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Glossary
allocative efficiency: - the production of the combination of products that best satisfies
consumers' demands.
average fixed cost: - total fixed cost divided by the quantity of output.
average product: - total product (or total output) divided by the quantity of inputs used to
produce that total.
average profit: - the profit per unit produced; that is, the total profit divided by the output.
average revenue: - the amount of revenue received per unit sold.
average total cost: - total cost divided by quantity of output.
average variable cost: - total variable cost divided by total output.
barriers to entry: - obstacles that make it difficult for new participants to enter a market.
break-even output: - the level of output at which the sales revenue of the firm just covers fixed
and variable costs, including normal profit.
break-even price: - the price at which the firm makes only normal profits, that is, makes zero
economic profits.
capital: - human-made goods that are used to produce other products.
cartel: - an association of sellers acting in unison.
ceteris paribus: - other things being equal, or other things remaining the same.
change in demand: - a change in the quantities demanded at every price, caused by a change in
the determinants of demand.
change in supply: - a change in the quantities supplied at every price, caused by a change in the
determinants of supply.
change in the quantity demanded: - the change in quantity that results from a price change. It is
illustrated by a movement along a demand curve.
change in the quantity supplied: - the change in the amounts that will be produced as a result of a
price change. This is shown as a movement along a supply curve.
collusion: - an agreement among suppliers to set the price of a product or the quantities each will
produce.
common property resource: - a resource not owned by an individual or a firm.
comparative advantage: - the advantage that comes from producing something at a lower
opportunity cost than others are able to do.
complementary products: - products that tend to be purchased jointly and for which demand is,
therefore, related.
concentration ratio: - a measurement of the percentage of an industry's total sales that is
controlled by the largest few firms.
constant returns to scale: - a firm's output increases by the same percentage as the increase in its
inputs.
constant-cost industry: - an industry in which the prices of resources and products remain
unchanged as the industry expands.
consumer goods and services: - products that are used by consumers to satisfy their wants and
needs.
consumer surplus: - the difference between what a customer is willing to pay and the actual price
of the product.
cross-elasticity of demand: - how the quantity demanded of product A responds to a change in
the price of product B.
currency-exchange controls: - government restrictions imposed limiting the amount of foreign
currencies that can be obtained.
deadweight loss: - the total surplus lost relative to an efficient market due to market
imperfections, taxes, or other factors.
decreasing returns to scale: - the situation in which a firm's output increases by a smaller
percentage than its inputs.
decreasing-cost industry: - an industry in which the prices of resources and products both fall as
the industry expands.
demand schedule: - a table showing the various quantities demanded per period of time at
different prices.
demand: - the quantities that consumers are willing and able to buy per period of time at various
prices.
depreciation: - the annual cost of any asset that is expected to be in use for more than one year.
diseconomies of scale: - bureaucratic inefficiencies in management that result in decreasing
returns to scale.
division of labour: - the dividing of the production process into a series of specialized tasks, each
done by a different worker.
dumping: - the sale of a product abroad for a lower price than is being charged in the domestic
market or for a price below the cost of production.
economic capacity: - that output at which average total cost is at a minimum.
economic profit: - revenue over and above all costs, including normal profits.
economic rent: - the return to any factor of production above what is required to keep the factor
in its present use.
economic surplus: - the summation of consumer surplus and producer surplus.
economies of scale: - cost advantages achieved as a result of large-scale operations.
elastic demand: - quantity demanded that is quite responsive to a change in price (coefficiency of
elasticity is greater than 1).
elasticity coefficient: - a number that measures the responsiveness of quantity demanded to a
change in price.
elasticity of supply: - the responsiveness of quantity supplied to a change in price.
enterprise: - the human resource that innovates and takes risks.
equilibrium price: - the price at which the quantity demanded equals the quantity supplied such
that there is neither a surplus nor a shortage.
equilibrium quantity: - the quantity that prevails at the equilibrium price.
excess capacity: - the situation in which a firm's output is below economic capacity.
excise tax: - a sales tax imposed on a particular product.
explicit cost: - a cost that is actually paid out in money.
external benefits: - benefits that are enjoyed by people other than the producers or consumers of
a product.
external costs: - costs that are incurred by people other than the producers or consumers of a
product.
externalities: - benefits or costs of a product experienced by people who neither produce nor
consume that product.
factor market: - the market for the factors of production.
factor output effect: - rising total output leads to an increased demand for labour.
factor substitution effect: - one factor replaces another factor as a result of technological change.
factors of production: - the productive resources that are available to an economy, categorized as
labour, capital, land, and enterprise; also resources.
fair-return price: - a price that guarantees that the firm will earn normal profits only; that is,
where P = AC.
