ECON definitions

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Index number: an average that measures change over time of such variables as the price level and industrial production; conventionally expressed as a percentage relative to a base period, which is assigned the value of 100
Limited partnership: a firm which has two classes of owners; general partners, who take part in managing the firm and are personally liable for the firm's actions and debts, and limited partners, who take no part on the management of the firm and risk only the money that they have invested
Cost-benefit analysis: an approach for evaluating the desirability of a given policy, based on comparing total (opportunity) costs with total benefits
Price elasticity of demand: a measure of the responsiveness of quantity demanded to a change in the commodity's own price
Barter: an economic system in which goods and services are traded directly for other goods and services
Allocative efficiency: a situation in which the market price for each good is equal to that good's marginal cost
Variable factor: an input whose quantity can be changed over the time period under consideration
Rivalrous: a good or service is rivalrous if, when one person consumes one unit of it, there is one less unit available for others to consume
Break-even price: the price at which a firm is just able to cover all of its costs, including the opportunity cost of capital
Common-property resource: a product that is rivalrous but not excludable
Supply curve: the graphical representation of the relationship between quantity supplied and the price of a commodity, other things being equal
Monopoly: a market containing a single firm
Isocost line: represents a combination of inputs which all cost the same amount. The use of the isocost pertains to cost-minimization in production, as opposed to utility-maximization. The typical isocost line represents the ratio of costs of labour and capital.
Law of diminishing returns: the hypothesis that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, the marginal product of the variable factor will eventually decrease
Specialization of labour: the specialization of individual workers in the production of particular goods or services
Perfect competition: a market structure in which all firms in an industry are price takers and in which there is freedom of entry into and exit from the industry.
Cost minimization: an implication of profit maximization that firms choose the production method that produces any given level of output at the lowest possible cost
Absolute price: the amount of money that must be spent to acquire one unit of a commodity. Also called money price.
Sellers' preferences: allocation of commodities in excess demand by decisions of the sellers
Income effect: the change in the quantity of a good demanded resulting from a change in real income (holding relative prices constant)
Utility: the satisfaction or well being that a consumer receives from consuming some good or service
Inelastic demand: following a given percentage change in price, there is a smaller percentage change in quantity demanded; elasticity less than 1
Intermediate products: all outputs that are used as inputs by other producers in a further stage of production
Partial-equilibrium analysis: the analysis of a single market in isolation, ignoring any feedbacks that may come from induced changes in other markets
Average revenue (AR): total revenue divided by quantity sold; this is the market price when all units are sold at the same price
Economies of scale: reduction of long-run average costs resulting from an expansion in the scale of a firm's operations so that more of all inputs are being used
Cross elasticity of demand: a measure of the responsiveness of the quantity of one commodity demanded to changes in the price of another commodity
Assumetric information: a situation in which one party to a transaction has more or better relevant information about the transaction than the other party
Production possibilities boundary: a curve showing which alternative combinations of commodities can just be attained if all available resources are used efficiently; it is the boundary between attainable and unattainable output combinations
Market structure: all features of a market that affect the behaviour and performance of firms in that market, such as the number and size of sellers, the extend of knowledge about one another's actions, the degrees of freedom of entry, and the degree of product differentiation
Game theory: the theory that studies decision making in situations in which one player anticipates the reactions of other players to its own actions
Short-run equilibrium: for a competitive industry, the price and output at which industry demand equals short-run industry supply, and all firms are maximizing their profits. Either profits or losses for individual firms are possible.
Dividends: profits paid out to shareholders of a corporation. Sometimes called distributed profits.
Differentiated product: a group of commodities that are similar enough to be called the same product but dissimilar enough that all of them do not have to be sold at the same price
Exogenous variable: A variable that is determined outside the theory. Sometimes called an autonomous variable or an independent variable.
Services: intangible commodities, such as haircuts or medical care
Rent seeking: behaviour whereby private firms and individuals try to use the powers of the government to enhance their own economic well-being in ways that are not in the social interest
Competition policy: policy designed to prohibit the acquisition and exercise of monopoly power by business firms
Economy: a system in which scarce resources are allocated among competing uses
State-owned enterprise: a firm that is owned by the government. In Canada, these are called Crown corporations.
