a resource (the quantity of all other resources employed remaining constant); equal to the change in total revenue divided by the change in the quantity of the resource employed.
marginal tax rate  The tax rate paid on each additional dollar of income.
marginal utility  The extra utility a consumer obtains from the consumption of 1 additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed.
market  Any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service.
market demand  (See total demand.)
market economy  An economy in which the private decisions of consumers, resource suppliers, and firms determine how resources are allocated; the market system.
market failure  The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do not provide desired public goods.
market for externality rights  A market in which firms can buy rights to discharge pollutants. The price of such rights is determined by the demand for the right to discharge pollutants and a perfectly inelastic supply of such rights (the latter determined by the quantity of discharges that the environment can assimilate).
market period  A period in which producers of a product are unable to change the quantity produced in response to a change in its price and in which there is a perfectly inelastic supply.
market system  All the product and resource markets of a market economy and the relationships among them; a method that allows the prices determined in those markets to allocate the economy's scarce resources and to communicate and coordinate the decisions made by consumers, firms, and resource suppliers.
marketing loan program  A Federal farm subsidy under which certain farmers can receive a loan (on a per-unit-of-output basis) from a government lender and then, depending on the price of the crop, either pay back the loan with interest or keep the loan proceeds while forfeiting their harvested crop to the lender.
median-voter model  The theory that under majority rule the median (middle) voter will be in the dominant position to determine the outcome of an election.
Medicaid  A Federal program that helps finance the medical expenses of individuals covered by the Supplemental Security Income (SSI) and Temporary Assistance for Needy Families (TANF) programs.
Medicare  A Federal program that is financed by payroll taxes and provides for (1) compulsory hospital insurance for senior citizens, (2) low-cost voluntary insurance to help older Americans pay physicians' fees, and (3) subsidized insurance to buy prescription drugs.
Medicare Part D  The newly enacted (2006) portion of Medicare that enables enrollees to shop among private health insurance companies to buy highly subsidized insurance to help reduce the out-of-pocket expense of prescription drugs.
medium of exchange  Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.
menu costs  The reluctance of firms to cut prices during recessions (that they think will be short lived) because of the costs of altering and communicating their price reductions; named after the cost associated with printing new menus at restaurants.
merger  The combination of two (or more) firms into a single firm.
microeconomics  The part of economics concerned with decision- making by individual units such as a household, a firm, or an industry and with individual markets, specific goods and services, and product and resource prices.
Microsoft case  A 2002 antitrust case in which Microsoft was found guilty of violating the Sherman Act by engaging in a series of unlawful activities designed to maintain its monopoly in operating systems for personal computers; as a remedy the company was prohibited from engaging in a set of specific anticompetitive business practices.
midpoint formula  A method for calculating price elasticity of demand or price elasticity of supply that averages the two prices and two quantities as the reference points for computing percentages.
minimum efficient scale (MES)  The lowest level of output at which a firm can minimize long-run average total cost.
minimum wage  The lowest wage that employers may legally pay for an hour of work.
monetarism  The macroeconomic view that the main cause of changes in aggregate output and price level is fluctuations in the money supply; espoused by advocates of a monetary rule.
monetary multiplier  The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans (or buying securities); equal to 1 divided by the reserve requirement.
monetary policy  A central bank's changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth.
monetary rule  The rule suggested by monetarism. As traditionally formulated, the rule says that the money supply should be expanded each year at the same annual rate as the potential rate of growth of the real gross domestic product; the supply of money should be increased steadily between 3 and 5 percent per year. (Also see Taylor rule.)
money  Any item that is generally acceptable to sellers in exchange for goods and services.
money capital  Money available to purchase capital; simply money, as defined by economists.
money income  (See nominal income.)
money market  The market in which the demand for and the supply of money determine the interest rate (or the level of interest rates) in the economy.
money market deposit accounts (MMDAs)  Interest-earning accounts at banks and thrift institutions, which pool the funds of depositors to buy various short-term securities.
money market deposit accounts (MMDAs)  Bank- and thrift-provided interest-bearing accounts that contain a variety of short-term securities; such accounts have minimum balance requirements and limits on how often the depositor can withdraw funds.
money supply  Narrowly defined, M1; more broadly defined, M2 and MZM. (See each.)
monopolistic competition  A market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price, and in which there is considerable nonprice competition.
monopoly  A market structure in which the number of sellers is so small that each seller is able to influence the total supply and the price of the good or service. (Also see pure monopoly.)
monopsony  A market structure in which there is only a single buyer of a good, service, or resource.
moral hazard problem  The possibility that individuals or institutions will change their behavior as the result of a contract or agreement. Example: A bank whose deposits are insured against loss may make riskier loans and investments.
most-favored-nation (MFN) status  An agreement by the United States to allow some other nation's exports into the United States at the lowest tariff level levied by the United States, then or at any later time.
MR= MC rule  The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.
MRP= MRC rule  The principle that to maximize profit (or minimize losses), a firm should employ the quantity of a resource at which its marginal revenue product (MRP) is equal to its marginal resource cost (MRC), the latter being the wage rate in pure competition.
multinational corporations  Firms that own production facilities in two or more countries and produce and sell their products globally.
multiple counting  Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once.
multiplier  The ratio of a change in the equilibrium GDP to the change in investment or in any other component of aggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in the equilibrium GDP.
multiplier effect  The effect on equilibrium GDP of a change in aggregate expenditures or aggregate demand (caused by a change in the consumption schedule, investment, government expenditures, or net exports).
mutual interdependence  A situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms). Any firm that makes such a change can expect the other rivals to react to the change.