game theory: - a method of analyzing firm behaviour that highlights mutual interdependence
among firms.
human capital: - the accumulation of all skills and knowledge acquired by individuals.
imperfect competition: - a market structure in which producers are identifiable and have some
control over price.
implicit cost: - a cost that does not require an actual expenditure of money.
income effect: - the effect that a price change has on real income and therefore on the quantity
demanded of a product.
income elasticity: - the responsiveness of quantity demanded to a change in income.
increasing returns to scale: - a firm's output increases by a greater percentage than the increase in
its inputs.
increasing-cost industry: - an industry in which the prices of resources and products both rise as
the industry expands.
indifference curve: - shows the combinations of goods that would give the same satisfaction (or
total utility) to an individual (or household).
inelastic demand: - quantity demanded that is not very responsive to a change in price
(coefficiency of elasticity is less than 1).
inferior products: - products for which demands will decrease as a result of an increase in income
and increase as a result of a decrease in income.
inputs: - See resources.
interest: - the payment made and the income received for the use of capital.
labour force supply: - the total hours that those in the labour force are willing to work.
labour force: - the total number of people over the age of 15 who are willing and able to work.
labour: - human physical and mental effort that can be used to produce goods and services.
laissez-faire: - the economic doctrine asserting that an economy works best with the minimum
amount of government intervention.
land: - any natural resource that can be used to produce goods and services.
law of diminishing marginal rate of substitution: - the more of one good a person has, the less of
another good he will be willing to give up to gain an additional unit of the first good.
law of diminishing marginal utility: - the amount of additional utility decreases as successive
units of a product are consumed.
law of diminishing returns: - as more of a variable input is added to a fixed input in the
production process, the resulting increase in output will, at some point, begin to diminish.
law of increasing costs: - as an economy's production level of any particular item increases, its
per-unit cost of production rises.
long run: - the period during in which all inputs are variable.
long-run average cost curve: - a graphical representation of the per-unit costs of production in the
long run.
macroeconomics: - the study of how the major components of an economy interact; it includes
the topics of unemployment, inflation, interest rate policy, and the spending and taxation policies
of government.
margin: - the extra or additional unit (also “marginal”).
marginal cost: - the increase in total variable costs as a result of producing one more unit of
output.
marginal private benefits: - the extra benefits that the buyer derives from consuming additional
quantities of a product.
marginal private costs: - the extra internal (or private) costs to the producer of increasing
production by one additional unit.
marginal product: - the increase in total product as a result of adding one more unit of input.
marginal profit: - the additional economic profit from the production and sale of an extra unit of
output.
marginal rate of substitution: - the amount of one good a consumer is willing to give up to get
one more unit of another good and still maintain the same level of satisfaction.
marginal revenue product: - the increase in a firm's total revenue that results from the use of one
more unit of input.
marginal revenue: - the extra revenue derived from the sale of one more unit.
marginal social benefits: - the additional benefits to both the consumer (internal benefits) and to
society (external benefits) of additional quantities of a product.
marginal social costs: - the additional costs to both the producer (internal costs) and to society
(external costs) of producing additional quantities of a product.
marginal utility: - the amount of additional utility derived from the consumption of an extra unit
of a product.
marginal wage cost: - the extra cost of hiring an additional worker.
market demand: - the total demand for a product by all consumers.
market failures: - the defects in competitive markets that prevent them from achieving an
efficient or equitable allocation of resources.
market supply: - the total supply of a product offered by all producers.
market: - a mechanism that brings buyers and sellers together and assists them in negotiating the
exchange of products.
microeconomics: - the study of the outcomes of decisions by people and firms; it focuses on the
supply and demand of goods, the costs of production, and market structures.
minimum efficient scale: - the smallest-size plant capable of achieving the lowest long-run
average cost of production.
minimum wage: - the lowest rate of pay per hour for workers, as set by government.
monopolistic competition: - a market in which there are many firms that sell a differentiated
product and have some control over the price of the products they sell.
monopoly: - a market in which a single firm (the monopolist) is the sole producer.
monopsony: - a market structure in which there is only one buyer.
mutual interdependence: - the condition in which a firm's actions depend, in part, on the
reactions of rival firms.
