Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Ch# 1 Term Ceteris paribus 1 Big tradeoff 1 Capital 1 Cross-section graph 1 Direct relationship 1 Economic model 1 Economic theory 1 Economics 1 Entrepreneurship Definition Other things being equal-all other relevant things remaining the same. The conflict between equity and efficiency. The tools, equipment, buildings, and other constructions that businesses now use to produce goods and services. A graph that shows the values of an economic variable for different groups in a population at a point in time. A relationship between two variables that move in the same direction. A description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand. A generalization that summarizes what we think we understand about the economic choices that people make and the performance of industries and entire economies. The social science that studies the choices that we make as we cope with scarcity and the incentives that influence and reconcile those choices. The human resource Sound 1 Factors of production 1 Goods and services 1 Human capital 1 Incentive 1 Interest 1 Inverse relationship 1 Labour 1 Land 1 Linear relationship 1 Macroeconomics 1 Margin that organizes the other three factors of production: labour, land, and capital. The resources used to produce goods and services. All the objects that people value and produce to satisfy their wants. The knowledge and skill that people obtain from education, on-thejob training, and work experience. A reward that encourages or a penalty that discourages an action. The income that capital earns. A relationship between variables that move in opposite directions. The work time and work effort that people devote to producing goods and services. All the gifts of nature that we use to produce goods and services. A relationship between two variables that is illustrated by a straight line. The study of the performance of the national economy and the global economy. When a choice is changed by a small amount or by a little at a time, the choice is made at the margin. 1 Marginal benefit 1 Marginal cost 1 Microeconomics 1 Negative relationship 1 Opportunity cost 1 Positive relationship 1 Profit 1 Rent 1 Scarcity The benefit that a person receives from consuming one more unit of a good or service. It is measured as the maximum amount that a person is willing to pay for one more unit of the good or service. The opportunity cost of producing one more unit of a good or service. It is the best alternative forgone. It is calculated as the increase in total cost divided by the increase in output. The study of the choices that individuals and businesses make, the way these choices interact, and the influence governments exert on them. A relationship between variables that move in opposite directions. The highest-valued alternative that we give up to get something. A relationship between two variables that move in the same direction. The income earned by entrepreneurship. The income that land earns. The state in which the resources available are insufficient to satisfy people's 1 Scatter diagram 1 Self-interest 1 Slope 1 Social interest 1 Time-series graph 1 Tradeoff 1 Trend 1 Wages 2 Absolute advantage 2 Allocative efficiency 2 Capital accumulation wants. A diagram that plots the value of one variable against the value of another. The choices that you think are best for you. The change in the value of the variable measured on the y -axis divided by the change in the value of the variable measured on the x -axis. Choices that are the best for society as a whole. A graph that measures time (for example, months or years) on the x axis and the variable or variables in which we are interested on the y -axis. A constraint that involves giving up one thing to get something else. The general tendency for a variable to move in one direction. The income that labour earns. A person has an absolute advantage if that person is more productive than another person. A situation in which we cannot produce more of any good without giving up some of another good that we value more highly. The growth of capital resources, 2 Comparative advantage 2 Dynamic comparative advantage 2 Economic growth 2 Firm 2 Learning-by-doing 2 Marginal benefit curve which includes human capital. A person or country has a comparative advantage in an activity if that person or country can perform the activity at a lower opportunity cost than anyone else or any other country. A comparative advantage that a person or country possesses as a result of having specialized in a particular activity and then, as a result of learning-by-doing, having become the producer with the lowest opportunity cost. The expansion of production possibilities that results from capital accumulation and technological change. An economic unit that hires factors of production and organizes those factors to produce and sell goods and services. People become more productive in an activity (learn) just by repeatedly producing a particular good or service (doing). A curve that shows the relationship between the marginal benefit of a good and the quantity of that good consumed. 2 Marginal benefit 2 Marginal cost 2 Market 2 Money 2 Preferences 2 Production efficiency 2 Production possibilities frontier 2 Property rights The benefit that a person receives from consuming one more unit of a good or service. It is measured as the maximum amount that a person is willing to pay for one more unit of the good or service. The opportunity cost of producing one more unit of a good or service. It is the best alternative forgone. It is calculated as the increase in total cost divided by the increase in output. Any arrangement that enables buyers and sellers to get information and to do business with each other. Any commodity or token that is generally acceptable as the means of payment. A description of a person's likes and dislikes. A situation in which the economy cannot produce more of one good without producing less of some other good. The boundary between the combinations of goods and services that can be produced and the combinations that cannot. Social arrangements that govern the ownership, use, 2 Relative price 2 Technological change 3 Change in demand 3 Change in supply 3 Change in the quantity demanded 3 Change in the quantity supplied and disposal of resources or factors of production, goods, and services that are enforceable in the courts. The ratio of the price of one good or service to the price of another good or service. A relative price is an opportunity cost. The development of new goods and of better ways of producing goods and services. A change in buyers' plans that occurs when some influence on those plans other than the price of the good changes. It is illustrated by a shift of the demand curve. A change in sellers' plans that occurs when some influence on those plans other than the price of the good changes. It is illustrated by a shift of the supply curve. A change in buyers' plans that occurs when the price of a good changes but all other influences on buyers' plans remain unchanged. It is illustrated by a movement along the demand curve. A change in sellers' plans that occurs when the price of a good changes but 3 Competitive market 3 Complement 3 Demand curve 3 Demand 3 Equilibrium price 3 Equilibrium quantity 3 Inferior good 3 Law of demand all other influences on sellers' plans remain unchanged. It is illustrated by a movement along the supply curve. A market that has many buyers and many sellers, so no single buyer or seller can influence the price. A good that is used in conjunction with another good. 