Inferior good: a good for which quantity demanded falls as income rises—its income elasticity is negative
Factors of production: resources used to produce goods and services; frequently divided into the basic categories of land, labour, and capital.
Income elasticity of demand: a measure of the responsiveness of quantity demanded to a change in income
Decreasing returns (to scale): a situation in which output increases less than in proportion to inputs as the scale of a firm's production increases. A firm in this situation is an increasing-cost firm.
Nash equilibrium: an equilibrium that results when each firm in an industry is currently doing the bst that it can, given the current behaviour of the other firms in the industry
Productive efficiency for the industry: when the industry is producing a given level of output at the lowest possible cost. This requires that marginal cost be equated across all firms in the industry
Duopoly: an industry that contains only two firms
Constant returns (to scale): a situation in which output increases in proportion to inputs as the scale of production is increased. A firm in this situation is a constant-cost firm
Isoquant: a contour line drawn through the set of points at which the same quantity of output is produced while changing the quantities of two or more inputs
Single proprietorship: a firm which ahs one owner who is personally responsible for the firm's actions and debts
Time-series data: a set of observations made of successive periods of time
Change in quantity supplied: a change in the specific quantity supplied, represented by a change from one point on a supply curve to another point, either on the original supply curve or on a new one
Paternalism: intervention in the free choices of individuals by others (including governments) to protect them against what is presumed to be their own ignorance or folly
Comparative statistics: the derivation of predictions by analyzing the effect of a change in some exogenous variable on the equilibrium
Rational ignorance: when agents have no incentive to become informed about some government policy because the costs of being informed exceed the benefits of any well-informed action the agent might take
Homogenous product: in the eyes of purchasers, every unit of the product is identical to every other unit.
Microeconomics: the study of the causes and consequences of the allocation of resources as it is affected by the workings of the price system.
Total variable cost (TVC): total costs of production that vary directly with the level of output
Equilibrium price: the price of which quantity demanded equals quantity supplied. Also called the market-clearing price
Minimum efficient scale (MES): the smallest output at which LRAC reaches its minimum. All available economies of scale have been realized at this point
Resource allocation: the allocation of an economy's scarce resources of land, labour, and capital among alternative uses.
Excludable: a good or service is excludable if its owner can prevent from others from consuming it
Ordinary partnership: a firm which has two or more joint owners, each of whom is personally responsible for the firm's actions and debts
Fixed factor: an input whose quantity cannot be changed in the short run
Budget line: a graph showing what combinations of quantities of two goods can be afforded by a consumer with a fixed total amount to spend
Bond: a debt instrument carrying a specified amount and schedule of interest payments and (usually) a date for redemption of its face value.
Black market: a situation in which goods are sold illegally at prices that violate a legal price control
Real income: income expressed in terms of the purchasing power of money income, that is, the quantity of goods and services that can be purchased with the money income
Economic model: a term used in several related ways: sometimes for an abstraction designed to illustrate some point but not designed to generate testable hypotheses, and sometimes as a synonym for theory.
Excess capacity theorem: the property of long-run equilibrium in monopolistic competition that firms produce on the falling portion of their long-run average cost curves. This results in excess capacity, measured by the gap between present output and the output that coincides with minimum average cost
Adverse selection: self-selection, within a single risk category, of persons of above-average risk
General-equilibrium analysis: the analysis of all the economy's markets simultaneously, recognizing the interactions among the various markets
Long run: a period of time in which all inputs may be varied, but the existing technology of production cannot be changed
Marginal utility: the additional satisfaction obtained by a consumer from consuming one additional unit of a commodity
Price setter: a firm that faces a downward sloping demand curve for its product. It chooses which price to set
Corporation: a firm which has a legal existence separate from that of the owners
Increasing returns (to scale): a situation in which output increases more than in proportion to inputs as the scale of a firm's production increases. A firm in this situation is a decreasing-cost firm.
