G l o s s a r y

A B C D E F G H I J K L M N O P Q R S T U V W

-A-

Average Total Cost – When total cost is divided by the level of output, average total cost is defined. For example, if production of 100 units of output entails a total cost of $500, average total cost will equal $5 per unit of output. The average total cost curve is just the vertical summation of the average variable cost curve and the average fixed cost curve.

-B-

Balance of Trade – The current account measures the difference between U.S. imports and exports of goods and services. That part of the current account balance reflecting merchandise transactions is known as the balance of trade. If U.S. imports exceed U.S. exports, a current-account deficit occurs.

Balanced Budget – In the case where government expenditures are exactly equal to tax revenues in a given year, the government is running a balanced budget for that year.

Barriers to Entry – A barrier to entry is anything that prevents firms from entering a market. Many types of barriers to entry give rise to a monopolistic market structure. Some of the more common barriers to entry are:

• Patents: If a firm holds a patent on a production process, it can legally exclude other firms from using that process for a number of years. If there are no other production processes that can be used, the firm that holds the patent will have a monopoly.
• Large start-up costs: In some markets, firms will face large start-up costs – for example, the cost of building a new production facility. If these start-up costs are large enough, most firms will be discouraged from entering the market.
• Limited access to resources: A monopolistic market structure is likely to arise when access to resources needed for production is limited. The market for diamonds, for example, is dominated by a single firm that owns most of the world’s diamond mines.

Budget Deficit – When government expenditures exceed government tax revenues in a given year, the government is running a budget deficit for that year. The budget deficit, which is the difference between government expenditures and tax revenues, is financed by government borrowing; the government issues long-term, interest-bearing bonds and uses the proceeds to finance the deficit. The total stock of government bonds and interest payments outstanding, from both the present and the past, is known as the national debt. Thus, when the government finances a deficit by borrowing, it is adding to the national debt.

Budget Surplus – When government expenditures are less than tax revenues in a given year, the government is running a budget surplus for that year. The budget surplus is the difference between tax revenues and government expenditures. The revenues from the budget surplus are typically used to reduce any existing national debt. Stock of government bonds and interest payments outstanding, from both the present and the past, is known as the national debt. Thus, when the government finances a deficit by borrowing, it is adding to the national debt.

Business Cycle - The tendency of economies to move, over time, through periods of boom and slump and occurs when real GDP moves away from its trend path. The business cycle is the fluctuations in the rate of economic growth that take place in the economy. These fluctuations appear to occur around every five years and have probably occurred ever since economies have occurred! It is the aim of all governments to try to dampen the effects of the business cycle and get more balanced long-term growth, but so far they have had limited success. The peak of the business cycle is usually referred to as a boom, and the trough as a recession or depression.

-C-

Capital Resources – Capital Resources are input goods that are purchased in order to increase the production of future output. Capital goods include tangible goods, such as buildings and structures, machinery and equipment, and inventories of goods in process. Capital goods also include intangible goods such as franchises, literary rights, and product brand names. An individual’s investment in knowledge from taking classes or learning “on the job” is another form of intangible capital called human capital.

Cartel – A cartel is defined as a group of firms that gets together to make output and price decisions. The conditions that give rise to an oligopolistic market are also conducive to the formation of a cartel; in particular, cartels tend to arise in markets where there are few firms and each firm has a significant share of the market. In the U.S., cartels are illegal; however, internationally, there are no restrictions on cartel formation. The organization of petroleum-exporting countries (OPEC) is perhaps the best-known example of an international cartel; OPEC members meet regularly to decide how must oil each member of the cartel will be allowed to produce. Oligopolistic firms join a cartel to increase their market power, and members work together to determine jointly the level of output that each member will produce and/or the price that each member will charge. By working together, the cartel members are able to behave like a monopolist. For example, if each firm in an oligopoly sells an undifferentiated product like oil, the demand curve that each firm faces will be horizontal at the market price. If, however, the oil-producing firms form a cartel like OPEC to determine their output and price, they will jointly face a downward-sloping market demand curve, just like a monopolist.

Complementary goods – If two goods are complements to each other, the enjoyment that comes with the use of one good is enhanced by consuming the other along with it. Thus a decline in the price of a complementary good will lead to a rise in the demand for its complement. Examples of complementary goods include bread and butter, and compact discs and compact-disc player. If the cross-price elasticity of demand is negative, the goods X and Y must be complements.

COLA – Cost-of-living adjustments written into labor contracts protect workers’ real wages from falling; they raise wages automatically to keep pace, either partially or totally, with increases in the price level.

