| Absolute advantage | The ability to produce a good using fewer inputs than another producer |
| Accounting profit | Total revenue minus total explicit cost |
| Adverse selection | Occurs when one party in a transaction has more information than the other, leading to market inefficiencies |
| Agent | A person who performs an act for another person, called the principal |
| Arrow’s Impossibility Theorem | A mathematical result showing that, under certain assumed conditions, there is no method for aggregating individual preferences into a valid set of social preferences Properties of the ideal voting system:
Unanimity - if everyone prefers A to B, Then A beats B,
Transivity - If A beates B, and B beats C, then A beats C
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| Average fixed cost | Fixed cost divided by the quantity of output |
| Average revenue | Total revenue divided by the quantity sold |
| Average total cost | Total cost divided by the quantity of output |
| Average variable cost | Variable cost divided by the quantity of output |
| Behavioral economics | The subfield of economics that integrates the insights of psychology |
| Cartel | A group of firms acting in unison |
| Circular flow diagram | A visual model of the economy that shows how dollars flow through markets among households and firms |
| Coase theorem | The Coase Theorem states that under ideal economic conditions, where there is a conflict of property rights, the involved parties can bargain or negotiate terms that will accurately reflect the full costs and underlying values of the property rights at issue, resulting in the most efficient outcome |
| Collusion | An agreement among firms in a market about quantities to produce or prices to charge |
| Comparative advantage | The ability to produce a good at a lower opportunity cost than another producer |
| Competitive market | A market in which there are many buyers and many sellers so each has a negligible impact on the market price. Trading occurs in identical products, and each buyer and seller is a price taker. |
| Complements | Two goods for which an increase in the price of one leads to a decrease in the demand for the other |
| Condorcet paradox | The failure of majority rule to produce transitive preferences for society |
| Constant returns to scale | The property whereby long-run average total cost stays the same as the quantity of output changes |
| Consumer surplus | The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it |
| Corrective taxes | A tax designed to induce private decision makers to take into account the social costs that arise from a negative externality |
| Cost | The value of everything a seller must give up to produce a good |
| Cross-price elasticity of demand | A measure of how much the quantity demanded of one good responds to a change in the price of another good, calculated as the percentage change in the quantity demanded of the first good divided by the percentage change in the price of the second good |
| Demand curve | A graph of the relationship between the price of a good and the quantity demanded |
| Demand schedule | A table that shows the relationship between the price of a good and the quantity demanded |
| Diminishing marginal product | The property whereby the marginal product of an input declines as the quantity of the input increases |
| Diseconomies of scale | The property whereby long-run average total cost rises as the quantity of output increases |
| Dominant strategy | A strategy that is best for a player in a game regardless of the strategies chosen by the other players |
| Economic profit | Total revenue minus total cost, including both explicit and implicit costs |
| Economics | The study of how society manages its scarce resources |
| Economies of scale | The property whereby long-run average total cost falls as the quantity of output increases |
| Efficiency | The property of society getting the most it can from its scarce resources |
| Efficient scale | The quantity of output that minimizes average total cost |
| Elasticity | A measure of the responsiveness of the quantity demanded or quantity supplied to a change in one of its determinants |
| Equality | The property of distributing economic prosperity uniformly among the members of society |
| Equilibrium | A situation in which the market price has reached the level at which the quantity supplied equals the quantity demanded |
| Equilibrium price | The price that balances the quantity supplied and the quantity demanded |
| Equilibrium quantity | The quantity supplied and the quantity demanded at the equilibrium price |
| Explicit costs | Input costs that require an outlay of money by the firm |
| Exports | Goods produced domestically and sold abroad |
| Externality | The impact of one person’s actions on the well-being of a bystander |
| Fixed costs | Costs that do not vary with the quantity of output produced |
| Games from trade | The extra benefits (such as more goods, greater variety, or lower opportunity costs) that individuals, regions, or countries obtain by specializing in what they produce relatively efficiently and then trading with others, compared to remaining self-sufficient autarky) |
| Game theory | The study of how people behave in strategic situations |
| Implicit costs | Input costs that do not require an outlay of money by the firm |
| Imports | Goods produced abroad and sold domestically |
| Incentive | Something that induces a person to act |
| Income elasticity of demand | A measure of how much the quantity demanded of a good responds to a change in consumers’ income, calculated as the percentage change in quantity demanded divided by the percentage change in income |
| Inferior good | A good for which, other things being equal, an increase in income leads to a decrease in demand |
| Inflation | An increase in the overall level of prices in the economy |
| Internalizing the externality | Altering incentives so that people take into account the external effects of their actions |
