EcoGloss -- Glossary of terms used in economics (A-D)

EcoGloss -- A Glossary of Terms Used in Economics

A| B | C |D

Above full-employment equilibrium: An above full-employment equilibrium is a macroeconomic equilibrium in which real GDP exceeds potential GDP.
Absolute advantage: A person has an absolute advantage in the production of two goods, if by using the same quantities of inputs, that person can produce more of both goods than another person can. A country has an absolute advantage if its output per unit of inputs of all goods is larger than that of another country.
Abstract: The process (used in building a theory) of focusing on a limited number of variables to explain or predict an event.
Accounting cost: The actual outlays or expenses incurred in production; the costs that are actually paid and can be recorded as transactions. Also referred to as explicit cost.
Accounting profit: Accounting profit is the total revenue of the firm minus the total explicit costs of the firm in producing its product. It differs from both normal profit, which is a cost to the firm payable as the opportunity cost of the entrepreneur, and economic profit, which is the total revenue of the firm minus both the total explicit and total implicit cost of the firm in producing its output. Conceptually, both accounting profit and economic profit are residual concepts (revenue minus cost), while normal profit is a cost concept.
Ad valorem tax: A tax that is specified as a percentage of value. Sales, income, and property taxes are three of the more popular ad valorem taxes devised by government. The total ad valorem tax paid increases with the value of what's being taxed. Compare with excise tax.
Adverse selection: The tendency for people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less-informed party.
Aggregate demand: Aggregate demand is the relationship between the aggregate quantity of real GDP demanded (purchased) and the price level.
Aggregate hours: Aggregate hours are the total number of hours worked by all the people employed, both full time and part time, during a year.
Aggregate market: An economic model relating the price level and real production that is used to analyze business cycles, gross domestic product, unemployment, inflation, stabilization policies, and related macroeconomic phenomena. The aggregate market, inspired by the standard market model, captures the interaction between aggregate demand (the buyers) and short-run and long-run aggregate supply (the sellers).
Aggregate planned expenditure: Aggregate planned expenditure is the expenditure that households, firms, governments, and foreigners plan to undertake in given circumstances. It is the sum of planned consumption expenditure, planned investment, planned government purchases of goods and services, and planned exports minus planned imports.
Aggregate production function: The aggregate production function is the relationship between the quantity of real GDP supplied and the quantities of labor and capital and the state of technology.
Aggregate supply: Aggregate supply is the relationship between the aggregate quantity of real GDP supplied (produced) and the price level.
Allocative efficiency: Obtaining the most consumer satisfaction from the resources which are available. When allocative efficiency is attained, the economy is doing the best job possible of satisfying unlimited wants with limited resources. Contrast with technical efficiency.
Antitrust law: A law that regulates and prohibits certain kinds of market behavior, such as monopoly and monopolistic practices. While this type of law is continually evolving under the jurisdiction of the U.S. Department of Justice, there are three "big" pieces of legislation which provide the framework for its enforcement in the United State -- the Sherman Antitrust (1890), the Clayton Act (1914) and the Federal Trade Commission Act (1914).
Arbitrage: The process of purchasing a product in a lower-priced market and re-selling it to someone else in a higher priced market with essentially no risk; basically, the philosophy of "buy low-sell high." For example, say the same product is sold in one market at a price of $30 and in another market at a price of $31. In this case, an arbitrageur could purchase the product in the first market and immediately turn around an sell it in the second market, thereby earning $1 risk-free. Arbitrage opportunities arise from minor pricing discrepencies among markets.
Arbitrageur: A person involved in arbitrage. Arbitrageurs play an important role in markets by helping to eliminate price discrepancies between markets or related products.
Ask: The price that sellers say they are willing to sell a good for in an auction market.
Asset: Something which can be owned. In general, asset may fall into one of two classes -- physical assets and financial assets. A physical asset (also known as a real asset) is a productive resource, property, or satisfaction-generating good. A financial asset (also known as a paper asset) is a legal claim to or ownership of a physical asset, such as stocks, bonds, money, and government securities.
Automatic fiscal policy: Automatic fiscal policy is a change in fiscal policy that is triggered by the state of the economy.
Automatic stabilizers: Automatic stabilizers are mechanisms that stabilize real GDP without explicit action by the government.
Autonomous expenditure: Autonomous expenditure is the sum of those components of aggregate planned expenditure that are not influenced by real GDP.
Average cost pricing rule: A rule that sets price equal to average total cost.
Average fixed cost (AFC): Average fixed cost (AFC) is total fixed cost per unit of output. It is calculated by dividing total fixed cost by output.
Average product: The average product of a resource is the total product divided by the quantity of the resource employed.
Average revenue: Average revenue is the revenue per unit of output sold -- total revenue divided by the quantity of the good sold.
Average tax rate: The percentage of income that is paid in tax.
Average total cost (ATC): Average total cost (ATC) is total cost per unit of output. It is calculated by dividing total cost by output. It may also be calculated as average fixed cost plus average variable cost.
Average variable cost (AVC): Average variable cost (AVC) is total variable cost per unit of output. It is calculated by dividing total variable cost by output.
Axiom: An axiom is a basic precondition or assumption underlying a theory. Axioms are basic, unverifiable world view assumptions, including personal beliefs, political views, and cultural values, that form the foundation of a theory. Axioms can not be verified with real world data, and as such are largely accepted on faith. Belief in a supreme, omnipotent, omniscience being is one such axiom. The notion that people are basically good (or bad) is another. The presumption that the universe abides by cause-and-effect relationships is a key axiom for science.

