GLOSSARY

A

Absolute Advantageis the ability of a country to produce a larger quantity of a good with the same amount of resources as another country.

Aggregatemeans the sum total.

Aggregate Demandis the total demand for output by consumers, business, and

government at each price level.

Aggregate Supplyis the total amount of output produced at each price level.

Allocatemeans to distribute, as in the case of scarce resources or scarce goods.

Antitrustlegislation is aimed at reducing monopoly power.

Assumptionsare the simplifying device.

Automatic Stabilizers, such as unemployment compensation and the

progressive income tax structure, tend to move the level of income toward the full employment level and help “smooth out” the business cycle.

Average Fixed Cost (AFC)is the total fixed cost divided by the number of units produced.

Average-Marginal Relationspecifies that if the marginal is greater than the

average, the average will rise; and if the marginal is less than the average, the

average will fall.

Average Total Cost (ATC)is total cost divided by the level of output. ATC is

found by the following expression: ATC average total cost total cost TC quantity of output Q

Average Variable Cost (AVC)is the total variable cost divided by the level of

output. The expression for AVC follows: AVC average variable cost total variable cost TVC quantity of output Q

B

Balance of Paymentsis the sum of the current account and the capital account

from the international payments account. If this sum is positive, there is a surplus balance of payments, and if negative, a deficit.

Balance of Tradeis the difference in the value of what we export and what we import. If the value of what we import is greater than the value of what we export, then there is a balance-of-trade deficit. When the value of our exports exceeds the value of our imports, there is a balance-of-trade surplus.

Balanced Budgetresults when tax collections and government spending are equal.

Barriers to Entryare factors that keep firms from entering the market when there are incentives for them to enter.

Barter Systemis a method of trade without money where one good is directly exchanged for another.

Break-even Pointsare the points of intersection between demand and the average total cost. Any production level between the two break-even points yields an economic profit.

Business Cyclesare more-or-less-regular fluctuations in the level of economic

activity. These are the up and down phases that accompany the increases or decreases in gross domestic product. Each business cycle goes through four phases: peak, recession, trough, and recovery.

C

Capitalis a man-made tool of production; it is a good that has been produced for use in the production of other goods. Capital is a scarce resource.

Capital Accountis the international account that records the flow of money from one country to another for the purpose of buying financial assets.

Capitalismis an economic system where the individuals own and control the resources.

Cartelis a group of firms acting as one - in effect a monopoly -to determine the profit maximizing level of output and price.

Change in Demandis a shift of the whole demand curve and occurs when a determinant of demand changes.

Change in Quantity Demandedis a movement along the demand curve and occurs when the price of the good changes.

Change in Quantity Suppliedis a movement along the supply curve and occurs when the price of the good changes.

Change in Supplyis a shift of the whole supply curve and occurs when a determinant of supply changes.

Circular Flowis a macro model showing the flows of income and product between consumers and business.

Classical Economistsbelieve that the economy will always achieve equilibrium

at full employment.

Communismis an economic system identified by public - government - ownership of resources.

Comparative Advantagemeans a country can produce a good with a lower opportunity cost than the opportunity cost for the same good in another country.

Complementsare goods such that if you purchase more (less) of one, you purchase more (less) of the other.

Conclusionis drawn from a model and is a prediction of behavior.

Consumer Price Index (CPI)records the percentage change in the price of a selected number of consumer goods compared to a base year.

Consumption (C)is the purchase of goods and services by households.

Consumption Functionis the direct relation between income and consumption

that tells the amount of consumption at each level of income.

Cost-Push Inflationis a rise in the average price level due to an increase in production costs. Cost-push originates from the supply side of the economy.

Crowding-Out Effectoccurs when deficit spending by government increases interest rates and reduces investment.

Currencyis the portion of our money supply consisting of coins and Federal Reserve notes.

Current Accountis the international account that essentially records the value

of what is sold to foreign countries, the exports, minus the value of what is bought from other countries, the imports.

Cyclical Unemploymentoccurs when the economy slows down and there are more unemployed people than there are available jobs.

D

Deficit Budgetoccurs when government spends more than it collects in taxes.

Definitiongives a name to an idea.

