Economics

Microeconomics

Macroeconomics

Opportunity cost
Allocation of
resources
Market system

Model
Positive analysis
Normative analysis
Circular flow model

Demand curve

Ceteris paribus

Supply curve

Equilibrium

Completeness
assumption
Transitivity
assumption
Non-satiation
assumption
Indifference curve

The study of how people and societies deal with scarcity

The branch of economics focusing on the economic
behaviour of individual decision-making units, such as
households and firms, and how these individual decisions
fit together
The branch of economics focusing on the behaviour of
the economy as a whole, especially inflation,
unemployment and business cycles
The value of the most highly valued forgone alternative
How societys resources are divided among the various
outputs, among the different organizations that produce
these outputs, and among the members of society
A mode of organization in which resource allocation is
determined by the independent decisions and actions of
individual consumers and producers
A simplified description of some aspect of the economy,
often containing equations and graphs
Descriptive statements of cause and effect
Statements that embody value judgements
A representation of how the business and household
sectors are linked: the physical flows of commodities and
inputs between businesses and households, and the
expenditures for commodities and inputs going in the
opposite direction
The relation between the market price of a good and the
quantity demanded of that time period, other things
being the same
Latin for other things being the same; an economic
assumption holding all other variables constant in order
to focus on the specified ones
The relation between the market price and the amount of
good that producers are willing to supply during a given
period of time, ceteris paribus
A state of affairs that will persist because no one has any
incentive to change his or her behaviour. In the supply
and demand model, equilibrium is characterized by the
equality of quantity supplied and quantity demanded at
a particular price.
A consumer, when confronted with any two bundles, can
tell us which one she prefers, or whether she is
indifferent between them
Preferences are such that if bundle x is preferred to
bundle y, and bundle y is preferred to bundle z, then x is
preferred to z
More is better
The set of all bundles among which a consumer is

Marginal rate of
substitution (MRS)
Diminishing marginal
rate of substitution
Indifference map
Perfect substitutes

Perfect complements
Total utility
Utility function
Ordinal utility
function
Cardinal utility
function
Price taker
Budget constraint

Feasible set
Interior solution
Corner solution
Marginal utility

Comparative
statistics
Price-consumption
curve
Cross-price effect
Substitutes

Complements

Unrelated goods
Change in demand
Change in quantity

indifferent
The negative of the slope of an indifference curve; it
measures the rate at which the consumer is willing to
trade one good for the other
When the marginal rate of substitution falls as we move
down along an indifference curve
The entire collection of indifference curves
Goods that can be substituted for each other at a
constant rate, that is, that have a constant marginal rate
of substitution
Goods that have to be consumed in fixed proportions
The total satisfaction, sometimes given by a numerical
score, of consuming a particular commodity bundle
A formula showing the total utility associated with each
commodity bundle
A utility function allowing the ranking of bundles by their
amount of utility, but not precise comparisons of how
various bundles are valued relative to each other
The values of the utility function tell us exactly how
much better some commodity bundles are than other
bundles
A consumer whose price per unit of a commodity is not
affected by the number of units purchased
The representation of the bundles among which a
consumer may choose, given her income and the price
she faces
The collection of bundles satisfying the budget constraint
An equilibrium bundle that contains some amount of
each good
An equilibrium bundle in which the consumption of some
commodity is zero
The change in total utility associated with consumption
of one addition unit of a good
The process of comparing two equilibria
The set of commodity bundles traced out as the price of
a commodity varies, ceteris paribus
The impact of a change in the price of one good on the
quantity demanded of another
Two goods that satisfy similar wants. An increase in the
price of one good leads to an increase in quantity
demanded of a substitute, ceteris paribus
Two goods that tend to be used together. An increase in
the price of one good leads to a decrease in the quantity
demanded of a complement, ceteris paribus
An increase in the price of one good has no impact on
the quantity demanded of the other, ceteris paribus
A shift of the entire demand curve
A movement along a given demand curve

demanded
Normal good
Inferior good
Income-consumption
curve
Engel curve
Market demand curve

Horizontal summation
Price elasticity of
demand
Total expenditure

Inelastic
Elastic
Perfectly inelastic

Perfectly elastic
Cross-price elasticity
of demand for good X
with respect to the
price of good Y
Income elasticity of
demand
Luxury good

Consumer surplus
Two-part tariff

Trade quota
Deadweight loss
Time endowment
Value of the time
endowment
Labour supply curve

A good for which an increase in income increases

consumption, ceteris paribus
A good for which an increase in income decreases
consumption
The set of equilibrium commodity bundles traced out as
the consumers income varies, ceteris paribus
A representation of the relationship between income and
the consumption of a commodity, ceteris paribus
The relationship between a commoditys price and the
quantity demanded by all market participants, ceteris
paribus
The process of adding together individual demand
curves to derive the market demand curve
The negative of the percentage change in quantity
demanded divided by the percentage change in price
The amount of money consumers spend on a
commodity, computed as the number of units purchased
times the price per unit
Price elasticity of demand is less than 1
Price elasticity of demand is greater than 1
The price elasticity of demand equals 0; quantity
demanded does not change at all when price changes,
the demand curve is vertical
The price elasticity of demand equals infinity; the
demand curve is horizontal
The percentage change in the quantity of X demanded
that is induced by a percentage change in the price of Y:
a measure of the degree to which two goods are
substitutes or complements
The percentage change in quantity demanded with
respect to a percentage change in income
A commodity whose income elasticity of demand is
greater than 1
The difference between what a consumer is willing to
pay and what she has to pay
A pricing system under which a consumer first pays a
lump sum for the right to purchase a good, and then
pays a price for each unit of the good actually purchased
A quantitative restriction on the import of a commodity
The pure waste induced by an increase in price above
the efficient level
The upper limit of time that can be dedicated to labour
or leisure by an individual in a specified period
The amount of money an individual would have if he
worked every available hour
A schedule showing the relationship between the
quantity of labour supplied and the wage rate, ceteris
paribus