Two-part tariff: a method of charging for a good or a service in which the consumer pays a flat access fee and a specified amount per unit purchased
Scatter diagram: a graph of statistical observations of paired values of two variables, one measured on the horizontal and the other on the vertical axis. Each point on the coordinate grid represents the values of the variables for a particular unit of observation.
Command economy: an economy in which a central planning authority makes most economic decisions
Price taker: a firm that can alter its rate of production and sales without affecting the market price of its product
Price discrimination: the sale by one firm of different unites of a commodity at two or more different prices for reasons not associated with differences in cost
Substitutes: goods that cab be used in place of another good to satisfy similar needs or desires
Free-market economy: an economy in which most economic decisions are made by private households and firms
Consumption: the act of using goods or services to satisfy wants
Concentration ratio: the fraction of total market sales (or some other measure of market activity) controlled by a specified number of the industry's largest firms
Marginal cost (MC): the increase I total cost resulting from increasing output by one unit
Monopolistic competition: market structure of an industry in which there are many firms and freedom of entry and exit but in which each firm has a product somewhat differentiated from the others, giving it some control over its price
Indifference curve: a graph showing different bundles of goods, each measured as to quantity, between which a consumer is indifferent
Total revenue (TR): total receipts from the sale of a product; price times quantity
Short run: a period of time in which the quantity of some inputs cannot be increased beyond the fixed amount that is available
Total utility: the total satisfaction resulting from the consumption of a given commodity by a consumer
Macroeconomics: the study of the determination of economic aggregates such as total output, the price level, employment, and growth.
Multinational enterprises (MNEs): firms that have operations in more than one country
Substitution effect: the change in the quantity of a good demanded resulting from a change in its relative price (holding real income constant)
Marginal-cost pricing: setting price equal to marginal cost so that buyers for the last unit are just willing to pay the amount that it cost to make that unit
Production function: a functional relation showing the maximum output that can be produced by each and every combination of inputs
Average total cost (ATC): total cost of producing a given output divided by the number of units of output; it can also be calculated as the sum of average fixed costs and average variable costs. Also called unit cost or average cost.
Very long run: a period of time that is long enough for the technological possibilities available to a firm to change
Technical efficiency: when a given number of inputs are combined in such a way as to maximize the level of output
Cooperative (collusive) outcome: a situation in which existing firms cooperate to maximize their joint profits
Market power: the ability of a firm to influence the price of a product or the terms under which it is sold
Productivity: output produced per unit of some input; frequently used to refer to labour productivity, measured by total output divided by the amount of labour used
Entry barrier: any barrier to the entry of new firms into an industry. An entry barrier may be natural or created
Excise tax: a tax on the sale of a particular commodity
Non-cooperative outcome: an industry outcome reached when firms maximize their own profit without cooperating with other firms
Productive efficiency for the firm: when the firm chooses among all available production methods to produce a given level of output at the lowest possible cost
Marginal product (MP): the change in total output that results from using one more unit of a variable factor
Moral hazard: a situation in which an individual or a firm takes advantage of special knowledge while engaging in socially inefficient behaviour
Production: the act of making goods or services
Accounting profit: revenue minus explicit costs; not taking into consideration implicit costs
Economic profits: the difference between the revenues received from the sale of output and the opportunity cost of the inputs used to make the output. Negative economic profits are called economic losses.
Disequilibrium: a situation in a market in which there is excess demand or excess supply
Administered price: a price set by the conscious decision of the seller rather than by impersonal market forces
Average fixed cost (AFC): total fixed costs divided by the number of units of output
Supply schedule: a table showing the relationship between quantity supplied and the price of a commodity, other things being equal
Cartel: an organization of producers who agree to act as a single seller in order to maximize joint profits
Total fixed cost (TFC): all costs of production that do not vary with the level of output
Collusion: an agreement among sellers to act jointly in their common interest. Collusion may be overt or covert, explicit or tacit.