MZM   A definition of the money supply that includes monetary balances immediately available at zero cost to households and businesses for making transactions. MZM (money zero maturity) equals M2 minus small time deposits plus money market mutual fund balances owned by businesses.
national bank  A commercial bank authorized to operate by the U.S. government.
National Credit Union Administration (NCUA)  The federally chartered agency that insures deposit liabilities (up to $100,000 per account) in credit unions.
national health insurance (NHI)  A proposed program in which the Federal government would provide a basic package of health care to all citizens at no direct charge or at a low cost-sharing level. Financing would be out of general tax revenues.
national income  Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports ; the sum of wages and salaries, rent, interest, profit, proprietors' income, and such taxes.
national income accounting  The techniques used to measure the overall production of the economy and other related variables for the nation as a whole.
National Labor Relations Act (Wagner Act of 1935)  As amended, the basic labor-relations law in the United States; defines the legal rights of unions and management and identifies unfair union and management labor practices; established the National Labor Relations Board.
National Labor Relations Board (NLRB)  The board established by the National Labor Relations Act of 1935 to investigate unfair labor practices, issue cease-and-desist orders, and conduct elections among employees to determine if they wish to be represented by a labor union.
natural monopoly  An industry in which economies of scale are so great that a single firm can produce the product at a lower average total cost than would be possible if more than one firm produced the product.
natural rate of unemployment (NRU)  The full-employment unemployment rate; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation.
near-money  Financial assets, the most important of which are noncheckable savings accounts, time deposits, and U.S. short-term securities and savings bonds, which are not a medium of exchange but can be readily converted into money.
negative externality  A cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: A manufacturer dumps toxic chemicals into a river, killing the fish sought by sports fishers; an external cost or a spillover cost.
negative GDP gap  A situation in which actual gross domestic product is less than potential output.
negative relationship  (See inverse relationship.)
net domestic product  Gross domestic product less the part of the year's output that is needed to replace the capital goods worn out in producing the output; the nation's total output available for consumption or additions to the capital stock.
net exports  (n) Exports minus imports.
net foreign factor income  Receipts of resource income from the rest of the world minus payments of resource income to the rest of the world.
net investment income  The interest and dividend income received by the residents of a nation from residents of other nations less the interest and dividend payments made by the residents of that nation to the residents of other nations.
net private domestic investment  Gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year.
net taxes  The taxes collected by government less government transfer payments.
net transfers  The personal and government transfer payments made by one nation to residents of foreign nations less the personal and government transfer payments received from residents of foreign nations.
network effects  Increases in the value of a product to each user, including existing users, as the total number of users rises.
net worth  The total assets less the total liabilities of a firm or an individual; for a firm, the claims of the owners against the firm's total assets; for an individual, his or her wealth.
new classical economics  The theory that, although unanticipated price-level changes may create macroeconomic instability in the short run, the economy is stable at the full-employment level of domestic output in the long run because prices and wages adjust automatically to correct movements away from the full-employment, noninflationary output.
New Economy  The label attached by some economists and the popular press to the U.S. economy since 1995. The main characteristics are accelerated productivity growth and economic growth, caused by rapid technological advance and the emergence of the global economy.
NLRB  (See National Labor Relations Board.)
nominal gross domestic product (GDP)  The GDP measured in terms of the price level at the time of measurement (unadjusted for inflation).
nominal income  The number of dollars received by an individual or group for its resources during some period of time.
nominal interest rate  The interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation.
nominal wage  The amount of money received by a worker per unit of time (hour, day, etc.); money wage.
noncash transfer  A government transfer payment in the form of goods and services rather than money, for example, food stamps, housing assistance, and job training; also called in-kind transfers.
noncollusive oligopoly  An oligopoly in which the firms do not act together and in agreement to determine the price of the product and the output that each firm will produce.
noncompeting groups  Collections of workers in the economy who do not compete with each other for employment because the skill and training of the workers in one group are substantially different from those of the workers in other groups.
nondiscretionary fiscal policy  (See built-in stabilizer.)
nondurable good  A consumer good with an expected life (use) of less than 3 years.
nonexcludability  The inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a public good characteristic.
nonexhaustive expenditure  An expenditure by government that does not result directly in the employment of economic resources or the production of goods and services; see government transfer payment.
nonincome determinants of consumption and saving  All influences on consumption and saving other than the level of GDP.
noninterest determinants of investment  All influences on the level of investment spending other than the interest rate.
noninvestment transaction  An expenditure for stocks, bonds, or secondhand capital goods.
nonmarket transactions  The production of goods and services excluded in the measurement of the gross domestic product because they are not bought and sold.
nonprice competition  Competition based on distinguishing one's product by means of product differentiation and then advertising the distinguished product to consumers.
nonproduction transaction  The purchase and sale of any item that is not a currently produced good or service.
nonrivalry  The idea that one person's benefit from a certain good does not reduce the benefit available to others; a public good characteristic.
nontariff barriers (NTBs)  All barriers other than protective tariffs that nations erect to impede international trade, including import quotas, licensing requirements, unreasonable product-quality standards, unnecessary bureaucratic detail in customs procedures, and so on.
normal good  A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.
normal profit  The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.
normative economics  The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.