Back to the top

Bad: A bad is a product, either tangible or non-tangible, which yields disutility to a consumer when it is consumed. Contrast with goof and service.
Balanced budget: A balanced budget is a government budget in which tax revenues and expenditures are equal.
Balance of payments accounts: An accounting statement of the money value of international transactions between one nation and the rest of the world over a specific time period. The statement shows the sum of transactions of individuals, businesses, and government agencies located in one nation, against those of all other nations and includes trading, borrowing, and lending.
Balance of trade: That part of a nation's balance of payments accounts dealing with imports and exports, that is trade in goods and services, over a given period. It is computed as the value of exports minus the value of imports.If exports of goods exceed imports, the trade balance is said to be 'favorable' (a balance of trade surplus); if imports exceed exports, the trade balance if said to be 'unfavorable (a balance of trade deficit).'
Bank for International Settlements (BIS): The BIS, located in Basle, Switzerland, was established in 1930 to administer the post-World War I reparations agreements. Since the 1960s, the BIS has evolved into an important international monetary institution, and has provided a forum in which central bankers meet and consult on a monthly basis. As an independent financial organization, the BIS performs a variety of banking, trustee, and agent functions, primarily with central banks.
Bank holding company (BHC): Company that owns, or has controlling interest in, one or more banks. A company that owns more than one bank is known as a multibank holding company. A bank holding company may also own another bank holding company, which in turn owns or controls a bank; the company at the top of the ownership chain is called the top holder. The Board of Governors is responsible for regulating and supervising bank holding companies, even if the bank owned by the holding company is under the primary supervision of a different federal agency (the Comptroller of the Currency or the Federal Deposit Insurance Corporation).
Barriers to entry: Barriers to entry are legal, financial, logistical, or natural constraints which protect an existing firm from potential competitors. Barriers to entry are a prime source of the market power of a firm and of reducing the level of competition between firms within a market.
Barter: The direct exchange of one product for other products.
Below full-employment equilibrium: A below full-employment equilibrium is a macroeconomic equilibrium in which potential GDP exceeds real GDP.
Benefits principle of taxation: The idea that people should pay taxes based on the benefits they receive from government services.
Bid: The price that buyers say they are willing to pay for a good in an auction market.
Big tradeoff: The conflict between equity and efficiency.
Bilateral monopoly: A situation in which there is a single seller (a monopoly) and a single buyer (a monopsony).
Bilateralism: An international policy having as its objective the achievement of particular balances of trade between two nations by means of discriminatory tariffs, exchange, or other controls. The initiative is usually taken by the country having an 'unfavorable' balance of trade. Extensive bilateralism results in a shift of international trade away from channels that would result from the principle of comparative advantage. Compare to multilateralism.
Bill: See Treasury bill.
Black market: A market in which certain goods or services are traded in a manner contrary to the laws or regulations of the government in power (such as the price exceeding the legally imposed price ceiling). Typical reasons why the market goes underground in this way include the desire by substantial numbers of buyers and sellers to evade restrictive government price controls or inconvenient rationing schemes, to avoid paying heavy taxes on the good or service in question, or simply to be able to obtain forbidden products which the government does not want the people to have at all (such as illegal drugs).
Board of Governors: Central governmental agency of the Federal Reserve System, located in Washington, DC, and composed of seven members who are appointed by the President and confirmed by the Senate. The Board is responsible for domestic and international economic analysis with other components of the System; for the conduct of monetary policy; for supervision and regulation of certain banking organizations; for operation of much of the nation's payments system; and for administration of most of the nation's laws that protect consumers in credit transactions.
Bond: See Treasury bond.
Breakeven income: The level of disposable income at which households plan to consume all of their income (where saving equals zero.
Bretton Woods system: An international monetary system operating from 1946-1973. The value of the dollar was fixed in terms of gold, and every other country held its currency at a fixed exchange rate against the dollar. In this system of fixed exchange rates, the goal was for each country's central bank to intervene in the foreign exchange market to prevent their currency from trading outside a particular band. When trade deficits occurred, the central bank of the deficit country financed the deficit with its reserves of international currencies. The system was named after a conference held in Bretton Woods, N.H.
Budget constraint: All the combinations (or bundles) of goods a person can purchase given (1) a money income and (2) prices for those goods. The budget constraint limits the household's consumption choices as to what and how much can be purchased. In a two-product/two-price case, as is used in the analysis of indifference curves, the budget constraint is often referred to as the budget line.
Budget deficit: A budget deficit is a government's budget balance that is negative -- government expenditures exceed tax revenues.
Budget line: The various combinations of two products which can be purchased given (1) a money income and (2) prices for those goods. The budget line is used in the analysis of consumer behavior when combined with indifference curves.
Budget surplus: A budget surplus is a government's budget balance that is positive -- tax revenues exceed government expenditures.
Bundesbank: Established in 1875, the central bank of West Germany, located in Frankfurt.
Business cycle: The business cycle is the periodic but irregular up-and-down movement in production. The four phases of the business cycle are the trough, expansion (or recovery), peak, and recession.