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. The relationship between the quantity of a good that consumers plan to buy and the price of the good when all other influences on buyers' plans remain the same. It is described by a demand schedule and illustrated by a demand curve. The price at which the quantity demanded equals the quantity supplied. The quantity bought and sold at the equilibrium price. A good for which demand decreases as income increases. Other things 3 Law of supply 3 Money price 3 Normal good 3 Quantity demanded 3 Quantity supplied 3 Substitute 3 Supply curve 3 Supply remaining the same, the higher the price of a good, the smaller is the quantity demanded of it. Other things remaining the same, the higher the price of a good, the greater is the quantity supplied of it. The number of dollars that must be given up in exchange for a good or service. A good for which demand increases as income increases. The amount of a good or service that consumers plan to buy during a given time period at a particular price. The amount of a good or service that producers plan to sell during a given time period at a particular price. A good that can be used in place of another good. A curve that shows the relationship between the quantity supplied and the price of a good when all other influences on producers' planned sales remain the same. The relationship between the quantity of a good that producers plan to sell and the price of the good when all other influences 4 Cross elasticity of demand 4 Elastic demand 4 Elasticity of supply 4 Income elasticity of demand 4 Inelastic demand on producers' plans remain the same. It is described by a supply schedule and illustrated by a supply curve. The responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same. It is calculated as the percentage change in the quantity demanded of the good divided by the percentage change in the price of the substitute or complement. Demand with a price elasticity greater than 1; other things remaining the same, the percentage change in the quantity demanded exceeds the percentage change in price. The responsiveness of the quantity supplied of a good to a change in its price, other things remaining the same. The responsiveness of demand to a change in income, other things remaining the same. It is calculated as the percentage change in the quantity demanded divided by the percentage change in income. A demand with a price elasticity 4 Perfectly elastic demand 4 Perfectly inelastic demand 4 Price elasticity of demand 4 Total revenue test 4 Total revenue 4 Unit elastic demand between 0 and 1; the percentage change in the quantity demanded is less than the percentage change in price. Demand with an infinite price elasticity; the quantity demanded changes by an infinitely large percentage in response to a tiny price change. Demand with a price elasticity of zero; the quantity demanded remains constant when the price changes. A units-free measure of the responsiveness of the quantity demanded of a good to a change in its price, when all other influences on buyers' plans remain the same. A method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same. The value of a firm's sales. It is calculated as the price of the good multiplied by the quantity sold. Demand with a price elasticity of 1; the percentage change 5 Big tradeoff 5 Command system 5 Consumer surplus 5 Deadweight loss 5 Producer surplus 5 Symmetry principle 5 Transactions costs in the quantity demanded equals the percentage change in price. The conflict between equity and efficiency. A method of organizing production that uses a managerial hierarchyresources are allocated by order (command) of someone in authority. The value of a good minus the price paid for it, summed over the quantity bought. A measure of inefficiency. It is equal to the decrease in consumer surplus and producer surplus that results from an inefficient level of production. The price of a good minus the opportunity cost of producing it, summed over the quantity sold. A requirement that people in similar situations be treated similarly. The costs that arise from finding someone with whom to do business, of reaching an agreement about the price and other aspects of the exchange, and of ensuring that the terms of the agreement are fulfilled. The opportunity costs of conducting a 5 Utilitarianism 6 Black market 6 Farm marketing board 6 Living wage 6 Minimum wage 6 Price ceiling 6 Price floor 6 Production quota 6 Rent ceiling transaction. A principle that states that we should strive to achieve "the greatest happiness for the greatest number of people." An illegal trading arrangement in which the price exceeds the legally imposed price ceiling. A regulatory agency that intervenes in an agricultural market to stabilize the price of an agricultural product. An hourly wage rate that enables a person who works a 40-hour work week torent adequate housing for not more than 30 percent of the amount earned. A regulation that makes the hiring of labour below a specified wage rate illegal. A regulation that makes it illegal to charge a price higher than a specified level. A regulation that makes it illegal to charge a price lower than a specified level. An upper limit to the quantity of a good that may be produced in a specified period. A regulation that makes it illegal to charge a rent higher than a specified level. 6 Search activity 6 Subsidy 6 Tax incidence 7 Consumer equilibrium 7 Diminishing marginal utility 7 Marginal utility per dollar 7 Marginal utility 7 Real income 7 Relative price 7 Total utility The time spent looking for someone with whom to do business. A payment that the government makes to private producers. The division of the burden of the tax between the buyer and the seller. A situation in which a consumer has allocated all his or her available income in the way that, given the prices of goods and services, maximizes his or her total utility. The decrease in marginal utility as the quantity consumed increases. The marginal utility from a good divided by its price. The change in total utility resulting from a one-unit increase in the quantity of a good consumed. A household's income expressed as a quantity of goods that the household can afford to buy. The ratio of the price of one good or service to the price of another good or service. A relative price is an opportunity cost. The total benefit that a person gets from the consumption of 7 Utility 8 Budget line 8 Diminishing marginal rate of substitution 8 Income effect 8 Indifference curve 8 Marginal rate of substitution 8 Price effect 8 Real income goods and services. The benefit or satisfaction that a person gets from the consumption of a good or service. The limits to a household's consumption choices. The general tendency for a person to be willing to give up less of good y to get one more unit of good x , and at the same time remain indifferent, as the quantity of good x increases. The effect of a change in income on consumption, other things remaining the same. A line that shows combinations of goods among which a consumer is indifferent. The rate at which a person will give up good y (the good measured on the y -axis) to get an additional unit of good x (the good measured on the x -axis) and at the same time remain indifferent (remain on the same indifference curve). The effect of a change in the price on the quantity of a good consumed, other things remaining the same. A household's 8 Relative price 8 Substitution effect 9 Command system 9 Economic depreciation 9 Economic efficiency 9 Economic profit 9 Economies of scale income expressed as a quantity of goods that the household can afford to buy. The ratio of the price of one good or service to the price of another good or service. A relative price is an opportunity cost. The effect of a change in price of a good or service on the quantity bought when the consumer (hypothetically) remains indifferent between the original and the new consumption situations-that is, the consumer remains on the same indifference curve. A method of organizing production that uses a managerial hierarchyresources are allocated by order (command) of someone in authority. The change in the market value of capital over a given period. A situation that occurs when the firm produces a given output at the least cost. A firm's total revenue minus its opportunity cost. Features of a firm's technology