Deflationis a continued fall in the price level and an increase in the value of a dollar.

Demandis a list or schedule of the quantities of a particular good that a buyer would be willing and able to buy at alternative prices.

Demand-Pull Inflationis a rise in the average price level caused by excess demand at full employment. The excess demand increases the average level of

prices, which is inflation.

Determinants of Demand, including a change in taste for a good, a change in income, an expectation of a change in the price of a good, or a change in the price of a related good, are capable of shifting the demand curve.

Determinants of Price Elasticity of Demandinclude whether the buyer views

the good as a luxury or necessity, the availability of acceptable substitutes, and

how large a part of the budget the purchase is for the buyer.

Determinants of Supplyare changes in nature, the cost of production, the price of other goods, and expectations of a change in price, all of which are capable of shifting the supply curve.

Differentiated Productis one where the consumer can distinguish one firm’s output from another firm’s output.

Discount Rateis the interest rate that banks pay on money borrowed from the Federal Reserve System.

Disposable Incomeis income after taxes and can be either spent or saved by consumers.

Disservingconsumers are consuming more than they are making, either borrowing or spending past saving.

Double Countingoccurs when we count the value of the intermediate products

as well as the value of the final product in GDP.

E

Easy Entryis the absence of entry barriers in a market. Easy entry results in more firms and less control over price; more barriers to entry result in fewer firms and more control over price.

Economic Lossoccurs when total cost exceeds total revenue.

Economic Profitoccurs when total revenue exceeds total cost. The revenue of the firm more than covers all opportunity cost. After paying the explicit cost and accounting for the implicit cost, the firm has revenue left over. This remaining revenue is economic profit.

Economicsis a social science that studies how society chooses to allocate its scarce resources, which have alternative uses, to provide goods and services for

present and future consumption.

Economic Systemis the process used by each society to allocate resources.

Economies of Scalecause the average total cost to decline in the long run as the productive capacity of the firm increases and are a basis for natural monopoly.

Efficient Allocation of Resourcesoccurs when a good is produced at the lowest

possible opportunity cost. This means as few of society’s scarce resources as possible are used up, leaving resources free to be used in the production of other goods. A firm produces efficiently at the level of output corresponding to the lowest point on the average total cost curve.

Elastic Demandoccurs if the coefficient of elasticity is greater than one. This means that buyers are relatively responsive to a change in the price of the good.

Entrepreneurshipis the organizational force that combines the other factors of

production — land, labor, and capital — and transforms them into the desired output. Entrepreneurship is a scarce resource.

Equation of Exchangesays that the money supply times the velocity of circulation equals price times output, or MV = PQ.

Equilibriumis a balance of forces.

Equilibrium Pointoccurs at the intersection of the market supply and the market demand curves.

Excess Reservesare any reserves that a bank has over and above its required reserves. A bank is free to make loans with its excess reserves.

Exchange Rateis the price of one currency in terms of another.

Expectations Inflationoccurs when people expect prices to rise and act upon the expectation by buying more. Prices will rise as a result.

Expenditure Approachto gross domestic product is the sum of all spending by consumers, business, government, and net exports.

Explicit Costsare the money costs of producing the product.

Externalitiesoccur when the cost to society of production differs from the cost to the producer.

F

Fallacy of Compositionis an error in thinking that assumes that the behavior of the whole is the same as the behavior of its parts.

Fiscal Policyis the use of the federal budget as an economic tool to stabilize the economy.

Fixed Factorsof production are the inputs that cannot be increased during the short-run productive process.

Fractional Reserve Systemrequires that banks hold a percentage of their deposits as reserves.

Free Goodis a good with zero opportunity cost, which means that you can have all you want without giving up anything else.

Frictional Unemploymentincludes those people in the process of relocating from one job to another.

Full Employmentis defined at some level of unemployment. The exact percentage of unemployment that marks full employment is open to debate.

G

GDP Price Deflatoris a special price index used to convert money GDP into real GDP.

Goodis anything that satisfies a want.

Government Spending (G)is the total expenditure by government.

Gross Domestic Product (GDP)is the total dollar value of all final goods and services produced within a nation’s border during a year.