Concentration Ratio – The concentration ratio measures the market power of the leading firms in an industry. The concentration ratio is the fraction of total industry sales composed of the sales of the largest firms in the industry. The four leading firms in the industry are usually used to form the concentration the concentration ratio. For example, the top four firms in an industry might have market shares of 20, 15, 10, and 8 percent. The concentration ratio based on the leading four firms equals 53 percent

Consumption possibilities curve - begins at the point where a company (or state or local govt) specializes in production of the good in which it has a comparative advantage and would have a slope equal to the terms of trade. Since a company (or state or local govt) can trade for a greater quantity that it can produce, the consumption possibilities curve has rotated outward and the company (or state or local govt) has increased it consumption alternatives.

Contractionary Fiscal Policy – is defined as a decrease in government expenditures and/or an increase in taxes that causes the government’s budget deficit to decrease or its budget surplus to increase.

Cost-Benefit Analysis – Cost-benefit analysis involves calculation of the present-value dollar costs and benefits of activities such as building a dam, highway, or chemical-waste facility. Comparison is then made to determine whether the potential benefits exceed costs by a sufficient amount to warrant undertaking the project. This information is also used for ranking projects. The project with the greatest benefits compared to costs can be determined.

Cyclical Unemployment – The cyclically unemployed are individuals out of work because the economy is in a state of recession. Individuals who are cyclically unemployed generally return to work in the same or a similar position when the recession is over.


-D-

Demand- quantity of goods or services which buyers are ready, willing, and able
to take. E.g. Demand for ice cream cones is 6 millions a day. Consumers' total
demand for a product is reflected in the demand Curve.

Demands factors- a circumstance which influences the need for a good, service
or factors ot production.

Diminishing returns- given some mixture of factors of production in which one
of the factors is in less than optimum quantity. Adding certain percentage of
that factor will increase the output by more than that percentage until the
optimum is reached. After that point, called the point of decreasing returns,
adding more of that factor (keeping all other factors constant) will result in
smaller percentage increases in output. E.g. consider a factory with large
amount of machinery and natural resources. These can Keep certain number of
workers occupied. As more labor is added, employees work in teams. And
efficiency continues to increase up to a certain point. Further additions over
burden the resources and the output starts decreasing. It could even find a
negative Change in output results.

-E -

Economic growth- the growth in the total, or per capita, Output of an economy,
often measured by an increase in real gross national product, and caused by an
increase in the Supply of factors of production or their productivity.
The achievement of a high rate of economy growth is one of the four main
objectives of macroeconomic policy. The significance of economic growth lies in
its contribution to the general prosperity of the community.

Economics- the examination of the allocation of limited resources for the
Satisfaction of the unlimited wants Of humans. The problem is that whereas
wants are virtually without limit, the resources- natural resources, labor and
capital- available at any one time to produce goods and services, are limited
in supply; i.e., resources are scarce relative to the demands They are Called
upon to satisfy. Economics has a microeconomic and a macroeconomic dimension. Microeconomics is concerned with the efficient supply of particular products. Macroeconomics is concerned with the overall efficiency of resource use in the economy.

Equilibrium market price- the price at which the quantity demanded of a good is
exactly equal to the quantity Supplied.


-G-
Goods: Anything of value that you would want to buy or use your scares resources to acquire. A good is anything that would create a net gain in utility. It is not necessarily a physical item as in canned goods but if you wanted your car repaired you might think it is a service but in the economics world traditional goods and services are called just “goods”. Example: Crossing the Sahara desert in a Jeep, you might need to acquire goods along the way. It might be bottled water or it might be to have your radiator repaired or it might be direction as to which way to go. One is a physical thing, one is a service and one is information, but if you need any of them, the act or acquiring them would advance your well-being

Normal goods: These are the first choice good of the consumers. There behavior is true to the law of demand in that the demand for normal goods increases when income increases. Normal goods are in contrast to substitute good or inferior goods. Example:, Diet Coke is to many a normal good, many people will pay the price because of personal taste and brand loyalty.

Inferior goods: Goods that are seen as second-rate substitution goods. They take the place of normal goods if the demand for the Normal goods shifts to the right and the price increases. Consumers turn to an inferior good to replace it. What identifies it as a inferior good rather than a substitute good is as soon the individual incomes rises consumers dump the inferior good and return to buying the normal good.

Substitute Goods: A substitute good is one that is normally interchangeable in the market like Cola and Root Beer, the rise in price of one will trigger a rise in demand for the other. Because people will turn to the substitute good as prices rise for the normal good, the substitute becomes more in demand raising its price also. Example: Increased demand for cola will have an effect on other sodas but will not affect sales of beer or hot coffee.