Back to the top

Capacity output: The output at which average total cost is a minimum--the output at the bottom of the U-shaped ATC curve.
Capacity utilization rate: The percentage of the economy's total plant and equipment that is currently in production. Usually a decrease in this percentage signals a slowing down of the economy, possibly the beginning of a recession, while an increase signals economic expansion.
Capital: Capital is the man-made resources which are used in the production process -- it is the equipment, buildings, tools, and manufactured goods that we use to produce other products. It is one of the four classes of resources used in production. Payments to capital resources are known as interest.
Capital account: The capital account is a record of foreign investment in a country minus its investment abroad.
Capital accumulation: Capital accumulation is the growth of capital resources.
Capital flight: A large and sudden reduction in the demand for financial assets located in a country.
Capital gain: The increase in the value of an asset through an increase in its price.
Capital gains tax: A tax on the increase in the value of an asset.
Capital stock: The total quantity of plant, equipment, buildings, and inventories.
Capture theory: A theory of regulation that states that the regulations are supplied to satisfy the demand of producers to maximize producer surplus -- to maximize economic profit.
Cartel: A group of firms that has entered into a collusive agreement to restrict output and increase prices and profits.
Causation: A relation of cause and effect between variables in which one variable is a determinant of another variable.
Central bank: A central bank is a bank's bank and a public authority charged with regulating and controlling a country's monetary policy and financial institutions and financial markets. For example, the Federal Reserve System is the central bank of the United States and the Bundesbank is the central bank of Germany.
Ceteris paribus: Ceteris paribus means "other things being equal" -- all other relevant things remaining the same.
Chain-weighted output index: An index that measures the growth rate of real GDP.
Change in demand: A change in demand is a change in consumers' willingness and ability to purchase products which occurs when some influence on those plans (other than the price of the product) changes. It is illustrated by a shift of the demand curve and by the creation of a new demand schedule. Contrast with change in the quantity demanded.
Change in supply: A change in supply is a change in producers' willingness and ability to produce and sell their products which occurs when some influence on those plans (other than the price of the product) changes. It is illustrated by a shift of the supply curve and by the creation of a new supply schedule. Contrast with change in the quantity supplied.
Change in the quantity demanded: A change in the quantity demanded is a change in the consumers' willingness and ability to purchase products which occurs when the price of the product changes, ceteris paribus. A change in the quantity demanded is illustrated by a movement along the demand curve and as a movement along a given demand schedule. Contrast with change in demand.
Change in the quantity supplied: A change in the quantity supplied is a change in the producers' willingness and ability to produce and sell products which occurs when the price of the product changes, ceteris paribus. A change in the quantity supplied is illustrated by a movement along the supply curve and as a movement along a given supply schedule. Contrast with change in supply.
Circular-flow diagram: A visual model of the economy that shows how trade exists within an economy. The simple circular flow model uses two flows (physical and money) to illustrate trade within two markets (product and resource) between two sectors (household and business) of an economy. Notably, the value of the physical flow is exactly equal to, and in opposite directon of, the value of the money flow.
Classical growth theory: Classical growth theory is a theory of economic growth based on the view that real GDP growth is temporary and that when real GDP per person increases above subsistence level, a population explosion brings real GDP back to subsistence level.
Closed economy: An economy that does not interact with other economies in the world. Contrast with open economy.
Coase theorem: The proposition that if property rights exist and transactions costs are low, private transactions are efficient. Equivalently, with property rights and low transaction costs, there are no externalities.
Coincidence of wants: A condition required for exchange in a nonmonetary system; to accomplish a trade, it is necessary to find someone who has what you want and also wants what you have.
Collateral: Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security.)
Collective bargaining: A process of negotiation between representatives of employers and unions to agree on terms of employment, work rules, and other items associated with work.
Collusive agreement: An agreement between two (or more) producers to restrict output so as to increase prices and profits.
Command system: A system in which some people give orders and other people obey them.
Commercial bank: A firm, licensed either by the Comptroller of the Currency (in the U.S. Treasury) or by a state agency to receive deposits and make loans. These depository institutions offer a broad range of deposit accounts, including checking, savings, and time deposits, and extend loans to individuals and businesses. Commercial banks can be contrasted with investment banking firms, such as brokerage firms, which generally are involved in arranging for the sale of corporate or municipal securities.
Comparable worth: A doctrine according to which jobs deemed comparable should be paid the same wage.