Nash equilibrium: - a situation where each rival chooses the best actions given the (anticipated)
actions of the other(s).
natural monopoly: - a single producer in a market (usually with large economies of scale) in
which it is able to produce at a lower cost than competing firms could.
nominal wage: - the wage rate expressed as a dollar-and-cents figure.
non-excludable: - a feature of certain goods that means that it is impossible (or extremely costly)
to prevent nonbuyers from enjoying the benefits.
nonrival goods: - one person's consumption does not reduce the amount available for others.
normal products: - products for which demand will increase as a result of an increase in income
and decrease as a result of a decrease in income.
normal profit: - the minimum profit that must be earned to keep the entrepreneur in that type of
business.
normative statement: - a statement of opinion or belief that cannot be verified.
oligopoly: - a market dominated by a few large firms.
opportunity cost: - the value of the next-best alternative that is given up as a result of making a
particular choice.
optimal purchasing rule: - in order to maximize utility, consumers should allocate their budgets
so that marginal utility per dollar spent on all products is equal.
perfect competition: - a market in which all buyers and sellers are price takers.
perfect price discrimination: - a situation where customers are charged the highest price they are
willing to pay for each unit of a product bought.
positive statement: - a statement of fact that can be verified.
price ceiling: - a government regulation stipulating the maximum price that can be charged for a
product.
price controls: - government regulations to set either a maximum or minimum price for a
product.
price discrimination: - the selling of an identical product at a different price to different
customers for reasons other than differences in the cost of production.
price elasticity of demand: - a measure of the percentage change of quantity demanded relative to
a change in price.
price floor: - a government regulation stipulating the minimum price that can be charged for a
product.
private goods: - goods or services whose benefits can be denied to nonbuyers and whose
consumption by one person reduces the amount available for others.
producer surplus: - the difference between the amount that producers would be willing to accept
for each unit of output and the price they receive when the output is sold.
producers' preference: - an allocation system in which sellers are allowed to determine the
method of allocation on the basis of their own preferences.
product differentiation: - the attempt by a firm to distinguish its product from that of its
competitors.
product market: - the market for consumer goods and services.
production possibilities curve: - a graphical representation of the various combinations of
maximum output that can be produced from the available resources and technology.
productive efficiency: - production of an output at the lowest possible average cost.
profit: - the income received from the activity of enterprise.
protectionism: - the economic policy of protecting domestic producers by restricting the
importation of foreign products.
public goods: - goods or services whose benefits are not affected by the number of users and
from which no one can be excluded.
public utilities: - goods or services regarded as essential and, therefore, usually provided by
government.
quasi-public goods: - private goods that are often provided by government because they involve
extensive benefits for the general public.
quota: - a limit imposed on the production or sale of a product.
rationing: - allocating products that are in short supply using ration coupons issued by
government, guaranteeing a certain quantity of something per family.
real income: - income measured in terms of the amount of goods and services that it will buy.
Real income will increase if either actual income increases or prices fall.
real wage: - the purchasing power of the nominal wage; that is, nominal wage divided by the
price level.
rent control: - a government regulation making it illegal to rent accommodation above a
stipulated level.
rent: - the payment made and the income received for the use of land.
resources: - physical or virtual entities that can be used to produce goods and services.
short run: - any period of time in which at least one input in the production process is fixed
(cannot be increased or decreased).
shortage: - at the prevailing price, the quantity supplied is smaller than the quantity demanded.
shutdown price: - the price that is just sufficient to cover a firm's variable costs
.
socially optimum price: - the price that produces the best allocation of products (and, therefore,
resources) from society's point of view, that is, P = MC.
substitute products: - any products for which demand varies directly in relation to a change in the
price of a similar product.
substitution effect: - the substitution of one product for another as a result of a change in their
relative prices.
sunk costs: - costs that are unrecoverable.
supply schedule: - a table showing the various quantities supplied per period of time at different
prices.
supply: - the quantities that producers are willing and able to sell per period of time at various
prices.
surplus: - at the prevailing price, the quantity demanded is smaller than the quantity supplied.
tariff: - a tax (or duty) levied on imports.
technological improvement: - changes in production techniques that reduce the costs of
production.
technology: - a method of production; the way in which resources are combined to produce
goods and services.
terms of trade: - the average price of a country's exports compared with the price of its imports.
total cost: - the sum of both total variable cost and total fixed cost.
total fixed costs: - costs that do not vary with the level of output.
total product: - the total output of any productive process.
total revenue: - the total receipts of a firm from its sales; formally, it is price multiplied by the
quantity of the product sold.
total variable cost: - the total of all costs that vary with the level of output.
transfer earnings: - a necessary payment that a factor of production must earn in order for it to
remain in its present use.
unitary elasticity: - the point where the percentage change in quantity is exactly equal to the
percentage change in price, that is, where the elasticity coefficient is equal to 1.
utility: - the satisfaction or pleasure derived from the consumption of a product.
voluntary export restriction (VER): - an agreement by an exporting country to restrict the amount
of its exports to another country.
wages: - the payment made and the income received for the use of labour.