Complementary Goods: Goods that tend to be a match set. The enjoyment of the pair of goods is greater than each when consumed individually. There for a rise in the demand for one tends to trigger a rise in the demand for the other, not as a replacement but as a companion. Example: A increased demand for pepperoni pizza will cause a corresponding demand for beer. Same with freedom fries and ketchup or Corona’s and limes.

Government Spending: Government spending does not happen in a true market economy. Most venders exist solely to supply the Government, government regulations and security need override economic laws of supply and demand. Also government have a responsibility to spend money goods that are non-rival and non excludable. Example: National defense projects, weapon systems and flood control projects


Gross domestic product: It is the value of our market production and is used as a measure of market activity and our success in increasing our resources. It si used for comparison from year to year growth of an individual country and comparison and is a comparison between countries. GDP is very controversial because there are so many additional variables to consider. In its raw form GDP is know as nominal GDP and the real GDP is the GDP with inflation factored in. The GDP of the US is 10.57 trillion dollar the next highest is china with 5.7 trillion .

Horizontal equity: A measure as to whether people of equal economic means face an equal burden. In taxation people with the same income conceivably should pay the same tax rates. An Example of the lack of economic equity would be the fact that up until recently married couples paid a higher tax rate that the same two people filing separately. This horizontal inequality of the tax system was know as the marriage tax penalty


-I-
Implicit cost The true cost of any transaction is the explicit cost the monetary cost pulse the implicit cost or non monetary cost of the transaction. The unseen cost. Most implicit cost are opportunity cost. The loss of what you would have done with the money if you had not spent as you did. Example instead of spending $300 on a rental you drive the Oldsmobile to San Diego and have to spend $600 dollars on repair on the 3rd day of a 5 day trip. The total cost is the $600 (explicit cost) pulse the loss of a days time and the fact that you cannot afford to go to Sea World (implicit cost). While you still would have had to fix the car eventually you know have the added lose of the kids not seeing Shamu!

Inclusive or industrial unionism: If all workers are unionized the union can artificially increases the wages of laborers thereby causing decrees in employment rates. Just as when the government artificially raises wages, forcing other out of work, powerful labor unions can do the same.

Import; market activities between different countries. International transaction cannot proceed with same freedom as national transaction because of overriding government concerns for market stability, policy and national security. Example, you just can’t have weapons contractors selling armaments to unfriendly countries.

Income effect : In the law of demand The income effect is the fact that a reduction in price means that you have more cash left over after buying what you normally would have, so you take the extra amount and buy more of the product. Example you go to your favorite sports bar where you plan to buy $1.50 worth of hot wings at 15 cents each but you find that the bottom has fallen out of the wing market and they are being sold for 10 cents each. You buy your 10 wings and with your 50 cents left you buy 5 more. This tends to drive the price of wing back up

Inflation The situation where on average, over time, prices of goods is increasing making the monetary unit worth less. Inflation occurs because of system wide shortages or a rise in demand that is not kept up with. Example when the economy is running good and everybody has cash they tend to go out and spend it which drives prices up causing inflation. ( Or when the government needs more money so they print up a bunch). Either way you monetary unit buys less.

Infrastructure: Major capital outlays that are needed to get the economy going, no market could function if someone, the government didn’t take the risk of building or at least funding the building of a transportation system and a power grid. Example The Iraqi economy will grow much faster once the power and civil infrastructure is up and running

Inelastic : Defines the kind of relationship between economic factor A and economic factor B A change in one has vary little if any change in the other. Example: Changes in cigarette tax rates has an inelastic effect on cigarette sales

Interest rate; The cost of borrowing money. In America it is used as a economic throttle, if times are bad, money is loaned out at a cheep rate in order to stimulate investments in future activities. If the market is speeding along and the government fears inflation they will charge more to borrow money there by putting the brakes on the economy.

-L-
Labor A type of resource the unit of measure of human effort put into the economy Labor like other scares resources are controlled by the same market laws of supply and demand. Example, as the size of the labor force increases (surplus) it tends to drive down wages, as manufacturing increases and competition for workers increases it tends to drive wages up.

Labor union. Private organization that attempt to organize workers to act as one in accepting employment and wage rates or in participating in work stoppages and strikes. The idea is that you have more negotiating power as a part of a group that as a single workers. Unions are effective in maintaining workers rights but tend to artificially affect wage rates thereby increasing unemployment.

