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art of economics
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The application of the knowledge learned in positive economics to the achievement of the goals one has determined in normative economics.
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economic decision rule
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If the marginal benefits of doing something exceed the marginal costs, do it. If the marginal costs exceed the marginal benefits, don't do it.
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economic force
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The necessary reaction to scarcity.
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economic model
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A framework that places the generalized insights of a theory in a more specific contextual setting.
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economic policy
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An action (or inaction) taken by government to influence economic actions.
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economic principle
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A commonly held economic insight stated as a law or general assumption.
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economics
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The study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.
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efficiency
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Achieving a goal as cheaply as possible. Also: Using as few inputs as possible.
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experimental economics
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A branch of economics that studies the economy through controlled laboratory experiments.
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invisible hand
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The price mechanism: the rise and fall of prices that guide our actions in a market.
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invisible hand theorem
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A market economy, through the price mechanism, will tend to allocate resources efficiently.
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macroeconomics
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The study of the economy as a whole, which includes inflation, unemployment, business cycles, and growth.
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marginal benefit
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Additional benefit above the benefits already derived.
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marginal cost
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Additional cost over and above the costs already incurred. Also: Increase (decrease) in the total cost from increasing (or decreasing) the level of output by one unit. Also: the change in total cost associated with a change in quantity.
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market force
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A economic force that is given relatively free rein by society to work through the market.
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microeconomics
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The study of individual choice, and how that choice is influenced by economic forces.
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natural experiment
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A naturally occurring event that approximates a controlled experiment where something has changed in one place but has not changed somewhere else. That is, an event created by nature that can serve as an experiment.
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normative economics
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The study of what the goals of the economy should be.
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opportunity cost
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The benefit you might have gained from choosing the next-best alternative.
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positive economics
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The study of what is and how the economy works.
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precepts
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Policy rules that conclude that a particular course of action is preferable.
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scarcity
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The goods available are too few to satisfy individuals' desires.
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sunk cost
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Cost that has already been incurred and cannot be recovered.
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theorems
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Propositions that are logically true based on the assumptions in a model.
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comparative advantage
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The ability to be better suited to the production of one good than to the production of another good.
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globalization
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The increasing integration of economies, cultures, and institutions across the world.
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inefficiency
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Getting less output from inputs that, if devoted to some other activity, would produce more output.
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laissez-faire
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An economic policy of leaving the coordination of individuals' actions to the market.
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law of one price
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The wages of workers in one country will not differ significantly from the wages of (equal) workers in another institutionally similar country.
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production possibility curve
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A curve measuring the maximum combination of outputs that can be obtained from a given number of inputs.
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production possibility table
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A table that lists a choice's opportunity costs by summarizing what alternative outputs can be achieved with given inputs.
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productive efficiency
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Achieving as much output as possible from a given amount of inputs or resources.
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business
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A private producing unit in our society.
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capitalism
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An economic system based on the market in which the ownership of the means of production resides with a small group of individuals called capitalists.
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consumer sovereignty
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The principle that the consumer's wishes determined what's produced.
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corporation
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A business that is treated as a person, legally owned by its stockholders. Its stockholders are not liable for the actions of the corporate "person."
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demerit good or activity
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A good or activity that government believes is bad for people even though they choose to use the good or engage in the activity.
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entrepreneurship
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The ability to organize and get something done. Also: Labor services that involve high degrees of organizational skills, concern, oversight responsibility, and creativity.
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externality
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An effect of a decision on a third party not taken into account by the decision maker.
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global corporation
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A corporation with substantial operations on both the production and sales sides in more than one country.
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government failure
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A situations in which the government intervention in the market to improve market failure actually makes the situation worse.
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households
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Groups of individuals living together and making joint decisions.
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institutions
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The formal and informal rules that constrain human behavior.
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macroeconomic externality
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An externality that affects the levels of unemployment, inflation, or growth in the economy as a whole.
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market economy
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An economic system based on private property and the market in which, in principle, individuals decide how, what, and for whom to produce.
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market failure
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A situation in which the invisible hand pushes in such a way that individual decisions do not lead to socially desirable outcomes.
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merit good or activity
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A good or activity that government believes is good for you, even though you may not choose to consume the good or engage in the activity.
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partnership
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A business with two or more owners.
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private good
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A good that, when consumed by one individual, cannot be consumed by another individual.
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private property right
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Control a private individual or firm has over an asset.
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profit
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What's left over from total revenues after all the appropriate costs have been subtracted. That is Total revenue - Total cost. Also: a return on entrepreneurial activity and risk taking.