that lead to a falling long-run average cost as 9 Economies of scope 9 Firm 9 Four-firm concentration ratio 9 HerfindahlHirschman Index 9 Implicit rental rate 9 Incentive system 9 Monopolistic competition 9 Monopoly output increases. Decreases in average total cost that occur when a firm uses specialized resources to produce a range of goods and services. An economic unit that hires factors of production and organizes those factors to produce and sell goods and services. A measure of market power that is calculated as the percentage of the value of sales accounted for by the four largest firms in an industry. A measure of market power that is calculated as the square of the market share of each firm (as a percentage) summed over the largest 50 firms (or over all firms if there are fewer than 50) in a market. The firm's opportunity cost of using its own capital. A method of organizing production that uses a market-like mechanism inside the firm. A market structure in which a large number of firms compete by making similar but slightly different products. A market structure in which there is 9 Normal profit 9 Oligopoly 9 Perfect competition 9 Principal-agent problem 9 Product differentiation 9 Technological efficiency one firm, which produces a good or service that has no close substitutes and in which the firm is protected from competition by a barrier preventing the entry of new firms. The expected return for supplying entrepreneurial ability. A market structure in which a small number of firms compete. A market in which there are many firms each selling an identical product; there are many buyers; there are no restrictions on entry into the industry; firms in the industry have no advantage over potential new entrants; and firms and buyers are well informed about the price of each firm's product. The problem of devising compensation rules that induce an agent to act in the best interest of a principal. Making a product slightly different from the product of a competing firm. A situation that occurs when the firm produces a given output by using the least amount of inputs. 9 Technology 9 Transactions costs 10 Average fixed cost 10 Average product 10 Average total cost 10 Average variable cost 10 Constant returns to scale 10 Diminishing marginal returns Any method of producing a good or service. The costs that arise from finding someone with whom to do business, of reaching an agreement about the price and other aspects of the exchange, and of ensuring that the terms of the agreement are fulfilled. The opportunity costs of conducting a transaction. Total fixed cost per unit of output. The average product of a factor of production. It equals total product divided by the quantity of the factor employed. Total cost per unit of output. Total variable cost per unit of output. Features of a firm's technology that lead to constant long-run average cost as output increases. When constant returns to scale are present, the LRAC curve is horizontal. The tendency for the marginal product of an additional unit of a factor of production to be less than the marginal product of the previous unit of the 10 Diseconomies of scale 10 Economies of scale 10 Law of diminishing returns 10 Long run 10 Long-run average cost curve 10 Marginal cost 10 Marginal product factor. Features of a firm's technology that lead to rising long-run average cost as output increases. Features of a firm's technology that lead to a falling long-run average cost as output increases. As a firm uses more of a variable input, with a given quantity of other inputs (fixed inputs), the marginal product of the variable input eventually diminishes. A period of time in which the quantities of all resources can be varied. The relationship between the lowest attainable average total cost and output when both plant size and labour are varied. The opportunity cost of producing one more unit of a good or service. It is the best alternative forgone. It is calculated as the increase in total cost divided by the increase in output. The increase in total product that results from a one-unit increase in the variable input, with all other inputs remaining the same. It is 10 Minimum efficient scale 10 Short run 10 Sunk cost 10 Total cost 10 Total fixed cost 10 Total product 10 Total variable calculated as the increase in total product divided by the increase in the variable input employed, when the quantities of all other inputs are constant. The smallest quantity of output at which the longrun average cost curve reaches its lowest level. The short run in microeconomics has two meanings. For the firm, it is the period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. The fixed input is usually capitalthat is, the firm has a given plant size. For the industry, the short run is the period of time in which each firm has a given plant size and the number of firms in the industry is fixed. The past cost of buying a plant that has no resale value. The cost of all the productive resources that a firm uses. The cost of the firm's fixed inputs. The total output produced by a firm in a given period of time. The cost of all cost 11 External diseconomies 11 External economies 11 Long-run industry supply curve 11 Marginal revenue 11 Perfect competition the firm's variable inputs. Factors outside the control of a firm that raise the firm's costs as the industry produces a larger output. Factors beyond the control of a firm that lower the firm's costs as the industry produces a larger output. A curve that shows how the quantity supplied by an industry varies as the market price varies after all the possible adjustments have been made, including changes in plant size and the number of firms in the industry. The change in total revenue that results from a one-unit increase in the quantity sold. It is calculated as the change in total revenue divided by the change in quantity sold. A market in which there are many firms each selling an identical product; there are many buyers; there are no restrictions on entry into the industry; firms in the industry have no advantage over potential new entrants; and firms and buyers are well informed 11 Price taker 11 Short-run industry supply curve 11 Shutdown point 11 Total revenue 12 Average cost pricing rule 12 Barriers to entry 12 Legal monopoly about the price of each firm's product. A firm that cannot influence the price of the good or service it produces. A curve that shows the quantity supplied by the industry at each price when the plant size of each firm and the number of firms in the industry remain the same. The output and price at which the firm just covers its total variable cost. In the short run, the firm is indifferent between producing the profitmaximizing output and shutting down temporarily. The value of a firm's sales. It is calculated as the price of the good multiplied by the quantity sold. A rule that sets price to cover cost including normal profit, which means setting the price equal to average total cost. Legal or natural constraints that protect a firm from potential competitors. A market structure in which there is one firm and entry is restricted by the granting of a public franchise, government licence, patent, 12 Marginal cost pricing rule 12 Market power 12 Monopoly 12 Natural monopoly 12 Perfect price discrimination 12 Price discrimination 12 Rent seeking 12 Single-price or copyright. A rule that sets the price of a good or service equal to the marginal cost of producing it. The ability to influence the market, and in particular the market price, by influencing the total quantity offered for sale. A market structure in which there is one firm, which produces a good or service that has no close substitutes and in which the firm is protected from competition by a barrier preventing the entry of new firms. A monopoly that occurs when one firm can supply the entire market at a lower price than two or more firms can. Price discrimination that extracts the entire consumer surplus. The practice of selling different units of