Law of demand There is a inverse relationship between the price of an item and what consumers are willing to purchase. As the price goes up, people will purchase less and as the price goes down they will purchase more, all things being equal. (Income, related goods, preferences, expectations and number of consumers). Example: As the price of DVD burners has dropped through efficiency of production, more and more are being sold. when iceberg lettuce hits $2.00 a head less people buy lettuce.

Law of supply The relationship between the price of a good and the number of that good that are produced. It is the maxim quantity of a good that the sellers are willing to sell at that price at that time. As the price of a good goes up people seek to make more of them to take advantage of its increased value, all things being equal. (Number of sellers, cost of production, expectations, related goods) Example. As bottled water became popular more and more manufactures begin producing bottled water

Living standards Measure of the average availability of resources to individuals in a given country. Computed by divide the GDP by the population. Like the GDP it has problems with various factors like inflation and cost of living but it is a yardstick to measure and compare from year to year and from country to country China is about $5,000 The US is about $ 37,800
losses : When the cost of production is more that the equilibrium price you end up producing losses. Losses show are the messenger that you are doing something wrong James D. Gwartney says, “losses are a penalty imposed on those who misuses resources “

-M-

Marginal revenue - The addition to total revenue resulting from the sale of one additional unit of output

Minimum efficient scale - The smallest output of a firm consistent with minimum average cost (Total cost divided by output).

Minimum wage - The lowest compensation you are allowed to pay an employee for hourly work. It is defined by Federal and state laws. State laws may be more restrictive than Federal law, and certainly may differ.

Monetarist economic views - Followers of Milton Friedman who focus on the effect of money and monetary policy on changing price and employment levels.
Monetary multiplier - the amount by which a new deposit into the banking system (from the outside)is multiplied as it is loaned out, redeposited, reloaned, etc., by banks

Monetary rule - That part of the government's economic policy which tries to control the size of the total stock of money (and other highly liquid financial assets that are close substitutes for money) available in the national economy in order to achieve policy objectives that are often partly contradictory

Money supply - There are several formal definitions, but all include the quantity of currency in circulation plus the amount of demand deposits. The money supply, together with the amount of real economic activity in a country, is an important determinant of its price level and its exchange rate.

Monopolistic competition - Essentially the same as imperfect competition: a market situation in which one or more firms may be capable of influencing the price of the product. It is characterized by product differentiation, often established through advertising

Monopsony model - assumes a market in which employers have some degree of monopoly buying power. Under monopsony, wages can in theory be increased within a certain range with no reduction (and maybe even an increase) in employment. But if the wage rises above a critical point, then disemployment kicks in. Thus, a believer in the monopsony model can consistently favor small increases in the minimum wage while still opposing large ones. Firms set

Marginal cost of workers equal to marginal revenue. The wage and employment level both lower than competitive level where supply equals demand.
MRP = MRC Rule - The MRP = MRC Rule and Demand for Resources to maximize profit, a firm will use a resource in an amount at which the resource’s marginal revenue product equals its marginal resource cost (MRP =MRC).

-N-
Natural rate monopoly - A market situation in which economies of scale are such that a single firm of efficient size is able to supply the entire market demand
near-monies - Assets which are not directly exchangeable for goods and services but which may be readily converted into money. A savings account is an example
negative externalities - An externality is an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account. Classic example of a negative externality: pollution, generated by some productive enterprise, and affecting others who had no choice and were probably not taken into account.

-O-

Open market - Markets that are free of restrictions on who can buy and sell
opportunity cost - The best alternative sacrificed to have or to do something else
output effect - if the price of machinery declines for example, firms will find it profitable to produce more output, which in turn increases the demand for labor. If the substitution effect outweighs the output effect, a change in the price of a substitute resource will change the demand for labor in the same direction. If the output effect outweighs the substitution effect, a change in the price of a substitute resource will change the demand for labor in the opposite direction

-P-

Price (a.k.a. Equilibrium) - The price of a product at which buyers are willing to purchase exactly the quantities per unit of time that sellers want to sell

Price ceiling - A maximum price set for a product, usually by a governmental unit. Sellers of the product are not permitted to charge higher prices

Price floor - A minimum price set for a product, usually by a governmental unit or a group of sellers. Sellers are not permitted to resell at lower prices.

Price indexes (numbers) - A set of numbers showing price level changes relative to some base years.

Price discrimination - The sale of the same product to different persons or groups of persons at different prices.

Production possibilities (curve) - A graphical representation of the maximum quantities of two goods and/or services that an economy can produce when its resources are used in the most efficient way possible.