Comparative advantage: A person or country has a comparative advantage in an activity if that person or country can perform that activity at a lower opportunity cost than anyone else or any other country.
Compensating wage differential: A difference in wages for people with similar skills based on some characteristic of the job, such as riskiness, discomfort, or convenience of the time schedule.
Competitive market: A market with many buyers and sellers trading homogeneous products. In competitive markets, since there are many buyers and many sellers, each has a negligible impact on the market price and is said to be a price taker.
Complement: A complement is a product which is used in conjunction with another product. With complements, the demand for one rises as the price of the other falls (or, the demand for one falls as the price of the other rises). Hence, an inverse relationship exists between changes in the price of one good and changes in the demand for another good (its complement). Goods which have a negative cross price elasticity of demand are complements. Contrast with substitute.
Constant returns to scale: Constant returns to scale are technological conditions under which a given percentage increase in all of the firm's inputs (the long-run) results in the firm's output increasing by the same percentage. With constant returns to scale, the firm's long-run average cost stays the same as its output changes.
Consumer efficiency: Consumer efficiency is the situation which occurs when consumers cannot make themselves better of by reallocating their budget.
Consumer equilibrium: Consumer equilibrium is a situation in which a consumer has allocated his or her income in the way that maximizes his or her total utility from the goods and services consumed.
Consumer Price Index (CPI): The Consumer Price Index (CPI) is an index that measures the average level of prices of the goods and services that a typical urban family buys.
Consumer surplus: Consumer surplus is the value that the consumer gets from each unit of a good minus the price paid for it.
Consumption expenditure: Consumption expenditure is the total amount spent on consumption goods and services.
Consumption function: The consumption function is the functional relationship between consumption expenditure and disposable income, ceteris paribus.
Consumption schedule: The consumption schedule shows the various amounts that households plan to spend on consumer goods at different levels of disposable income, ceteris paribus.
Contestable market: A market in which one firm (or a small number of firms) operates but in which entry and exit are free, so the firm (or firms) in the industry faces competition from potential entrants.
Contractionary fiscal policy: Contractionary fiscal policy is a decrease in government expenditures or an increase in tax revenues.
Contractionary monetary policy: Contractionary monetary policy is a policy decision of the Federal Reserve System which is designed to restrict the growth of money and credit in the economy.
Controlled experiments: Empirical tests of theories in a controlled setting in which particular effects can be isolated.
Cooperative equilibrium: The outcome of a collusive agreement between players when the players make and share the monopoly profit.
Corporate income tax: A tax on the accounting profits of corporations. This tax is only levied on corporations, and excludes businesses that are proprietorships or partnerships. This tax is often criticized (usually by members of the second estate because corporate dividends are taxed twice -- once as corporate profits, then a second time as income with the personal income tax.
Corporation: One of the three basic forms of business organization (the other two being proprietorship and partnership). A corporation is a business established through ownership shares (termed corporate stock). A corporation is considered a distinct legal person which can be sued, forced to pay taxes, etc., just like a human person. Unlike proprietorships and partnerships, a corporation exists separately from it's owners. As such, the owners have what is termed limited liability. Owners can not be held personally responsible for corporate debts. They owners can only lose the value of their ownership shares, but no more.
Correlation: The degree to which economic variables are observed to move together: If they move in the same direction, there is positive correlation; if they move in opposite directions, there is negative correlation.
Cost: The value of everything a seller must give up to produce a good.
Cost-benefit analysis: A study that compares the costs and benefits to society of providing a public good.
Cost-push inflation: A term that applies when increases in the price level (inflation) are caused by increases in cost. Compare to demand-pull inflation.
Craft union: An organized group of workers representing a single occupation, whose members come from a variety of industries. Contrast to industrial union.
Cross price elasticity of demand: The responsiveness of consumers in the demand for one good (holding the price of that good constant) as the price of a related good changes, other things remaining the same. It is measured as the percentage change in the demand of good B divided by the percentage change in the price of good A. A negative cross price elasticity of demand indicates the two goods are complements. A positive cross price elasticity of demand indicates the two goods are substitutes. A cross price elasticity of demand which is inconsistent in sign or is equal to zero indicates the the goods are unrelated in use.
Crowding out: The decline in private investment owing to an increase in government purchases.
Council of Economic Advisers: A three-member group of economists appointed by the President of the United States to analyze the economy and make recommendations about economic policy.
Currency: The paper bills and coins in the hands of the public.
Cyclical unemployment: The deviation of unemployment from its natural rate due to fluctuations in the business cycle