a good or service for different prices or of charging one customer different prices for different quantities bought. Any attempt to capture a consumer surplus, a producer surplus, or an economic profit. A monopoly that monopoly 13 Cartel 13 Collusive agreement 13 Contestable market 13 Cooperative equilibrium 13 Dominant strategy equilibrium 13 Duopoly 13 Game theory must sell each unit of its output for the same price to all its customers. A group of firms that has entered into a collusive agreement to restrict output and increase prices and profits. An agreement between two (or more) producers to restrict output, raise the price, and increase profits. A market in which firms can enter and leave so easily that firms in the market face competition from potential entrants. The outcome of a game in which the players make and share the monopoly profit. A Nash equilibrium in which the best strategy for each player is to cheat (deny) regardless of the strategy of the other player. A market structure in which two producers of a good or service compete. A tool that economists use to analyze strategic behaviourbehaviour that takes into account the expected behaviour of others and the recognition of mutual interdependence. 13 Limit pricing 13 Monopolistic competition 13 Nash equilibrium 13 Oligopoly 13 Payoff matrix 13 Product differentiation 13 Signal 13 Strategies 14 Anti-combine law The practice of setting the price at the highest level that inflicts a loss on an entrant. A market structure in which a large number of firms compete by making similar but slightly different products. The outcome of a game that occurs when player A takes the best possible action given the action of player B and player B takes the best possible action given the action of player A. A market structure in which a small number of firms compete. A table that shows the payoffs for every possible action by each player for every possible action by each other player. Making a product slightly different from the product of a competing firm. An action taken by an informed person (or firm) to send a message to uninformed people. All the possible actions of each player in a game. A law that regulates and prohibits certain kinds of market behaviour, such as monopoly and monopolistic practices. 14 Average cost pricing rule 14 Capture theory 14 Crown Corporation 14 Earnings sharing regulation 14 Government failure 14 Marginal cost pricing rule 14 Market failure 14 Political equilibrium 14 Price cap regulation 14 Rate of return regulation A rule that sets price to cover cost including normal profit, which means setting the price equal to average total cost. 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. A publicly owned firm in Canada. A regulation that if a firm's profits rise above a target level, they must be shared with the firm's customers. A situation in which government actions result in inefficiency. A rule that sets the price of a good or service equal to the marginal cost of producing it. A state in which the market does not allocate resources efficiently. The outcome that results from the choices of voters, firms, politicians, and bureaucrats. A regulation that specifies the highest price that the firm is permitted to set. A regulation that requires the firm to justify its 14 Regulation 14 Social interest theory 15 Coase theorem 15 Copyright 15 Externality price by showing that the price enables it to earn a specified target percent return on its capital. Rules administered by a government agency to influence economic activity by determining price, product standards and types, and conditions under which a new firm may enter an industry. A theory that politicans supply the regulation that achieves an efficient allocation of resources. The proposition that if property rights exist, if only a small number of parties are involved, and transactions costs are low, then private transactions are efficient. A governmentsanctioned exclusive right granted to the inventor of a good, service, or productive process to produce, use, and sell the invention for a given number of years. A cost or a benefit that arises from production and falls on someone other than the producer, or a cost or a benefit that arises from 15 Intellectual property rights 15 Marginal external benefit 15 Marginal external cost 15 Marginal private benefit 15 Marginal private cost 15 Marginal social benefit 15 Marginal social cost consumption and falls on someone other than the consumer. Property rights for discoveries owned by the creators of knowledge. The benefit from an additional unit of a good or service that people other than the consumer enjoy. The cost of producing an additional unit of a good or service that falls on people other than the producer. The benefit from an additional unit of a good or service that the consumer of that good or service receives. The cost of producing an additional unit of a good or service that is borne by the producer of that good or service. The marginal benefit enjoyed by society-by the consumer of a good or service (marginal private benefit) plus the marginal benefit enjoyed by others (marginal external benefit). The marginal cost incurred by the entire society-by the producer and by everyone else on whom the cost falls- and is the sum of marginal 15 Negative externality 15 Patent 15 Pigovian taxes 15 Positive externality 15 Property rights 15 Public provision 15 Subsidy private cost and marginal external cost. An externality that arises from either production or consumption and that imposes an external cost. A governmentsanctioned exclusive right granted to the inventor of a good, service, or productive process to produce, use, and sell the invention for a given number of years. Taxes that are used as an incentive for producers to cut back on an activity that creates an external cost. An externality that arises from either production or consumption and that provides an external benefit. Social arrangements that govern the ownership, use, and disposal of resources or factors of production, goods, and services that are enforceable in the courts. The production of a good or service by a public authority that receives its revenue from the government. A payment that the government makes to private producers. 15 Transactions costs 15 Voucher 16 Common resource 16 Excludable 16 Free-rider problem 16 Individual transferable quota (ITQ) 16 Nonexcludable 16 Nonrival The costs that arise from finding someone with whom to do business, of reaching an agreement about the price and other aspects of the exchange, and of ensuring that the terms of the agreement are fulfilled. The opportunity costs of conducting a transaction. A token that the government provides to households, which they can use to buy specified goods and services. A resource that is rival and nonexcludable. A good or service or a resource is excludable if it is possible to prevent someone from enjoying the benefit of it. The absence of an incentive for people to pay for what they consume. A production limit that is assigned to an individual who is free to transfer the quota to someone else. A good or service or a resource is nonexcludable if it is impossible (or extremely costly) to prevent someone from benefiting from it. A good or service or a resource is nonrival if its use by one person 16 Principle of minimum differentiation 16 Private good 16 Public good 16 Rational ignorance 16 Rival 17 Bilateral monopoly 17 Derived demand 17 Discounting 17 Economic rent does not decrease the quantity available for someone else. The tendency for competitors to make themselves identical as they try to appeal to the maximum number of clients or voters. A good or service that is both rival and excludable. A good or service that is both nonrival and nonexcludable-it can be consumed simultaneously by everyone and from which no one can be excluded. The decision not to acquire information because the cost of doing so exceeds the expected benefit. A good or service or a resource is rival if its use