North American Free Trade Agreement (NAFTA)  A 1993 agreement establishing, over a 15-year period, a free-trade zone composed of Canada, Mexico, and the United States.
occupation  A category of activities or tasks performed by a set of workers for pay, independent of employer or industry. Examples are managers, nurses, farmers, and cooks.
occupational discrimination  The arbitrary restriction of particular groups from entering the more desirable, higher-paying occupations.
occupational licensure  The laws of state or local governments that require that a worker satisfy certain specified requirements and obtain a license from a licensing board before engaging in a particular occupation.
occupational segregation  The crowding of women or minorities into less desirable, lower-paying occupations.
official reserves  Foreign currencies owned by the central bank of a nation.
offshoring  The practice of shifting work previously done by American workers to workers located abroad.
Okun's law  The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment unemployment rate will increase the GDP gap by 2 percent of the potential output (GDP) of the economy.
oligopoly  A market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms), and in which there is typically nonprice competition.
OPEC  (See Organization of Petroleum Exporting Countries.)
open economy  An economy that exports and imports goods and services.
open-market operations  The buying and selling of U.S. government securities by the Federal Reserve Banks for purposes of carrying out monetary policy.
open shop  A place of employment in which the employer may hire nonunion workers and the workers need not become members of a labor union.
opportunity cost  The amount of other products that must be forgone or sacrificed to produce a unit of a product.
opportunity-cost ratio  An equivalency showing the number of units of two products that can be produced with the same resources; the cost 1 corn = 3 olives show that the resources required to produce 3 units of olives must be shifted to corn production to produce 1 unit of corn.
optimal amount of R&D  The level of R&D at which the marginal benefit and marginal cost of R&D expenditures are equal.
optimal reduction of an externality  The reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal.
Organization of Petroleum Exporting Countries (OPEC)  A cartel of 11 oil-producing countries (Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, Venezuela, and the UAE) that controls the quantity and price of crude oil exported by its members and that accounts for a large percentage of the world's export of oil.
other-things-equal assumption  The assumption that factors other than those being considered are held constant; ceteris paribus assumption.
outpayments  The expenditures of domestic or foreign currency that the individuals, firms, and governments of one nation make to purchase goods and services, for remittances, to pay investment income, and for purchases of foreign assets.
output effect  The situation in which an increase in the price of one input will increase a firm's production costs and reduce its level of output, thus reducing the demand for other inputs; conversely for a decrease in the price of the input.
paper money  Pieces of paper used as a medium of exchange; in the United States, Federal Reserve Notes.
paradox of voting  A situation where paired-choice voting by majority rule fails to provide a consistent ranking of society's preferences for public goods or services.
parity concept  The idea that year after year a specific output of a farm product should enable a farmer to acquire a constant amount of nonagricultural goods and services.
parity ratio  The ratio of the price received by farmers from the sale of an agricultural commodity to the prices of other goods paid by them; usually expressed as a percentage; used as a rationale for price supports.
partnership  An unincorporated firm owned and operated by two or more persons.
patent  An exclusive right given to inventors to produce and sell a new product or machine for 20 years from the time of patent application.
payments deficit  (See balance-of-payments deficit.)
payments surplus  (See balance-of-payments surplus.)
payroll tax  A tax levied on employers of labor equal to a percentage of all or part of the wages and salaries paid by them and on employees equal to a percentage of all or part of the wages and salaries received by them.
P= MC rule  The principle that a purely competitive firm will maximize its profit or minimize its loss by producing that output at which the price of the product is equal to marginal cost, provided that price is equal to or greater than average variable cost in the short run and equal to or greater than average total cost in the long run.
peak  The point in a business cycle at which business activity has reached a temporary maximum; the economy is near or at full employment and the level of real output is at or very close to the economy's capacity.
per capita GDP  Gross domestic product (GDP) per person; the average GDP of a population.
per capita income  A nation's total income per person; the average income of a population.
perfectly elastic demand  Product or resource demand in which quantity demanded can be of any amount at a particular product price; graphs as a horizontal demand curve.
perfectly elastic supply  Product or resource supply in which quantity supplied can be of any amount at a particular product or resource price; graphs as a horizontal supply curve.
perfectly inelastic demand  Product or resource demand in which price can be of any amount at a particular quantity of the product or resource demanded; quantity demanded does not respond to a change in price; graphs as a vertical demand curve.
perfectly inelastic supply  Product or resource supply in which price can be of any amount at a particular quantity of the product or resource demanded; quantity supplied does not respond to a change in price; graphs as a vertical supply curve.
per se violations  Collusive actions, such as attempts by firms to fix prices or divide a market, that are violations of the antitrust laws, even if the actions themselves are unsuccessful.
personal consumption expenditures  The expenditures of households for durable and nondurable consumer goods and services.
personal distribution of income  The manner in which the economy's personal or disposable income is divided among different income classes or different households or families.
personal income (PI)  The earned and unearned income available to resource suppliers and others before the payment of personal taxes.
personal income tax  A tax levied on the taxable income of individuals, households, and unincorporated firms.
Personal Responsibility Act  A 1996 law that eliminated the Federal government's six-decade-long guarantee of cash assistance for poor families, whether adults in the family work or not; sets a limit of 5 years on receiving Temporary Assistance for Needy Families (TANF) benefits and requires that able-bodied adults work after 2 years to continue to receive public assistance.
personal saving  The personal income of households less personal taxes and personal consumption expenditures; disposable income not spent for consumer goods.
per-unit production cost  The average production cost of a particular level of output; total input cost divided by units of output.