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public good
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A good that if supplied to one person must be supplied to all and whose consumption by one individual does not prevent its consumption by another individual. That is, a good that is nonexclusive and non-rival.
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socialism
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An economic system based on individuals' goodwill toward others, not on their own self-interest, and in which, in principle, society decides what, how, and for whom to produce.
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sole proprietorship
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A business that only has one owner.
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demand
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A schedule of quantities of a good that will be bought per unit of time at various prices, other things constant.
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demand curve
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The graphic representation of the relationship between price and quantity demanded.
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equilibrium
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A concept in which opposing dynamic forces cancel each other out.
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equilibrium price
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The price toward which the invisible hand drives the market.
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equilibrium quantity
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The amount bought and sold at the equilibrium price.
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excess demand
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Situation when quantity demanded is greater than quantity supplied.
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excess supply
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Situation when quantity supplied in greater than quantity demanded.
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fallacy of composition
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The false assumption that what is true for part will also be true for the whole.
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law of demand
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Quantity demanded rises as price falls, other things constant. Also can be stated as: Quantity demanded falls as price rises, other things constant.
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law of supply
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Quantity supplied rises as price rises, other things constant. Also can be stated as: Quantity supplied falls as price falls, other things constant.
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market demand curve
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The horizontal sum of all individual demand curves.
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market supply curve
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The horizontal sum of all individual supply curves. Also: horizontal sum of all the firms' marginal cost curves, taking account of any changes in input prices that might occur.
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movement along a demand curve
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The graphical representation of the effect of a change in a price on the quantity demanded.
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movement along a supply curve
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The graphical representation of the effect of a change in price on the quantity supplied.
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quantity demanded
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A specific amount that will be demanded per unit of time at a specific price, other things constant.
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quantity supplied
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A specific amount that will be supplied as a specific price, other things constant.
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shift in demand
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The graphical representation of the effect of anything other than price on demand.
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shift in supply
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The graphical representation of the effect of a change in a factor other than price on supply.
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supply
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A schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant.
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supply curve
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A graphical representation of the relationship between price and quantity supplied.
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excise tax
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A tax that is levied on a specific good.
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minimum wage law
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A law specifying the lowest wage a firm can legally pay an employee.
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price ceiling
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A government-imposed limit on how high a price can be charged. In other words, a government-set price below the market equilibrium price.
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price floor
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A government-imposed limit on how low a price can be charged. In other words, a government-set price above equilibrium price.
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rent control
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A price ceiling on rents, set by government.
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tariff
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An excise tax on an imported (internationally traded) good.
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third-party-payer market
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A market in which the person who receives the good differs from the person paying for the good.
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complements
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Goods that are used in conjunction with other goods.
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cross-price elasticity of demand
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The percentage change in demand divided by the percentage change in the price of a related good.
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elastic
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The percentage change in quantity is greater than the percentage change in price (E>1).
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income elasticity of demand
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The percentage change in demand divided by the percentage change in income.
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inelastic
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The percentage change in quantity is less than the percentage change in price (E<1).
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inferior good
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Good whose consumption decreases when income increases.
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luxury
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A good that has an income elasticity greater than 1.
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necessity
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A good that has an income elasticity less than 1.
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normal good
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A good whose consumption increases with an increase in income.
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perfectly elastic
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Quantity responds enormously to changes in price (E=infinity).
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perfectly inelastic
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Quantity does not respond at all to changes in price (E=0).
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price elasticity of demand
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The percentage change in quantity demanded divided by the percentage change in price.
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price elasticity of supply
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The percentage change in quantity supplied divided by the percentage change in price.
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substitute
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A good that can be used in place of another good.
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unit elastic
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The percentage change in quantity is equal to the percentage change in price (E=1).
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consumer surplus
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The difference between what consumers would have been willing to pay and what they actually pay. Also, the value the consumer gets from buying a product less its price.
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deadweight loss
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The loss of consumer and producer surplus from a tax.
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general rule of political economy
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When small groups are helped by a government action and large groups are hurt by that same action, the small group tends to lobby far more effectively than the large group.
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producer surplus
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Price the producer sells a product for less the cost of producing.
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public choice economist
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An economist who integrates an economic analysis of politics with an analysis of the economy.
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rent-seeking activity
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Activity designed to transfer surplus from one group to another.
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welfare loss triangle
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A geometric representation of the welfare cost in terms of misallocated resources caused by a deviation from a suppl/demand equilibrium.
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