by one person decreases the quantity available for someone else. A situation in which a single seller (a monopoly) faces a single buyer (a monopsony). Demand for a factor of production, which is derived from the demand for the goods and services produced by that factor. The conversion of a future amount of money to its present value. The income 17 Labour union 17 Marginal revenue product 17 Monopsony 17 Net present value 17 Nonrenewable natural resources 17 Present value received by the owner of a factor of production over and above the amount required to induce that owner to offer the factor for use. An organized group of workers whose purpose is to increase wages and to influence other job conditions. The change in total revenue that results from employing one more unit of a factor of production (labour) while the quantity of all other factors remains the same. It is calculated as the increase in total revenue divided by the increase in the quantity of the factor (labour). A market in which there is a single buyer. The present value of the future flow of marginal revenue product generated by capital minus the cost of the capital. Natural resources that can be used only once and that cannot be replaced once they have been used. The amount of money that, if invested today, will grow to be as large as a given future amount when the interest that it will earn is taken into 17 Rand Formula 17 Renewable natural resources 18 After-tax income 18 Average tax rate 18 Big tradeoff 18 Lorenz curve 18 Low-income cutoff 18 Market income 18 Poverty account. A requirement that all workers represented by a union must pay union dues, whether they join the union or not. Natural resources that can be used repeatedly without depleting what is available for future use. Total income minus tax payments by households to governments. The percentage of income that is paid in tax. The conflict between equity and efficiency. A curve that graphs the cumulative percentage of income or wealth against the cumulative percentage of households. The income level, determined separately for different types of families (for example, single persons, couples, one parent) that is selected such that families with incomes below that limit normally spend 55 percent or more of their income on food, shelter, and clothing. The wages, interest, rent, and profit earned in factor markets and before paying income taxes. A state in which a 18 Progressive income tax 18 Proportional income tax 18 Regressive income tax 18 Total income 19 Business cycle 19 Current account 19 Deflation 19 Discouraged worker 19 Economic growth household's income is too low to be able to buy the quantities of food, shelter, and clothing that are deemed necessary. A tax on income at an average rate that increases with the level of income. A tax on income at a constant average rate, regardless of the level of income. A tax on income at an average rate that decreases with the level of income. Market income plus cash payments to households by governments. The periodic but irregular up-anddown movement in production and jobs. A record of exports minus imports and interest payments paid to and received from abroad. A fnegative inflation rate-a process in which the price level is falling. A person who does not have a job, is available for work, and is willing to work but who has given up the effort to find work. The expansion of production possibilities that results from capital accumulation and 19 Expansion 19 Fiscal policy 19 Government budget deficit 19 Government budget surplus 19 Great Depression 19 Growth recession 19 Inflation 19 Labour force technological change. A business cycle phase between a trough and a peaka period in which real GDP increases. The use of the federal budget to achieve macroeconomic objectives such as full employment, sustained longterm economic growth, and price level stability by setting and changing taxes, making transfer payments, and purchasing goods and services. The deficit that arises when the government spends more than it collects in taxes. The surplus that arises when the government collects more in taxes than it spends. A decade (19291939) of high unemployment and stagnant production throughout the world economy. A situation in which the growth rate of real GDP remains positive but slows so that real GDP falls below potential GDP. A process in which the price level is rising and money is losing value. The sum of the people who are employed and who 19 Lucas wedge 19 Monetary policy 19 Output gap 19 Potential GDP 19 Price level 19 Productivity growth slowdown 19 Real GDP 19 Real gross domestic product (real GDP) 19 Recession are unemployed. The accumulated loss of output that results from a slowdown in the growth rate of real GDP per person. The attempt to control inflation and moderate the business cycle by changing the quantity of money and adjusting interest rates and the exchange rate. Real GDP minus potential GDP. The value of production when all the economy's labour, capital, land, and entrepreneurial ability are fully employed; the quantity of real GDP at full employment. The average level of prices as measured by a price index. A situation in which the growth rate of output per person sags. The value of final goods and services produced in a given year when valued at constant prices. The value of final goods and services produced in a given year when valued at constant prices. A period during which real GDP decreases-the growth rate of real GDP is negative-for at least two 19 Unemployment rate 19 Unemployment 20 Capital consumption 20 Chain-weighted output index 20 Consumption expenditure 20 Depreciation 20 Economic growth rate 20 Economic welfare 20 Exports 20 Final good 20 Flow 20 GDP deflator successive quarters. The percentage of the people in the labour force who are unemployed. A state in which a person does not have a job but is available for work, willing to work, and has made some effort to find work within the previous four weeks. The decrease in the capital stock that results from wear and tear and obsolescence. An index that uses the prices of two adjacent years to calculate the real GDP growth rate. The total payment for consumer goods and services. The decrease in the capital stock that results from wear and tear and obsolescence. The percentage change in the quantity of goods and services produced from one year to the next. A comprehensive measure of the general state of economic wellbeing. The goods and services that we sell to people in other countries. An item that is bought by its final user during the specified time period. A quantity per unit of time. One measure of the 20 Government expenditures 20 Gross domestic product (GDP) 20 Gross investment 20 Imports 20 Intermediate good 20 Investment 20 National saving 20 Net exports 20 Net investment 20 Net taxes price level, which is the average of current-year prices as a percentage of base-year prices. Goods and services bought by the government. The market value of all final goods and services produced within a country during a given time period. The total amount spent on purchases of new capital and on replacing depreciated capital. The goods and services that we buy from people in other countries. An item that is produced by one firm, bought by another firm, and used as a component of a final good or service. The purchase of new plant, equipment, and buildings and additions to inventories. The sum of private saving (saving by households and businesses) and government saving. The value of exports minus the value of imports. Net increase in the capital stockgross investment minus depreciation. Taxes paid to governments minus transfer payments received from governments. 