Phillips Curve  A curve showing the relationship between the unemployment rate (on the horizontal axis) and the annual rate of increase in the price level (on the vertical axis).
planned investment  The amount that firms plan or intend to invest.
plant  A physical establishment that performs one or more functions in the production, fabrication, and distribution of goods and services.
"play or pay"  A means of expanding health insurance coverage by requiring that employers either provide insurance for their workers or pay a special payroll tax to finance insurance for noncovered workers.
policy economics  The formulation of courses of action to bring about desired economic outcomes or to prevent undesired occurrences.
political business cycle  The alleged tendency of Congress to destabilize the economy by reducing taxes and increasing government expenditures before elections and to raise taxes and lower expenditures after elections.
positive economics  The analysis of facts or data to establish scientific generalizations about economic behavior.
positive externality  A benefit obtained without compensation by third parties from the production or consumption of sellers or buyers. Example: A beekeeper benefits when a neighboring farmer plants clover. An external benefit or a spillover benefit.
positive GDP gap  A situation in which actual gross domestic product exceeds potential output.
positive relationship  (See direct relationship.)
post hoc, ergo propter hoc fallacy  The false belief that when one event precedes another, the first event must have caused the second event.
potential competition  The new competitors that may be induced to enter an industry if firms now in that industry are receiving large economic profits.
potential output  The real output (GDP) an economy can produce when it fully employs its available resources.
poverty  A situation in which the basic needs of an individual or family exceed the means to satisfy them.
poverty rate  The percentage of the population with incomes below the official poverty income levels that are established by the Federal government.
preferred provider organization (PPO)  An arrangement in which doctors and hospitals agree to provide health care to insured individuals at rates negotiated with an insurer.
price  The amount of money needed to buy a particular good, service, or resource.
price ceiling  A legally established maximum price for a good or service.
price discrimination  The selling of a product to different buyers at different prices when the price differences are not justified by differences in cost.
price elasticity of demand  The ratio of the percentage change in quantity demanded of a product or resource to the percentage change in its price; a measure of the responsiveness of buyers to a change in the price of a product or resource.
price elasticity of supply  The ratio of the percentage change in quantity supplied of a product or resource to the percentage change in its price; a measure of the responsiveness of producers to a change in the price of a product or resource.
price fixing  The conspiring by two or more firms to set the price of their products; an illegal practice under the Sherman Act.
price floor  A legally determined minimum price above the equilibrium price.
price index  An index number that shows how the weighted-average price of a "market basket" of goods changes over time.
price leadership  An informal method that firms in an oligopoly may employ to set the price of their product: One firm (the leader) is the first to announce a change in price, and the other firms (the followers) soon announce identical or similar changes.
price level  The weighted average of the prices of all the final goods and services produced in an economy.
price-level stability  A steadiness of the price level from one period to the next; zero or low annual inflation; also called "price stability."
price-level surprises  Unanticipated changes in the price level.
price maker  A seller (or buyer) of a product or resource that is able to affect the product or resource price by changing the amount it sells (or buys).
price support  A minimum price that government allows sellers to receive for a good or service; a legally established or maintained minimum price.
price taker  A seller (or buyer) of a product or resource that is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys).
price war  Successive and continued decreases in the prices charged by firms in an oligopolistic industry. Each firm lowers its price below rivals' prices, hoping to increase its sales and revenues at its rivals' expense.
prime interest rate  The benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals.
principal-agent problem  A conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals' (stockholders') goals.
private good  A good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits.
private property  The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.
private sector  The households and business firms of the economy.
process innovation  The development and use of new or improved production or distribution methods.
producer surplus  The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.
product differentiation  A strategy in which one firm's product is distinguished from competing products by means of its design, related services, quality, location, or other attributes (except price).
product innovation  The development and sale of a new or improved product (or service).
production possibilities curve  A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.
productive efficiency  The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs.
productivity  A measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work.
productivity growth  The percentage increase in productivity from one period to another.
product market  A market in which products are sold by firms and bought by households.
profit  The return to the resource entrepreneurial ability (see normal profit); total revenue minus total cost (see economic profit).
profit-maximizing combination of resources  The quantity of each resource a firm must employ to maximize its profit or minimize its loss; the combination in which the marginal revenue product of each resource is equal to its marginal resource cost (to its price if the resource is employed in a competitive market).
profit-sharing plan  A compensation device through which workers receive part of their pay in the form of a share of their employer's profit (if any).
progressive tax  A tax whose average tax rate increases as the taxpayer's income increases and decreases as the taxpayer's income decreases.
property tax  A tax on the value of property (capital, land, stocks and bonds, and other assets) owned by firms and households.
proportional tax  A tax whose average tax rate remains constant as the taxpayer's income increases or decreases.
proprietor's income  The net income of the owners of unincorporated firms (proprietorships and partnerships).
protective tariff  A tariff designed to shield domestic producers of a good or service from the competition of foreign producers.
public assistance programs  Government programs that pay benefits to those who are unable to earn income (because of permanent disabilities or because they have very low income and dependent children); financed by general tax revenues and viewed as public charity (rather than earned rights).
public choice theory  The economic analysis of government decision making, politics, and elections.
public debt  The total amount owed by the Federal government to the owners of government securities; equal to the sum of past government budget deficits less government budget surpluses.
public good  A good or service that is characterized by nonrivalry and nonexcludability; a good or service with these characteristics provided by government.
public interest theory of regulation  The presumption that the purpose of the regulation of an industry is to protect the public (consumers) from abuse of the power possessed by natural monopolies.