H

Hyperinflationis an accelerating increase in the average price level.

I

Implicit Costsare the opportunity costs of owner-owned resources which are used in production, and for which no money is paid.

Incomeis the money society earns through productive processes. The payments

to resource owners are rent, wages, interest, and profit and are the returns to land, labor, capital, and entrepreneurship.

Income Approach to GDPis found by adding all income received by the resource owners.

Income Effectof a change in price measures the change in consumption of a good because of the change in purchasing power when the price changed.

Income Multipliermeans that any initial change in spending results in a greater change to total income. The income multiplier is the reciprocal of the marginal propensity to save.

Inelastic Demandoccurs if the coefficient of elasticity is less than one. This means that buyers are not so responsive to a change in the price of a good.

Inferior Goodis a good for which demand decreases as income increases.

Inflationis a continued rise in the average level of prices.

Investment (I)represents business spending for capital goods plus inventories.

Business is the only sector of the economy that invests in the economic sense.

K

Keynesian Economistsbelieve that the economy can be fine tuned using the fiscal and monetary tools.

Kinked Demandis a model of oligopolistic behavior.

L

Laboris human effort, both physical and mental. Labor is a scarce resource.

Labor Forceconsists of those employed and those unemployed but looking for work.

Laissez-Faire is the classical attitude that the government should leave the macro economy alone.

Landis land itself and anything that grows on it or can be taken from it – the “natural resources.” Land is a scarce resource.

Law of Demandstates that there is an inverse relationship between the price of a good and the quantity demanded of that good.

Law of Diminishing Returnsstates that as an increasing amount of a variable factor is added to a fixed factor, the marginal product of the variable factor will

eventually fall.

Law of Increasing Costsstates that as society obtains an extra unit of one good, ever-increasing amounts of the other good must be sacrificed.

Law of Supplystates that a direct relation exists between the price of a good and quantity supplied of that good.

Long Runis a period of time in which all inputs to the productive process are variable.

M

Macroeconomics (macro)is the study of the economy as a whole.

Marginal Cost (MC)is the change in total cost as one more unit of output is produced. It is the additional or extra cost of producing another unit. The expression for marginal cost follows: MC marginal cost change in total cost TC

change in quantity of output Q

Marginal Input Cost (MIC)is the change in total cost due to the hiring of another unit of a variable input.

Marginal Product (MP)is the change in total product as one more unit of variable input is added to a productive process.

Marginal Profitis the change in total profit when one more unit is produced and sold.

Marginal Propensity to Consume (MPC)is the amount by which consumption

changes when income changes by one dollar. The expression for MPC follows:

MPC marginal propensity to consume change in consumption C change in income Y

Marginal Propensity to Save (MPS)is the change in saving when income changes by one dollar. The expression for MPS follows: MPS marginal propensity to save change in saving S change in income Y

Marginal Revenue (MR)is the change in total revenue as one more unit is produced and sold. Marginal revenue answers the question, What is the extra revenue from the sale of one more unit of output? The following is the expression for marginal revenue: MR marginal revenue change in total revenue TR change in output Q

Marginal Revenue Product (MRP)is the change in total revenue due to the use of another unit of the variable input.

Marketis a situation where buyers and sellers meet to negotiate price and to trade.

Market Poweris the ability to control price. When a firm changes the price of

its good, not only will it affect its own revenue, but it may affect the revenue of other firms as well.

Market Structurerefers to the elements of market organization that affect the

behavior of the firms. Three elements identify the market structure: the number

of firms in the market, freedom of entry and exit, and the degree to which the product is standardized.

Measure of Debtis a function of money that records the amount of money to be paid in the future.

Medium of Exchangeis anything that is generally accepted in exchange for goods and services. Medium of exchange is a function of money.

Microeconomics (micro)is the study of the individual parts of the economy.

Misallocation of Resourcesoccurs when a good is produced at other than the lowest point on the average total cost curve.

Modelis a simplification of reality.

Monetaristsbelieve only changes in the money supply affect output or prices.

Monetary Policyis the use of monetary tools by the Federal Reserve System to

influence the money supply and interest rates to stabilize the business cycle.