20 Nominal GDP 20 Price level 20 Real GDP 20 Real gross domestic product (real GDP) 20 Saving 20 Stock 20 Wealth 21 Aggregate hours 21 Base period 21 Consumer Price Index (CPI) The value of the final goods and services produced in a given year valued at the prices that prevailed in that same year. It is a more precise name for GDP. The average level of prices as measured by a price index. The value of final goods and services produced in a given year when valued at constant prices. The value of final goods and services produced in a given year when valued at constant prices. The amount of income that households have left after they have paid their taxes and bought their consumption goods and services. A quantity that exists at a point in time. The market value of all the things that people ownthe market value of their assets. The total number of hours worked by all the people employed, both full time and part time, during a year. The period in which the CPI is defined to be 100. An index that measures the average of the prices paid by 21 Cyclical unemployment 21 Discouraged worker 21 Employment-topopulation ratio 21 Frictional unemployment 21 Full employment 21 Growth rate cycle downturn 21 Inflation rate 21 Labour force participation rate urban consumers for a fixed "basket" of the consumer goods and services. The fluctuations in unemployment over the business cycle. A person who does not have a job, is available for work, and is willing to work but who has given up the effort to find work. The percentage of people of working age who have jobs. The unemployment that arises from normal labour turnover-from people entering and leaving the labour force and from the ongoing creation and destruction of jobs. A situation in which the quantity of labour demanded equals the quantity supplied. At full employment, there is no cyclical unemployment-all unemployment is frictional, structural, and seasonal. A pronounced, pervasive, and persistent decline in the growth rate of aggregate economic activity. The percentage change in the price level from one year to the next. The percentage of the working-age 21 Labour force 21 Natural rate of unemployment 21 Potential GDP 21 Real wage rate 21 Seasonal unemployment 21 Structural unemployment 21 Unemployment rate population who are members of the labour force. The sum of the people who are employed and who are unemployed. The unemployment rate when the economy is at full employment. There is no cyclical unemployment; all unemployment is frictional, structural, and seasonal. The value of production when all the economy's labour, capital, land, and entrepreneurial ability are fully employed; the quantity of real GDP at full employment. The quantity of goods and services that an hour's work can buy. It is equal to the money wage rate divided by the price level and multiplied by 100. Unemployment that arises because the number of jobs available has decreased because of the season. The unemployment that arises when changes in technology or international competition change the skills needed to perform jobs or change the locations of jobs. The percentage of the people in the labour force who are unemployed. 21 Working-age population 22 Above fullemployment equilibrium 22 Aggregate demand 22 Aggregate production function 22 Below fullemployment equilibrium 22 Disposable income 22 Fiscal policy 22 Inflationary gap 22 Long-run aggregate supply curve The total number of people aged 15 years and over. A macroeconomic equilibrium in which real GDP exceeds potential GDP. The relationship between the quantity of real GDP demanded and the price level. The relationship between the quantity of real GDP supplied and the quantities of labour and capital and the state of technology. A macroeconomic equilibrium in which potential GDP exceeds real GDP. Aggregate income minus taxes plus transfer payments. The use of the federal budget to achieve macroeconomic objectives such as full employment, sustained longterm economic growth, and price level stability by setting and changing taxes, making transfer payments, and purchasing goods and services. The amount by which real GDP exceeds potential GDP. The relationship between the quantity of real GDP supplied and the price level in the long run when real GDP equals potential GDP. 22 Long-run macroeconomic equilibrium 22 Macroeconomic long run 22 Macroeconomic short run 22 Monetary policy 22 Natural rate of unemployment 22 Recessionary gap 22 Short-run aggregate supply curve 22 Short-run macroeconomic A situation that occurs when real GDP equals potential GDP-the economy is on its long-run aggregate supply curve. A time frame that is sufficiently long for real GDP to return to potential GDP so that full employment prevails. A period during which real GDP has fallen below or risen above potential GDP. The attempt to control inflation and moderate the business cycle by changing the quantity of money and adjusting interest rates and the exchange rate. The unemployment rate when the economy is at full employment. There is no cyclical unemployment; all unemployment is frictional, structural, and seasonal. The amount by which potential GDP exceeds real GDP. A curve that shows the relationship between the quantity of real GDP supplied and the price level in the short run when the money wage rate, other resource prices, and potential GDP remain constant. A situation that occurs when the equilibrium 23 Aggregate planned expenditure 23 Autonomous expenditure 23 Consumption function 23 Disposable income quantity of real GDP demanded equals the quantity of real GDP supplied-at the point of intersection of the AD curve and the SAS curve. 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 expenditures on goods and services, and planned exports minus planned imports. The sum of those components of aggregate planned expenditure that are not influenced by real GDP. Autonomous expenditure equals the sum of investment, government expenditures, exports, and the autonomous parts of consumption expenditure and imports. The relationship between consumption expenditure and disposable income, other things remaining the same. Aggregate income minus taxes plus transfer payments. 23 Equilibrium expenditure 23 Induced expenditure 23 Marginal propensity to consume 23 Marginal propensity to import 23 Marginal propensity to save 23 Multiplier 23 Saving function The level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP. The sum of the components of aggregate planned expenditure that vary with real GDP. Induced expenditure equals consumption expenditure minus imports. The fraction of a change in disposable income that is consumed. It is calculated as the change in consumption expenditure divided by the change in disposable income. The fraction of an increase in real GDP that is spent on imports. The fraction of an increase in disposable income that is saved. It is calculated as the change in saving divided by the change in disposable income. The amount by which a change in autonomous expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP. The relationship between saving and disposable income, other things remaining the 24 Automatic fiscal policy 24 Automatic stabilizers 24 Autonomous tax multiplier 24 Autonomous taxes 24 Balanced budget 24 Budget deficit 24 Budget surplus 24 Contractionary fiscal policy 24 Cyclical surplus or deficit 24 Discretionary fiscal policy 24 Expansionary fiscal policy 24 Federal budget same. A change in fiscal policy that is triggered by the state of the economy. Mechanisms that stabilize real GDP without explicit action by the government. The magnification effect of a change in autonomous taxes on equilibrium expenditure and real GDP. Taxes that do not vary with real GDP. A government budget in which revenues and outlays are equal. A government's budget balance that is negativeoutlays exceed revenues. A government's budget balance that is positiverevenues exceed outlays. A decrease in government expenditures or an increase in taxes. The actual surplus or deficit minus the structural surplus or deficit. A policy action that is initiated by an act of Parliament. An increase in government expenditures or a decrease in taxes. The annual statement of the outlays and revenues of the government of 24 Fiscal policy 24 Government debt 24 Government expenditures