public investments  Government expenditures on public capital (such as roads, highways, bridges, mass-transit systems, and electric power facilities) and on human capital (such as education, training, and health).
public sector  The part of the economy that contains all government entities; government.
public utility  A firm that produces an essential good or service, has obtained from a government the right to be the sole supplier of the good or service in the area, and is regulated by that government to prevent the abuse of its monopoly power.
purchasing power  The amount of goods and services that a monetary unit of income can buy.
purchasing power parity  The idea that exchange rates between nations equate the purchasing power of various currencies. Exchange rates between any two nations adjust to reflect the price-level differences between the countries.
pure competition  A market structure in which a very large number of firms sells a standardized product, into which entry is very easy, in which the individual seller has no control over the product price, and in which there is no nonprice competition; a market characterized by a very large number of buyers and sellers.
purely competitive labor market  A resource market in which many firms compete with one another in hiring a specific kind of labor, numerous equally qualified workers supply that labor, and no one controls the market wage rate.
pure monopoly  A market structure in which one firm sells a unique product, into which entry is blocked, in which the single firm has considerable control over product price, and in which nonprice competition may or may not be found.
pure profit  (See economic profit.)
pure rate of interest  An essentially risk-free, long-term interest rate that is free of the influence of market imperfections.
quantity demanded  The amount of a good or service that buyers (or a buyer) desire to purchase at a particular price during some period.
quantity supplied  The amount of a good or service that producers (or a producer) offer to sell at a particular price during some period.
quasi-public bank  A bank that is privately owned but governmentally (publicly) controlled; each of the U.S. Federal Reserve Banks.
quasi-public good  A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an under-allocation of resources.
R&D  Research and development activities undertaken to bring about technological advance.
rate of exchange  The price paid in one's own money to acquire 1 unit of a foreign currency; the rate at which the money of one nation is exchanged for the money of another nation.
rate of return  The gain in net revenue divided by the cost of an investment or an R&D expenditure; expressed as a percentage.
rational behavior  Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility.
rational expectations theory  The hypothesis that firms and households expect monetary and fiscal policies to have certain effects on the economy and (in pursuit of their own self-interests) take actions that make these policies ineffective.
rationing function of prices  The ability of market forces in competitive markets to equalize quantity demanded and quantity supplied and to eliminate shortages and surpluses via changes in prices.
real-balances effect  The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.
real-business-cycle theory  A theory that business cycles result from changes in technology and resource availability, which affect productivity and thus increase or decrease long-run aggregate supply.
real capital  (See capital.)
real GDP  (See real gross domestic product.)
real GDP per capita  Inflation -adjusted output per person; real GDP /population.
real gross domestic product (GDP)  Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal.
real income  The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.
real interest rate  The interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.
real wage  The amount of goods and services a worker can purchase with his or her nominal wage; the purchasing power of the nominal wage.
recession  A period of declining real GDP, accompanied by lower real income and higher unemployment.
recessionary expenditure gap  The amount by which the aggregate expenditures schedule must shift upward to increase the real GDP to its full-employment, noninflationary level.
Reciprocal Trade Agreements Act  A 1934 Federal law that authorized the president to negotiate up to 50 percent lower tariffs with foreign nations that agreed to reduce their tariffs on U.S. goods. (Such agreements incorporated the most-favored-nation clause.)
refinancing the public debt  Paying owners of maturing government securities with money obtained by selling new securities or with new securities.
regressive tax  A tax whose average tax rate decreases as the taxpayer's income increases and increases as the taxpayer's income decreases.
regulatory agency  An agency, commission, or board established by the Federal government or a state government to control the prices charged and the services offered by a natural monopoly.
rental income  The payments (income) received by those who supply land to the economy.
rent-seeking behavior  The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense.
required reserves  The funds that banks and thrifts must deposit with the Federal Reserve Bank (or hold as vault cash) to meet the legal reserve requirement; a fixed percentage of the bank's or thrift's checkable deposits.
reserve requirement  The specified minimum percentage of its checkable deposits that a bank or thrift must keep on deposit at the Federal Reserve Bank in its district or hold as vault cash.
resource  A natural, human, or manufactured item that helps produce goods and services; a productive agent or factor of production.
resource market  A market in which households sell and firms buy resources or the services of resources.
restrictive monetary policy  Federal Reserve system actions to reduce the money supply, increase interest rates, and reduce inflation ; a tight money policy.
revenue tariff  A tariff designed to produce income for the Federal government.
reverse discrimination  The view that the preferential treatment associated with affirmative action efforts constitutes discrimination against other groups.
right-to-work law  A state law (in about 22 states) that makes it illegal to require that a worker join a labor union in order to retain his or her job; laws that make union shops and agency shops illegal.
rule of reason  The rule stated and applied in the U.S. Steel case that only combinations and contracts unreasonably restraining trade are subject to actions under the antitrust laws and that size and possession of monopoly power are not illegal.
rule of 70  A method for determining the number of years it will take for some measure to double, given its annual percentage increase. Example: To determine the number of years it will take for the price level to double, divide 70 by the annual rate of inflation.
sales tax  A tax levied on the cost (at retail) of a broad group of products.
saving  Disposable income not spent for consumer goods; equal to disposable income minus personal consumption expenditures.
savings account  A deposit in a commercial bank or thrift institution on which interest payments are received; generally used for saving rather than daily transactions; a component of the M 2 money supply.
savings and loan association (S&L)  A firm that accepts deposits primarily from small individual savers and lends primarily to individuals to finance purchases such as autos and homes; now nearly indistinguishable from a commercial bank.
saving schedule  A schedule that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income.
savings deposit  A deposit that is interest-bearing and that the depositor can normally withdraw at any time.
savings institution  (See thrift institution.)