Back to the top

Deadweight loss: Deadweight loss is a measure of inefficiency. It is equal to the loss in total surplus (consumer surplus plus producer surplus) when output is below or above its efficient level. Generally, these market inefficiencies are attributable to market imperfections created by market power, taxes, regulations, or other factors.
Debtor nation: A debtor nation is a country that, during its entire history, has borrowed more from the rest of the world than it has lent to it.
Decisions at the margin: Decision making characterized by weighing additional (marginal) benefits of a change against the additional (marginal) cost of a change with respect to current conditions.
Decreasing returns to scale: Decreasing returns to scale are technological conditions under which a given percentage increase in all the firm's inputs (the long-run) results in the firm's output increasing by the smaller percentage. With decreasing returns to scale, the firm's long-run average cost increases as its output increases.
Deflation: A deflation is a process in which the price level falls -- a negative inflation.
Demand: Demand is defined as a schedule of various prices and quantities of a product which consumers are willing and able to purchase during a period of time, ceteris paribus.
Demand is described by a demand schedule and illustrated by a demand curve. A change in the price of the product will cause a change in quantity demanded while a change in one of the determinants of demand will cause a change in demand.
Demand curve: A demand curve is a curve that shows the relationship between the quantity demanded of a good and its price when all other influences on consumers' planned purchases remain the same. It is based on the demand schedule of prices and quantities demanded.
Demand for labor: The relationship between the quantity of labor demanded and the real wage rate when all other influences on firm’s hiring plans remain the same.
Demand schedule: The numerical tabulation of the various quantities demanded of a good at different prices. The demand schedule is the basis for the demand curve.
Demand-pull inflation: A term used when an increase in aggregate demand occurs which cannot be offset by a corresponding increase in real supply causing an increase in the price level (inflation). An inflation that results from an initial increase in aggregate demand. Compare to cost-push inflation.
Deposit multiplier: The deposit multiplier is the amount by which an increase in bank reserves is multiplied to calculate the increase in bank deposits.
Depository institution: A financial institution that obtains its funds mainly through deposits from the public. This includes commercial banks, savings and loan associations, savings banks, and credit unions. Although historically they have specialized in certain types of credit, the powers of nonbank depository institutions have been broadened in recent years. For example, NOW accounts, credit union share drafts, and other services similar to checking accounts may be offered by thrift institutions.
Depreciation: The decrease in the capital stock resulting from wear and tear and obsolescence.
Depression: A severe or long-lasting recession.
Derived demand: Demand for a productive resource which is derived from the demand for the goods and services produced by the resource.
Diminishing marginal rate of substitution: The general tendency for the marginal rate of substitution of one good for another to diminish as a consumer moves along an indifference curve increasing consumption of the first good.
Diminishing marginal product: See diminishing marginal returns.
Diminishing marginal returns: Diminishing marginal returns is the tendency for the marginal product of an additional resource eventually to be less than the marginal product of the previous unit of the resource.