Productivity - The average amount of output that can be produced with a given set of inputs. The productivity of any resource can be calculated as the ratio of the units of output to the units of input.

Psychic income - Benefits in the form of personal satisfaction, rather than monetary gain, that an individual receives from pursing an endeavor.

Public goods - Goods and services of a collectively consumed nature, usually provided by governmental units.

Pure market economy - The pure market economy is based on private ownership and control of resources, known as private property rights, and on coordination of resource-use decisions through markets

-R-

Reserve ratio - The ration of reserves to deposits that banks are required by law to maintain.

Resources - The ingredients that go into the production of goods and services. They consist of labor resources and capital resources.

-S-

Shortage - A situation in which buyers of a product want larger quantities per unit of time than sellers will place on the market. It may be caused by the existence of an effective price ceiling.

Social insurance - Government programs, financed through tax revenues, that guarantee citizens financial benefits against event which are beyond and individual’s control, such as old age, disability, and poor health.


Structural unemployment- Relatively long-lasting unemployment resulting from long-term shifts in economies and markets rather than short-term savings in economic conditions. Structural unemployment tends to develop around major changes in an economy, such as the move from an industrial to a technological economy. Workers displaced by the decline of the old economy tend not to be trained in fields suitable for the new economy, so they remain out of work.

Substitute good- a good that can be used in place of another (as the price of one rises the demand for the other rises)

Substitution effect- When the price of a good changes, that part of the effect on quantity demanded that results from the change in the terms of trade between goods; when the price of an input changes, that part of the effect on employment that results from the firm’s substitution toward other inputs

Superior good- A good for which an increase in income causes an increase in demand, and the income elasticity of demand is positive and greater than one. A superior good, also termed a luxury good, is a special type of normal good. Like a normal good an increase in income causes a rightward shift in the demand curve. However, a superior good has the added distinction that the income elasticity of demand is greater than one. In other words, people don't just buy more of a superior good, they buy a LOT more

Supply- the amount of a good or service that producers are willing and able to offer for sale at each possible price during a period of time, ceteris paribus

Supply factors- determinants other than the price of the good that influence supply—prices of resources, technology and productivity, expectations of producers, number of producers, and the prices of related goods and services

Supply-side fiscal policy- Supply side economics holds that increased taxation steadily reduces economic trade between economic participants within a nation. Taxes act as a type of trade barrier that causes economic participants to revert to less efficient means of satisfying their needs. As such higher taxation leads to lower economic efficiency. The idea is illustrated by the Laffer Curve.

Surplus-a quantity supplied that is larger than the quantity demanded at a given price

T-

Tariff- tax on import or export

Tight money policy- A policy in which a central monetary authority, for example, the Federal Reserve System, seeks to restrict credit and raise interest rates. A tight-money policy might be pursued to limit inflation.

Tastes and preferences- a factor of demand

Technology- The sum total of knowledge and information that society has acquired concerning the use of resources to produce goods and services. This technology often takes the form of scientific knowledge (the best combination of chemicals to make a long-lasting floor wax), but can also be plain old common sense (irrigate during a drought, not during a flood). Whether scientific or not, technology affects the technical efficiency with which resources are combined in production. An improvement in technology is thus an increase in the technical efficiency of production--more output with given inputs or fewer inputs for a given output. Technology is often embodied in capital goods. Bigger, better, faster, and less expensive computers are the result of advances in silicon chip technology. However, technology is also embodied in labor as human capital.

-U-

Unemployment- The general condition in which resources are willing and able to produce goods and services but are not engaged in productive activities. While unemployment is most commonly thought of in terms of labor, any of the other factors of production (capital, land, and entrepreneurship) can be unemployed as well. The analysis of unemployment, especially labor unemployment, goes hand-in-hand with the study of macroeconomics that emerged from the Great Depression of the 1930s.

Unions- organizations of workers or employees who act jointly to negotiate with their employers over wages, fringe benefits, working conditions, and other facets of employment. The main function of unions is to provide a balance for the market control exerted over labor by big business.

-V-

Variable costs- the costs of hiring variable factors

Vertical equity- A system of taxes that treats unequal people unequally. In other words, if you make the less income than someone else and pay fewer personal income taxes, then we have vertical equity.

-W-

Wants- This is often thought of as a psychological desire which makes life just a little more enjoyable, but which is not physiological necessary to life. You need oxygen, but you want a hot fudge sundae. Satisfaction is achieved by fulfilling wants.

Wealth substitution effect- a change in the real value of wealth that causes spending to change when the price level changes