Say's law  The largely discredited macroeconomic generalization that the production of goods and services (supply) creates an equal demand for those goods and services.
scarce resources  The limited quantities of land, capital, labor, and entrepreneurial ability that are never sufficient to satisfy people's virtually unlimited economic wants.
scientific method  The procedure for the systematic pursuit of knowledge involving the observation of facts and the formulation and testing of hypotheses to obtain theories, principles, and laws.
seasonal variations  Increases and decreases in the level of economic activity within a single year, caused by a change in the season.
secular trend  A long-term tendency; a change in some variable over a very long period of years.
self-interest  That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.
seniority  The length of time a worker has been employed absolutely or relative to other workers; may be used to determine which workers will be laid off when there is insufficient work for them all and who will be rehired when more work becomes available.
separation of ownership and control  The fact that different groups of people own a corporation (the stockholders) and manage it (the directors and officers).
service  An (intangible) act or use for which a consumer, firm, or government is willing to pay.
Sherman Act  The Federal antitrust act of 1890 that makes monopoly and conspiracies to restrain trade criminal offenses.
shirking  Workers' neglecting or evading work to increase their utility or well-being.
shortage  The amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price.
short run  (1) In microeconomics, a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable. (2) In macroeconomics, a period in which nominal wages and other input prices do not change in response to a change in the price level.
short-run aggregate supply curve  An aggregate supply curve relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level.
short-run competitive equilibrium  The price at which the total quantity of a product supplied in the short run in a purely competitive industry equals the total quantity of the product demanded and hat is equal to or greater than average variable cost.
short-run supply curve  A supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firm's short-run marginal cost curve that lies above its average-variable-cost curve.
shutdown case  The circumstance in which a firm would experience a loss greater than its total fixed cost if it were to produce any output greater than zero; alternatively, a situation in which a firm would cease to operate when the price at which it can sell its product is less than its average variable cost.
simple multiplier  The multiplier in any economy in which government collects no net taxes, there are no imports, and investment is independent of the level of income; equal to 1 divided by the marginal propensity to save.
simultaneous consumption  The same-time derivation of utility from some product by a large number of consumers.
slope of a line  The ratio of the vertical change (the rise or fall) to the horizontal change (the run) between any two points on a line. The slope of an upward-sloping line is positive, reflecting a direct relationship between two variables; the slope of a downward- sloping line is negative, reflecting an inverse relationship between two variables.
Smoot-Hawley Tariff Act  Legislation passed in 1930 that established very high tariffs. Its objective was to reduce imports and stimulate the domestic economy, but it resulted only in retaliatory tariffs by other nations.
social insurance programs  Programs that replace the earnings lost when people retire or are temporarily unemployed, that are financed by payroll taxes, and that are viewed as earned rights (rather than charity).
socially optimal price  The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product.
social regulation  Regulation in which government is concerned with the conditions under which goods and services are produced, their physical characteristics, and the impact of their production on society; in contrast to industrial regulation.
Social Security  The social insurance program in the United States financed by Federal payroll taxes on employers and employees and designed to replace a portion of the earnings lost when workers become disabled, retire, or die.
Social Security trust fund  A Federal fund that saves excessive Social Security tax revenues received in one year to meet Social Security benefit obligations that exceed Social Security tax revenues in some subsequent year.
sole proprietorship  An unincorporated firm owned and operated by one person.
special-interest effect  Any result of government promotion of the interests (goals) of a small group at the expense of a much larger group.
specialization  The use of the resources of an individual, a firm, a region, or a nation to concentrate production on one or a small number of goods and services.
speculation  The activity of buying or selling with the motive of later reselling or rebuying for profit.
SSI  (See Supplemental Security Income.)
stagflation  Inflation accompanied by stagnation in the rate of growth of output and an increase in unemployment in the economy; simultaneous increases in the inflation rate and the unemployment rate.
standardized budget  A comparison of the government expenditures and tax collections that would occur if the economy operated at full employment throughout the year; the full-employment budget.
standardized product  A product whose buyers are indifferent to the seller from whom they purchase it as long as the price charged by all sellers is the same; a product all units of which are identical and thus are perfect substitutes for each other.
Standard Oil case  A 1911 antitrust case in which Standard Oil was found guilty of violating the Sherman Act by illegally monopolizing the petroleum industry. As a remedy the company was divided into several competing firms.
start-up (firm)  A new firm focused on creating and introducing a particular new product or employing a specific new production or distribution method.
state bank  A commercial bank authorized by a state government to engage in the business of banking.
static economy  A hypothetical economy in which the basic forces such as resource supplies, technological knowledge, and consumer tastes are constant and unchanging.
statistical discrimination  The practice of judging an individual on the basis of the average characteristic of the group to which he or she belongs rather than on his or her own personal characteristics.
stock (corporate)  An ownership share in a corporation.
stock options  Contracts that enable executives or other key employees to buy shares of their employers' stock at fixed, lower prices when the stock prices rise.
store of value  An asset set aside for future use; one of the three functions of money.
strategic behavior  Self-interested economic actions that take into account the expected reactions of others.
strategic trade policy  The use of trade barriers to reduce the risk inherent in product development by domestic firms, particularly that involving advanced technology.
strike  The withholding of labor services by an organized group of workers (a labor union).
structural-change hypothesis  The explanation that ascribes the decline of unionism in the United States to changes in the structure of the economy and of the labor force.
structural unemployment  Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.
subsidy  A payment of funds (or goods and services) by a government, firm, or household for which it receives no good or service in return. When made by a government, it is a government transfer payment.
substitute goods  Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
substitution effect  (1) A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the product's price; (2) the effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.
sunk cost  A cost that has been incurred and cannot be recovered.