multiplier 24 Induced taxes 24 Provincial budget 24 Structural surplus or deficit Canada, together with the laws and regulations that approve and support those outlays and revenues. The use of the federal budget to achieve macroeconomic objectives such as full employment, sustained longterm economic growth, and price level stability by setting and changing taxes, making transfer payments, and purchasing goods and services. The total amount of borrowing that the government has undertaken. It equals the sum of past budget deficits minus the sum of past budget surpluses. The magnification effect of a change in government expenditures on goods and services on equilibrium expenditure and real GDP Taxes that vary with real GDP. The annual statement of the outlays and revenues of a provincial government, together with the laws and regulations that approve and support those outlays and revenues. The budget balance that would occur 25 Automated Clearing Settlement System (ACSS) 25 Barter 25 Central bank 25 Chartered bank 25 Credit union 25 Currency drain ratio 25 Currency 25 Demand for money curve 25 Depository if the economy were at full employment and real GDP were equal to potential GDP. A system through which all payments not processed by the LVTS are handled. The direct exchange of one good or service for other goods and services. A public authority that supervises financial institutions and markets and conducts monetary policy. A private firm, chartered under the Bank Act of 1992 to receive deposits and make loans. A cooperative organization that operates under the Co-operative Credit Association Act of 1992 and that receives deposits and makes loans to its members. The ratio of currency to deposits. The coins and Bank of Canada notes that we use today. The relationship between the quantity of money demanded and the interest rate when all other influences on the amount of money that people wish to hold remain the same. A firm that takes institution 25 Desired reserve ratio 25 Excess reserves 25 Financial innovation 25 Interest rate 25 Large Value Tranfer System (LVTS) 25 Lender of last resort 25 Liquidity 25 M1 deposits from households and firms and makes loans to other households and firms. The ratio of reserves to deposits that banks wish to hold. A bank's actual reserves minus its desired reserves. The development of new financial products-new ways of borrowing and lending. The amount received by a lender and paid by a borrower expressed as a percentage of the amount of the loan. An electronic payments system that enables financial institutions and their customers to make large payments instantly and with sure knowledge that the payment has been made. The Bank of Canada stands ready to make loans to banks when the banking system as a whole is short of reserves. The property of being instantly convertible into a means of payment with little loss in value. A measure of money that consists of currency held outside the banks plus demand 25 M2+ 25 Means of payment 25 Monetary base 25 Monetary policy 25 Money multiplier 25 Money 25 Payments system deposits at chartered banks that are owned by individuals and businesses. A measure of money that consists of M1 plus personal savings deposits, and nonpersonal notice deposits at chartered banks plus all types of deposits at trust and mortgage loan companies, credit unions, caisses populaires, and other financial institutions. A method of settling a debt. The sum of the Bank of Canada notes outside the Bank of Canada, chartered banks' deposits at the Bank of Canada, and coins held by households, firms, and banks. The attempt to control inflation and moderate the business cycle by changing the quantity of money and adjusting interest rates and the exchange rate. The ratio of the change in the quantity of money to the change in the monetary base. Any commodity or token that is generally acceptable as the means of payment. The system through which banks make payments to each other to settle transactions by their customers. 25 Reserve ratio 25 Reserves 25 Trust and mortgage loan company 26 Canadian interest rate differential 26 Crawling peg 26 Currency appreciation 26 Currency depreciation 26 Currency union 26 Fixed exchange rate The fraction of a bank's total deposits that are held in reserves. Cash in a bank's vault plus the bank's deposits at the Bank of Canada. A privately owned depository institution that operates under the Trust and Loan Companies Act of 1992. A gap equal to the Canadian interest rate minus the foreign interest rate. A policy regime is one that selects a target path for the exchange rate with intervention in the foreign exchange market to achieve that path. The rise in the value of one currency in terms of another currency. The fall in the value of one currency in terms of another currency. A merger of the currencies of a number of countries to form a single money and avoid foreign exchange transactions. A policy regime in which the value of the exchange rate is decided by the government or central bank and the unregulated forces of demand and supply are blocked by direct 26 Flexible exchange rate 26 Foreign currency 26 Foreign exchange market 26 Foreign exchange rate 26 Interest rate parity 26 Purchasing power parity Cost-push inflation 27 27 Demand-pull inflation 27 Equation of exchange 27 Long-run Phillips curve intervention in the foreign exchange market. A policy regime in which the value of the exchange rate is determined by demand and supply with no direct intervention in the foreign exchange market by the central bank. The notes, coins and bank deposits in the currency of another country. The market in which the currency of one country is exchanged for the currency of another. The price at which one currency exchanges for another. A situation in which the interest rates on assets in different currencies are equal when exchange rate changes are taken into account. The equal value of different monies. An inflation that results from an initial increase in costs. An inflation that results from an initial increase in aggregate demand. An equation that states that the quantity of money multiplied by the velocity of circulation equals GDP. A curve that shows the relationship between inflation 27 Phillips curve 27 Quantity theory of money 27 Rational expectation 27 Short-run Phillips curve 27 Velocity of circulation 28 k -percent rule 28 Bank rate and unemployment when the actual inflation rate equals the expected inflation rate. A curve that shows a relationship between inflation and unemployment. The proposition that in the long run, an increase in the quantity of money brings an equal percentage increase in the price level. The most accurate forecast possible, a forecast that uses all the available information, including knowledge of the relevant economic forces that influence the variable being forecasted. A curve that shows the tradeoff between inflation and unemployment, when the expected inflation rate and the natural rate of unemployment remain the same. The average number of times a dollar of money is used annually to buy the goods and services that make up GDP. A rule that makes the quantity of money grow at a rate of k percent a year, where k equals the growth rate of potential GDP. The interest rate that the Bank of 28 Core inflation 28 Instrument rule 28 Interest-sensitive expenditure curve 28 McCallum rule 28 Nominal interest rate Canada charges the chartered banks on the reserves it lends them. A measure of inflation based on the CPI excluding the eight most volatile pricesthe prices of fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, and tobacco-and also excluding changes in indirect taxestaxes such as GST, HST, and provincial sales taxes. A decision rule for monetary policy that sets the policy instrument at a level that is based on the current state of the economy. The relationship between aggregate expenditure plans and the real interest rate when all other influences on expenditure plans remain the same. A rule that