Moneyserves as a medium of exchange and also functions as a standard of value, a store of value, and a measure of debt. Anything that is money performs these functions in a society.

Money or Current GDPis the GDP figure without adjustment for changes in

price.

Money Demandtells how much money people will hold in currency or in checkable deposits at each interest rate.

Money Multiplieris the multiple change in the total money supply resulting from any initial change in bank excess reserves. The money multiplier is the reciprocal of the reserve requirement.

Money Supplyin the narrow M1 definition consists of currency in circulation and any checkable deposits.

Monopolistic Competitionis characterized by a market structure that has many sellers, a differentiated product, and easy entry.

Monopolyis a market structure where there is a single seller, no acceptable substitutes for the product, and entry into the market is restricted. The firm faces the same downward-sloping demand as the market because the firm is the market.

N

National Debtis the outstanding government debt created when the government

spends more than it collects in taxes. The national debt is also commonly referred to as the federal or public debt.

Natural Monopolyis characterized by a market that is large enough to support

only one firm of an efficient size.

Natural Rate of Unemploymentis frictional plus structural unemployment.

Net Exportsis the difference between exports and imports and accounts for the foreign sector in the expenditure approach to GDP.

Normal Goodis a good for which demand increases as income increases.

Normal Profitresults when total revenue equals total cost. A normal profit is also called a zero economic profit. This means that the firm exactly covers its opportunity cost.

Normativemodels express value judgments that prescribe how the world should

be.

O

Official Settlements Accountis the international account that includes the movements of cash from one country to another or the movement of credit from one central bank to another, and records changes in the government’s reserves of foreign currencies.

Oligopolyis a market structure of just a few sellers, usually protected by barriers to entry, for a product that is either standardized or differentiated.

Open Marketis the exchange where negotiable government securities are traded, just like the stock market.

Open Market Operationis the purchase or sale of negotiable government securities in the open market by the Federal Reserve.

Opportunity Costis the value of the foregone alternative — what you give up

when you get something.

P

Per Capita GDPis GDP per person. To find per capita GDP, divide GDP by the population.

Perfectly Competitive Marketis a market structure characterized by many firms, a standardized product, and easy entry. When a market is competitive, no firm has control over price.

Perfectly Elastic Demandoccurs if the coefficient of elasticity is some number

divided by zero. No matter how many units are bought, the price stays the same.

Perfectly Inelastic Demandoccurs if the coefficient of elasticity is zero. No matter what the change in price, the quantity demanded does not respond.

Phillips Curveshows the inverse relation between unemployment and inflation.

The outward shift of the Phillips curve shows stagflation.

Positiveeconomic models are models that describe.

Potential Equilibriaare the combinations of Y and C + I (or C + I + G) where

equilibrium could possibly occur, where Y = C + I (or Y = C + I + G).

Priceis what the buyer gives up to get another unit of a good.

Price Elasticity of Demandmeasures the responsiveness of the quantity demanded to a change in price.

Price Leadershipis the practice of all oligopoly firms uniformly increasing price after an increase in price by the industry leader. The price leader may be the most powerful firm or simply one taking the position by custom.

Producer Price Index (PPI)is a measure of the prices of certain goods sold at

wholesale and is thought to be a predictor of consumer price movements.

Production Possibilitiesmodel shows all possible combinations of two different

outputs that the society is capable of producing.

Profitis total revenue minus total cost.

Profit Maximizationmeans making the greatest possible amount of profit.

Profit Maximization Point(input) is the point of intersection of the marginal input cost with the marginal revenue product. The level of input that this point represents is the profit maximizing level of input.

Profit Maximization Point(output) is the point of intersection of the marginal

cost with the marginal revenue. The level of output that this point represents is the profit maximizing level of output.

Public Goodsare goods that we consume collectively; that is, goods for which

an increase in your consumption does not require me to decrease mine.

Q

Quantity Demandedis the amount a buyer is willing and able to buy at a specific price.

Quantity Suppliedtells the amount that a seller is willing and able to produce at a specific price.

Quotais a restriction on the amount of a particular good that can be imported.

R

Rational Expectationsis the belief that people adjust to expected actions by the government so that, when the action actually occurs, its effect has already been accounted for in the market.