Supplemental Security Income (SSI)  A federally financed and administered program that provides a uniform nationwide minimum income for the aged, blind, and disabled who do not qualify for benefits under Social Security in the United States.
supply  A schedule showing the amounts of a good or service that sellers (or a seller) will offer at various prices during some period.
supply curve  A curve illustrating supply.
supply factor (in growth)  An increase in the availability of a resource, an improvement in its quality, or an expansion of technological knowledge that makes it possible for an economy to produce a greater output of goods and services.
supply schedule  (See supply.)
supply-side economics  A view of macroeconomics that emphasizes the role of costs and aggregate supply in explaining inflation, unemployment, and economic growth.
surplus  The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.
surplus payment  A payment to a resource that is not required to ensure its availability in the production process; for example, land rent.
tacit understanding  Any method used by an oligopolist to set prices and outputs that does not involve outright (or overt) collusion. Price leadership is a frequent example.
TANF  (See Temporary Assistance for Needy Families.)
tariff  A tax imposed by a nation on an imported good.
taste-for-discrimination model  A theory that views discrimination as a preference for which an employer is willing to pay.
tax  An involuntary payment of money (or goods and services) to a government by a household or firm for which the household or firm receives no good or service directly in return.
taxes on production and imports  A national income accounting category that includes such taxes as sales,excise, business property taxes, and tariffs which firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price.
tax incidence  The person or group that ends up paying a tax.
tax subsidy  A grant in the form of reduced taxes through favorable tax treatment. For example, employer-paid health insurance is exempt from Federal income and payroll taxes.
tax-transfer disincentives  Decreases in the incentives to work, save, invest, innovate, and take risks that allegedly result from high marginal tax rates and transfer payments.
Taylor rule  A modern monetary rule proposed by economist John Taylor that would stipulate exactly how much the Federal Reserve should change interest rates in response to divergences of real GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation.
technological advance  New and better goods and services and new and better ways of producing or distributing them.
technology  The body of knowledge and techniques that can be used to combine economic resources to produce goods and services.
Temporary Assistance for Needy Families (TANF)  A state-administered and partly federally funded program in the United States that provides financial aid to poor families; the basic welfare program for low-income families in the United States; contains time limits and work requirements.
terms of trade  The rate at which units of one product can be exchanged for units of another product; the price of a good or service; the amount of one good or service that must be given up to obtain 1 unit of another good or service.
theoretical economics  The process of deriving and applying economic theories and principles.
theory of human capital  The generalization that wage differentials are the result of differences in the amount of human capital investment and that the incomes of lower-paid workers are raised by increasing the amount of such investment.
thrift institution  A savings and loan association, mutual savings bank, or credit union.
till money  (See vault cash.)
time deposit  An interest-earning deposit in a commercial bank or thrift institution that the depositor can withdraw without penalty after the end of a specified period.
total cost  The sum of fixed cost and variable cost.
total demand  The demand schedule or the demand curve of all buyers of a good or service; also called market demand.
total demand for money  The sum of the transactions demand for money and the asset demand for money.
total product (TP)  The total output of a particular good or service produced by a firm (or a group of firms or the entire economy).
total revenue (TR)  The total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.
total-revenue test  A test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it does not change when price changes.
total spending  The total amount that buyers of goods and services spend or plan to spend; also called aggregate expenditures.
total supply  The supply schedule or the supply curve of all sellers of a good or service; also called market supply.
total utility  The total amount of satisfaction derived from the consumption of a single product or a combination of products.
Trade Adjustment Assistance Act  A U.S. law passed in 2002 that provides cash assistance, education and training benefits, health care subsidies, and wage subsidies (for persons age 50 or older) to workers displaced by imports or relocations of U.S. plants to other countries.
trade balance  The export of goods (or goods and services) of a nation less its imports of goods (or goods and services).
trade bloc  A group of nations that lower or abolish trade barriers among members. Examples include the European Union and the nations of the North American Free Trade Agreement.
trade controls  Tariffs, export subsidies, import quotas, and other means a nation may employ to reduce imports and expand exports.
trade deficit  The amount by which a nation's imports of goods (or goods and services) exceed its exports of goods (or goods and services).
trademark  A legal protection that gives the originators of a product an exclusive right to use the brand name.
tradeoff  The sacrifice of some or all of one economic goal, good, or service to achieve some other goal, good, or service.
trade surplus  The amount by which a nation's exports of goods (or goods and services) exceed its imports of goods (or goods and services).
trading possibilities line  A line that shows the different combinations of two products that an economy is able to obtain (consume) when it specializes in the production of one product and trades (exports) it to obtain the other product.
tragedy of the commons  The tendency for commonly owned natural resources to be overused, neglected, or degraded because their common ownership gives nobody an incentive to maintain or improve them.
transactions demand for money  The amount of money people want to hold for use as a medium of exchange (to make payments); varies directly with the nominal GDP.
transfer payment  A payment of money (or goods and services) by a government to a household or firm for which the payer receives no good or service directly in return.