Market failure: failure of the unregulated market system to achieve allocative efficiency
Supply: the entire relationship between the quantity of some commodity that producers wish to sell and the price of that commodity, other things being equal
Disequilibrium price: a price at which quantity demanded does not equal quantity supplied
Transnational corporations (TNCs): firms that have operations in more than one country. Also called multinational enterprises (MNEs)
Quantity supplied: the amount of a commodity that producers wish to sell during some time period
Excess demand: a situation in which, at the given price, quantity demanded exceeds quantity supplied
Private goods: goods or services that are both rivalrous and excludable
Social cost: the value of the best alternative use of resources used in production as valued by society
Oligopoly: an industry that contains two or more firms, at least one of which produces a significant portion of the industry's total output
Cross-sectional data: a set of observations made at the same time across several different units (such as households, firms, or countries).
Division of labour: the breaking up of a production process into a series of specialized tasks, each by a different worker.
Strategic behaviour: behaviour designed to take account of the reactions of one's rivals to one's own behaviour
Price elasticity of supply: a measure of the responsiveness of quantity supplied to a change in the product's own price
Average variable cost (AVC): total variable costs divided by the number of units of output
Technological change: any change in the available techniques of production
Average product (AP): total product divided by the number of units of the variable factor used in its production
Giffen good: an inferior good for which the income effect outweighs the substitution effect so that the demand curve is positively sloped
Crown corporations: in Canada, business concerns owned by the federal or provincial government
Non-profit organizations: firms that provide goods and services with the objective of just covering their costs
Producer surplus: the price of a good minus the marginal cost of producing it, summed over the quantity produced
Demand schedule: a table showing the relationship between quantity demanded and the price of a commodity, other things being equal
Principle of substitution: the principle that methods of production will change if relative prices of inputs change, with relatively more of the cheaper input and relatively less of the more expensive input being used
Change in supply: a change in the quantity supplied at each possible price of the commodity, represented by a shift in the whole supply curve
Positive statement: a statement about what actually is (was or ill be), as supposed to what ought to be
Monopolist: a firm that is the only seller in a market
Opportunity cost: the cost of using resources for a certain purpose, measured by the benefit given up by not using them in their best alternative use
Demand curve: the graphical representation of the relationship between quantity demanded and the price of a commodity, other things being equal
Total product (TP): total amount produced by a firm during some time period
Private cost: the value of the best alternative use of resources used in production as valued by the producer
Traditional economy: an economy in which behaviour is based mostly on tradition
Endogenous variable: a variable that is explained within a theory. Sometimes called an induced variable or a dependant variable.
Normative statement: a statement about what ought to be as opposed to what actually is
Goods: tangible commodities, such as cars or shoes.
Normal good: a good for which quantity demanded rises as income rises—its income elasticity is positive
Excess supply: a situation in which, at the given price, quantity supplied exceeds quantity demanded
Public goods: goods or services that can simultaneously provide benefits to a large group of people. Also called collective consumption goods.
Mixed economy: an economy in which some economic decisions are made by firms and households and some by the government
Change in quantity demanded: a change in the specific quantity of the good demanded, represented by a change from one point on a demand curve to another point, either on the original demand curve or on a new one
Relative price: the ratio of the money price of one commodity to the money price of another commodity; that is, a ratio of two absolute prices
Change in demand: a change in the quantity demanded at each possible price of the commodity, represented by a shift in the whole demand curve
Natural monopoly: an industry characterized by economies of scale sufficiently large that only one firm can cover its costs while producing at its minimum effect scale
Total cost (TC): the total cost of producing any given level of output, it can be divided into total fixed cost and total variable cost.
Long-run average cost (LRAC) curve: the curve showing the lowest possible cost of producing each level of output when all inputs can be varied
Elastic demand: following a given percentage change in price, there is a greater percentage change in quantity demanded; elasticity greater than 1
Variable: any well-defined item, such as the price or quantity of a commodity, which can take on various specific values
Complements: goods that tend to be consumed together
Marginal revenue (MR): the change is a firm's total revenue resulting from a change in its sales by one unit
Shut-down price: the price that is equal to the minimum of a firm's average variable costs. At prices below this, a profit-maximizing firm will shut down and produce no output
Externality: an effect on parties not directly involved in the production or use of a commodity. Also called third-party effects
Tax incidence: the location of the burden of a tax; that is, the identity of the ultimate bearer of the tax
Market: any situation in which buyers and sellers can negotiate the exchange of goods or services

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