| Law of demand | The claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises |
| Law of supply | The claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises |
| Law of supply and demand | The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance |
| Macroeconomics | The study of economy-wide phenomena, including inflation, unemployment, and economic growth |
| Marginal change | An incremental adjustment to a plan of action |
| Marginal cost | The increase in total cost that arises from an extra unit of production |
| Marginal product | The increase in output that arises from an additional unit of input |
| Marginal revenue | The change in total revenue from an additional unit sold |
| Market | A group of buyers and sellers of a particular good or service |
| Market economy | An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services |
| Market failure | A situation in which a market left on its own does not allocate resources efficiently |
| Market power | The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices |
| Median voter theorem | A mathematical result showing that if voters are choosing a point along a line and they all want the point closest to their own optimum, then majority rule will pick the optimum of the median voter |
| Microeconomics | The study of how households and firms make decisions and how they interact in markets |
| Midpoint method | A way to calculate percentage changes (often for elasticity) that uses the average of the starting and ending values as the base, so results don't depend on which point you treat as "initial" |
| Monopolistic competition | A market structure in which many firms sell products that are similar but not identical |
| Monopoly | A firm that is the sole seller of a product without close substitutes |
| Moral hazard | The tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior |
| Nash equilibrium | A situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen |
| Natural monopoly | A type of monopoly that arises because a single firm can supply a good or service to an entire market at a lower cost than could two or more firms |
| Normal good | A good for which, other things being equal, an increase in income leads to an increase in demand |
| Normative statements | Claims that attempt to prescribe how the world should be |
| Oligopoly | A market structure in which only a few sellers offer similar or identical products |
| Opportunity cost | Whatever must be given up obtaining some item |
| Political economy | The study of government using the analytic methods of economics |
| Positive statements | Claims that attempt to describe the world as it is |
| Price ceiling | A legal maximum on the price at which a good can be sold |
| Price discrimination | The business practice of selling the same good at different prices to different customers |
| Price elasticity of demand | A measure of how much the quantity demanded of a good responds to a change in its price, calculated as the percentage change in quantity demanded divided by the percentage change in price |
| Price elasticity of supply | A measure of how much the quantity supplied of a good responds to a change in its price, calculated as the percentage change in quantity supplied divided by the percentage change in price |
| Price floor | A legal minimum on the price at which a good can be sold |
| Principal | A person for whom another person, called the agent, performs some act |
| Prisoners’ dilemma | A particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial |
| Producer surplus | The amount a seller is paid for a good minus the seller’s cost of providing it |
| Production function | The relationship between the quantity of inputs used to make a good and the quantity of output of that good |
| Production possibilities frontier | A graph that shows the combinations of output that the economy can possibly produce with the available factors of production and production technology |
| Productivity | The quantity of goods and services produced from each unit of labor input |
| Profit | Total revenue minus total cost |
| Property rights | The ability of an individual to own and exercise control over scarce resources |
| Quantity demanded | The amount of a good that buyers are willing and able to purchase |
| Quantity supplied | The amount of a good that sellers are willing and able to sell |
| Rational people | People who systematically and purposefully do the best they can to achieve their objectives |
| Scarcity | The limited nature of society’s resources |
| Screening | An action taken by an uninformed party to induce an informed party to reveal information |
| Shortage | A situation in which the quantity demanded is greater than the quantity supplied |
| Signaling | An action taken by an informed party to reveal private information to an uninformed party |
| Substitutes | Two goods for which an increase in the price of one leads to an increase in the demand for the other |
| Sunk cost | A cost that has already been committed and cannot be recovered |
| Supply curve | A graph of the relationship between the price of a good and the quantity supplied |
| Supply schedule | A table that shows the relationship between the price of a good and the quantity supplied |
| Surplus | A situation in which the quantity supplied is greater than the quantity demanded |
| Tax incidence | The manner in which the burden of a tax is shared among participants in a market |
| Total cost | The market value of the inputs a firm uses in production |
| Total revenue | The amount paid by buyers and received by the sellers of a good, calculated as the price of the good times the quantity sold |
| Transaction costs | The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own |
| Variable costs | Costs that vary with the quantity of output produced |
| Welfare economics | The study of how the allocation of resources affects economic well-being |
| Willingness to pay | The maximum amount that a buyer will pay for a good |