Real GDPis a measure of output produced by an economy valued in the prices

of the base year. To find the real level of output, real GDP, divide the current level of output, money GDP, by the GDP price deflator index number for the current year:

Required Reservesare the amount of its deposits that a bank is required to hold in reserve and not lend out.

Reserve Requirementis the percentage of its deposits that a bank must keep in reserve as required by the Federal Reserve.

Resourcesare the so-called factors of production or means of production. These resources can be classified as land, labor, capital, and entrepreneurship.

S

Saving (S)is that part of income that is not spent for consumption or taxes.

Saving Functionis the direct relation between income and saving that tells how much is saved at each level of income.

Say’s Lawstates that supply creates its own demand. The meaning of this statement is that the money paid to resource owners for the use of their resources will be used to purchase the output of producers.

Scarcityis the basic economic problem of unlimited wants competing for

limited resources.

Seasonal Unemploymentoccurs when workers are laid off during the off season.

Shortageexists whenever the quantity demanded is larger than the quantity supplied at the going price.

Short Runis a period of time in which at least one of the factors of production is fixed.

Shutdown Decisiontells the firm to stop production if its revenue does not cover its variable cost.

Shutdown Pointis the lowest point on the average variable cost curve.

Socialismis an economic system that favors a combination of private and public ownership of resources.

Social Scienceuses the scientific method to study human behavior.

Stabilization Policyis any action taken by the government to smooth out the business cycle and includes both monetary and fiscal policies.

Stagflationis undesirable rates of both unemployment and inflation together. An outward shift of the Phillips curve shows stagflation.

Standard of Valueis a function of money that permits people to measure and compare the values of different goods.

Standardized Productis one where the consumer cannot distinguish one firm’s output from another firm’s output. The products seem identical.

Store of Valueis a function of money that allows people who have money now

to spend it at a later time.

Structural Unemploymentoccurs when there are many people unemployed while there are many jobs available, but the unemployed lack the necessary qualifications for the jobs.

Substitutesare goods such that if you buy more (less) of one, you buy less (more) of the other.

Substitution Effectof a change in price measures the change in consumption of a good because the good becomes a less or more attractive substitute for

other goods.

Supplyis the list or schedule of alternative prices and the amount of the product

that the seller is willing and able to offer for sale at each price.

Supply-Shock Inflationis inflation that results from infrequent drastic changes

in production cost of fundamental products.

Supply-Side Economicsis a view that emphasizes the importance of policy action on the aggregate supply curve.

Surplusis the condition that occurs when the quantity supplied exceeds the quantity demanded at the going price.

Surplus Budgetis a budget that results when the government collects more in taxes than it spends.

T

Tariffsare taxes imposed on imports.

Technologyis the knowledge required to turn inputs into output.

Total Cost (TC)is the sum of the fixed cost and the variable cost at each level

of output.

Total Fixed Cost (TFC)is the cost that does not change with the level of output. This means that the total fixed cost remains the same, or constant, whether zero or an infinite amount of output is produced. Total fixed cost is not related to the level of production.

Total Outputis the amount produced by the economy, real GDP.

Total Product (TP)is the total output produced by the inputs of a firm.

Total Revenue (TR)is the money the firm collects by selling the good (price times quantity sold).

Total Spendingis the amount spent by all sectors of the economy, C + I + G (C + I in a two-sector economy).

Total Variable Cost (TVC)are those costs that change with the level of output.

U

Underemploymentoccurs when workers can find only part-time employment or jobs not utilizing their skills.

Unemploymentexists when people are looking for a job, but they are unable to find work at the going wage.

Unemployment Ratefor the United States measures the percentage of the labor force who are not able to find employment.

Unitary Elasticitymeans that the percentage change in quantity demanded will be the same as the percentage change in price.

V

Variable Factorsof production, or variable inputs, are those inputs that can be

increased during production.

Velocity of Circulationis the number of times a dollar is spent in a year in buying the final output of the economy.

[1] С учётом реальной покупательной способности полученных доходов. Например, в 2011г. в Казахстане на 1665102 тенге или 11357 долл. США можно было купить столько товаров, сколько в США на 20668 долларов.