Diminishing marginal utility: Diminishing marginal utility is the decrease in marginal utility that a consumer gets from a product as more of it is consumed. Note that, even if marginal utility is diminishing, so long as the marginal utility is positive, increased consumption leads to increased total utility. It is only when marginal utility is negative that additional consumption reduces total utility.
Direct relationship: A direct relationship is a relationship between two variables that move in the same direction. As one variable increases, the other variable also increases. For a comparison, see inverse relationship.
Discounting: The conversion of a future amount of money to its present value.
Discount rate: The discount rate is the interest rate at which the Fed stands ready to lend reserves to commercial banks.
Discouraged workers: Discouraged workers are people who are available and willing to work but who have given up the effort to find work.
Discretionary fiscal policy: Discretionary fiscal policy is a policy action that is initiated by an act of Congress.
Discretionary policy: A policy that responds to the state of the economy in a possibly unique way that uses all the information available, including perceived lessons from past "mistakes."
Discrimination: The offering of different opportunities to otherwise similar individuals. Discrimination is often based on differences in race, ethnic group, sex, age, or other personal characteristics.
Diseconomies of scale: Features of a firm's technology that lead to rising long-run average cost as output increases.
Disequilibrium: A state of either surplus or shortage in a market.
Disequilibrium price: A price other than equilibrium price. A price at which quantity demanded does not equal quantity supplied. At a disequilibrium price, a shortage or a surplus is evident. If the market does not have outside interference, it is generally expected that a disequilibrium price will correct itself to the equilibrium price. A shortage suggests that the price will rise, while a surplus suggests that the price will fall.
Disposable income: The total income that can be used by the household sector for either consumption or saving during a given period of time, usually one year. This is the income left over after income taxes and social security taxes are removed and government transfer payments, like welfare, social security benefits, or unemployment compensation are added.
Disutility: Disutility is the dissatisfaction which a person receives from the consumption of a product. Generally, a product which yields disutility is referred to as a bad. Contrast with utility.
Dividend: The portion of a corporation's after-tax accounting profit that's paid to shareholders or owners. Corporate managers usually try to pay the shareholders some minimum dividend that's comparable to returns from other financial markets -- such as the interest on government securities or corporate bonds -- to keep the owners from selling off the company's stock. That portion of after-tax accounting profit that's not paid out as dividends is typically invested in capital.
Dominant strategy equilibrium: The outcome of a game in which there is a single best strategy (a dominant strategy) for each player, regardless of the strategy of the other players.
Dumping: Dumping is the sale of a good or service to a foreign country at a price that is less than the cost of producing the good or service.
Duopoly: A market in which two producers of a good or service compete.
Dynamic comparative advantage: Dynamic comparative advantage is a comparative advantage that a person or country possesses as a result of having specialized in a particular activity and, as a result of learning-by-doing, having become the producer with the lowest opportunity cost.

Back to the top

A | B | C | D