tying contract  A requirement imposed by a seller that a buyer purchase another (or other) of its products as a condition for buying a desired product; a practice forbidden by the Clayton Act.
unanticipated inflation  Increases in the price level (inflation) at a rate greater than expected.
unauthorized immigrant  A person who enters a country unlawfully for the purposes of residing there.
underemployment  A situation in which workers are employed in positions requiring less education and skill than they have.
undistributed corporate profits  After-tax corporate profits not distributed as dividends to stockholders; corporate or business saving; also called retained earnings.
unemployment  The failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force.
unemployment compensation  (See unemployment insurance).
unemployment insurance  The social insurance program that in the United States is financed by state payroll taxes on employers and makes income available to workers who become unemployed and are unable to find jobs.
unemployment rate  The percentage of the labor force unemployed at any time.
uninsurable risk  An event that would result in a loss and whose occurrence is uncontrollable and unpredictable. Insurance companies are not willing to sell insurance against such a loss.
union shop  A place of employment where the employer may hire either labor union members or nonmembers but where nonmembers must become members within a specified period of time or lose their jobs.
unit elasticity  Demand or supply for which the elasticity coefficient is equal to 1; means that the percentage change in the quantity demanded or supplied is equal to the percentage change in price.
unit labor cost  Labor cost per unit of output; total labor cost divided by total output; also equal to the nominal wage rate divided by the average product of labor.
unit of account  A standard unit in which prices can be stated and the value of goods and services can be compared; one of the three functions of money.
unlimited liability  Absence of any limits on the maximum amount that an individual (usually a business owner) may become legally required to pay.
unlimited wants  The insatiable desire of consumers for goods and services that will give them satisfaction or utility.
unplanned changes in inventories  Changes in inventories that firms did not anticipate; changes in inventories that occur because of unexpected increases or decreases of aggregate spending (of aggregate expenditures).
unplanned investment  Actual investment less planned investment; increases or decreases in the inventories of firms resulting from production greater than sales.
Uruguay Round  A 1995 trade agreement (fully implemented in 2005) that established the World Trade Organization (WTO), liberalized trade in goods and services, provided added protection to intellectual property (for example, patents and copyrights), and reduced farm subsidies.
U.S. securities  U.S. Treasury bills, notes, and bonds used to finance budget deficits ; the components of the public debt.
U.S. Steel case  The antitrust action brought by the Federal government against the U.S. Steel Corporation in which the courts ruled (in 1920) that only unreasonable restraints of trade were illegal and that size and the possession of monopoly power were not violations of the antitrust laws.
usury laws  State laws that specify the maximum legal interest rate at which loans can be made.
utility  The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).
utility-maximizing rule  The principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.
value added  The value of the product sold by a firm less the value of the products (materials) purchased and used by the firm to produce the product.
value-added tax  A tax imposed on the difference between the value of the product sold by a firm and the value of the goods purchased from other firms to produce the product; used in several European countries.
value judgment  Opinion of what is desirable or undesirable; belief regarding what ought or ought not to be (regarding what is right or just and wrong or unjust).
value of money  The quantity of goods and services for which a unit of money (a dollar) can be exchanged; the purchasing power of a unit of money; the reciprocal of the price index.
variable cost  A cost that in total increases when the firm increases its output and decreases when the firm reduces its output.
VAT  (See value-added tax.)
vault cash  The currency a bank has in its vault and cash drawers.
velocity  The number of times per year that the average dollar in the money supply is spent for final goods and services; nominal GDP divided by the money supply.
venture capital  That part of household saving used to finance high-risk business enterprises in exchange for shares of the profit if the enterprise succeeds.
vertical axis  The "up-down" or "north-south" measurement line on a graph or grid.
vertical integration  A group of plants engaged in different stages of the production of a final product and owned by a single firm.
vertical intercept  The point at which a line meets the vertical axis of a graph.
vertical merger  The merger of one or more firms engaged in different stages of the production of a final product.
very long run  A period in which technology can change and in which firms can introduce new products.
voice mechanism  Communication by workers through their union to resolve grievances with an employer.
voluntary export restrictions  Voluntary limitations by countries or firms of their exports to a particular foreign nation to avoid enactment of formal trade barriers by that nation.
wage  The price paid for the use or services of labor per unit of time (per hour, per day, and so on).
wage differential  The difference between the wage received by one worker or group of workers and that received by another worker or group of workers.
wage discrimination  The payment of a lower wage to members of a less preferred group than that paid to members of a more preferred group for the same work.
wage rate  (See wage.)
wages  The income of those who supply the economy with labor.
wealth  Anything that has value because it produces income or could produce income. Wealth is a stock; income is a flow. Assets less liabilities; net worth.
wealth effect  The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls.
welfare programs  (See public assistance programs.)
Wheeler-Lea Act  The Federal act of 1938 that amended the Federal Trade Commission Act by prohibiting and giving the commission power to investigate unfair and deceptive acts or practices of commerce (such as false and misleading advertising and the misrepresentation of products).
World Bank  A bank that lends (and guarantees loans) to developing nations to assist them in increasing their capital stock and thus in achieving economic growth.
world price  The international market price of a good or service, determined by world demand and supply.
World Trade Organization (WTO)  An organization of 149 nations (as of fall 2006) that oversees the provisions of the current world trade agreement, resolves trade disputes stemming from it, and holds forums for further rounds of trade negotiations.
WTO  (See World Trade Organization.)
X-inefficiency  The production of output, whatever it level, at a higher average (and total) cost than is necessary for producing that level of output.





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