makes the growth rate of the monetary base respond to the long-term average growth rate of real GDP and medium-term changes in the velocity of circulation of the monetary base. The percentage return on an asset such as a bond 28 Open market operation 28 Operating band 28 Overnight loans rate 28 Real exchange rate 28 Real interest rate 28 Settlements balances rate 28 Targeting rule expressed in terms of money. The purchase or sale of government of Canada securitiesTreasury bills and government bondsby the Bank of Canada from or to a chartered bank or the public. The target overnight loans rate plus or minus 0.25 percentage points. The interest rate on overnight loans that members of the LVTS (big banks) make to each other. The relative price of the GDP baskets of goods and services in two countries. The percentage return on an asset expressed in terms of what money will buy. It is the nominal interest rate adjusted for inflation and is approximately equal to the nominal interest rate minus the inflation rate. The interest rate that the Bank of Canada pays banks on their reserve deposits at the Bank of Canada. A decision rule for monetary policy that sets the policy instrument at a level that makes the forecast of the ultimate policy target equal to the 28 Taylor rule 29 Crowding in 29 Crowding out 29 International crowding out 29 Keynesian 29 Long-run neutrality 29 Monetarist 29 Policy conflict target. A rule that sets the overnight rate in response to only the current inflation rate rate and the current estimate of the output gap. The tendency for expansionary fiscal policy to increase investment. The tendency for an expansionary fiscal policy action to decrease investment. The tendency for an expansionary fiscal policy to decrease net exports. A macroeconomist who regards the economy as being inherently unstable and requiring active government intervention to achieve stability. The proposition that in the long run, a change in the quantity of money changes the price level and leaves all real variables unchanged. A macroeconomist who believes that fluctuations in the quantity of money are the main source of economic fluctuations. A situation in which the government and the Bank of Canada pursue different goals and the actions of one make it harder for 29 Policy coordination 30 Demand for labour 30 Efficiency wage 30 Human capital 30 Job rationing 30 Job search 30 Labour productivity Law of diminishing returns 30 the other to achieve its goals. A situation in which the government and the Bank of Canada work together to achieve a common set of goals. The relationship between the quantity of labour demanded and the real wage rate when all other influences on firms' hiring plans remain the same. A real wage rate that is set above the fullemployment equilibrium wage rate and that balances the costs and benefits of this higher wage rate to maximize the firm's profit. The knowledge and skill that people obtain from education, on-thejob training, and work experience. The practice of paying a real wage rate above the equilibrium level and then rationing jobs by some method. The activity of looking for an acceptable vacant job. Real GDP per hour of labour. As a firm uses more of a variable input, with a given quantity of other inputs (fixed inputs), the marginal product of the 30 Learning-by-doing 30 Long-run aggregate supply curve 30 Marginal product of labour 30 Minimum wage 30 Money wage rate 30 Production function 30 Quantity of labour demanded 30 Quantity of labour supplied 30 Real wage rate variable input eventually diminishes. People become more productive in an activity (learn) just by repeatedly producing a particular good or service (doing). The relationship between the quantity of real GDP supplied and the price level in the long run when real GDP equals potential GDP. The additional real GDP produced by an additional hour of labour when all other influences on production remain the same. A regulation that makes the hiring of labour below a specified wage rate illegal. The number of dollars that an hour of labour earns. The relationship between real GDP and the quantity of labour employed when all other influences on production remain the same. The number of labour hours hired by all the firms in the economy. The number of labour hours that all households in the economy plan to work. The quantity of goods and services that an hour's work can buy. It is equal to the 30 Short-run aggregate supply curve 30 Supply of labour 31 Aggregate production function 31 Classical growth theory 31 Growth accounting money wage rate divided by the price level and multiplied by 100. A curve that shows the relationship between the quantity of real GDP supplied and the price level in the short run when the money wage rate, other resource prices, and potential GDP remain constant. The relationship between the quantity of labour supplied and the real wage rate when all other influences on work plans remain the same. The relationship between the quantity of real GDP supplied and the quantities of labour and capital and the state of technology. 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. A method of calculating how much real GDP growth results from growth of labour and capital and how much is attributable to technological change. 31 31 Labour productivity Law of diminishing returns 31 Neoclassical growth theory 31 New growth theory 31 One-third rule 31 Productivity curve Real GDP per hour of labour. As a firm uses more of a variable input, with a given quantity of other inputs (fixed inputs), the marginal product of the variable input eventually diminishes. A theory of economic growth that proposes that real GDP per person grows because technological change induces a level of saving and investment that makes capital per hour of labour grow. A theory of economic growth based on the idea that real GDP per person grows because of the choices that people make in the pursuit of profit and that growth can persist indefinitely. The rule that, with no change in technology, a 1 percent increase in capital per hour of labour brings, on the average, a onethird of 1 percent increase in real GDP per hour of labour. A relationship that shows how real GDP per hour of labour changes as the amount of capital per hour of labour changes 31 Subsistence real wage rate 32 Dumping 32 Exports 32 General Agreement on Tariffs and Trade 32 Imports 32 Infant-industry argument 32 Net exports 32 Nontariff barrier 32 North American Free Trade Agreement 32 Quota with a given state of technology. The minimum real wage rate needed to maintain life. The sale by a foreign firm of exports at a lower price than the cost of production. The goods and services that we sell to people in other countries. An international agreement signed in 1947 to reduce tariffs on international trade. The goods and services that we buy from people in other countries. The argument that it is necessary to protect a new industry to enable it to grow into a mature industry that can compete in world markets. The value of exports minus the value of imports. Any action other than a tariff that restricts international trade. An agreement, which became effective on January 1, 1994, to eliminate all barriers to international trade between the United States, Canada, and Mexico after a 15-year phasing-in period. A quantitative restriction on the import of a particular good, 32 Tariff 32 Terms of trade 32 Voluntary export restraint 32 World Trade Organization which specifies the maximum amount that can be imported in a given time period. A tax that is imposed by the importing country when an imported good crosses its international boundary. The quantity of goods and services that a country exports to pay for its imports of goods and services. An agreement between two governments in which the government of the exporting country agrees to restrain the volume of its own exports. An international organization that places greater obligations on its member countries to observe the GATT rules.