Producer surplus

Market supply curve

of labour

Firm
Transaction costs
Total revenue
Total economic cost

Economic profit
Sunk expenditure
Depreciation
Firm-specific demand
curve
Total revenue curve
Total economic cost
curve
Profit function
Marginal revenue
(MR)
Marginal cost (MC)
Average revenue
Average economic
cost
Production function
Total product of L and
K
Isoquant
Isoquant map
Variable factor
Fixed factor

The amount of income an individual receives in excess of

what she would require in order to supply a given
number of units of a factor
A schedule showing the aggregate quantity of labour
that all individuals in the market are willing to supply at
each wage rate
Any organisation that buys and sells goods and services
The costs of conducting an economic exchange between
two parties
The sum of the payments that the firm receives from the
sale of its output
The firms total expenditures on the inputs used to
produce output, where expenditures are measured in
terms of opportunity cost
Total revenue minus total economic cost
A factor expenditure that, once made, cannot be
recovered
The fall in the value of an asset over a defined period of
time
A schedule showing the quantity of a single firms output
demanded for any price charged by that particular firm
A schedule showing the relationship between a firms
output level and the resulting amount of revenue
A schedule showing the relationship between a firms
output level and the resulting level of total economic
cost
The algebraic or graphical relationship between a firms
output level and its resulting profit level
The change in revenue due to the sale of one more unit
of output
The change in total cost due to the production of one
more unit of output
The firms total revenue divided by the number of units
produced
The firms total economic cost divided by the number of
units produced
A schedule that shows the highest level of output the
firm can produce from a given combination of inputs
The highest total amount of output the firm can produce
given the amount of its inputs
A curve showing all of the input combinations that yield
the same level of output
The collection of all isoquants corresponding to a given
production function
A factor whose level can be varied over the relevant
planning horizon
A factor whose level cannot be varied over the relevant
planning horizon

Short run
Long run
Marginal physical
product (MPP)
Increasing marginal
returns
Constant marginal
returns

Diminishing marginal
returns
Marginal rate of
technical substitution
(MRTS)
Perfect substitutes
Diminishing marginal
rate of technical
substitution
Degree of returns to
scale
Constant returns to
scale
Increasing returns to
scale
Decreasing returns to
scale

Economically efficient

Isocost line
Isocost map
Expansion path
Long-run total cost

A period over which only one of the firms inputs is

variable, while all others are fixed
A period of time long enough that all of the factors are
variable and none is fixed
The extra amount of output that can be produced when
the firm uses one additional unit of an input
A technology exhibits increasing marginal returns when
the marginal physical product of an input rises as the
amount of the input increases
A technology exhibits constant marginal returns when
there is a range of input levels over which the marginal
product of a factor remains unchanged as the amount of
the factor used increases
A technology exhibits diminishing marginal returns when
the marginal physical product of an input falls as the
amount of the input used increases
The rate at which the available technology allows the
substitution of one factor for another. It is -1 times the
slope of the isoquant
Two inputs have a constant marginal rate of technical
substitution of one for the other
A technology exhibits a diminishing marginal rate of
technical substitution when the rate at which one factor
can be substituted for the other falls as the amount of
the first factor rises
The rate at which the amount of output increases as the
firm increases all of its inputs proportionately
A technology such that a proportional increase in all
input levels leads to output growth in the same
proportion
A technology such that a proportional increase in all
input levels leads to greater than proportionate output
growth
A technology such that a proportional increase in all
input levels leads to less than proportionate output
growth
An input combination is economically efficient when it
has the lowest opportunity cost of those input
combinations that can be used to produce the desired
output
A line representing all input combinations that cost the
firm the same amount
The whole family of isocost lines that exists for a given
set of factor prices
The long-run set of least-cost input levels traced out as
the level of output changes, ceteris paribus
The minimal level of total expenditures (measured in
opportunity cost terms) needed to produce a given

Long-run marginal
cost
Long-run average
cost
Economies of scale
Diseconomies of
scale
Economies of scope

amount of output in the long run

The change in long-run total cost due to the production
of one more unit of output
Long-run total cost divided by the number of units being
produced
When long-run average costs fall as output rises, costs
are said to exhibit economies of scale
When long-run average costs rise with the output level,
costs are said to exhibit diseconomies of scale
When it is cheaper to produce two products together in
one firm instead of separately in two specialised firms,
costs are said to exhibit economies of scope

Price-taking firm

A price-taking firm chooses its actions under the

assumption that it cannot influence the prices of the
output that it sells or the input that it buys

Free entry

A market is said to be characterised by free entry when

new supplies can enter the market without any
restrictions on the process of entry
A market is said to be characterised by blocked entry
when it is impossible for new supplies to enter the
market at any reasonable cost
The economic environment in which buyers and sellers in
an industry operate
Perfect substitutes with a marginal rate of substitution of
one. Homogeneous goods are considered identical by
buyers
Producers of a single good who have different costs of
production from one another
A tax whose amount depends on the value of the
transaction being fixed
A tax that is levied as a fixed amount per unit of the item
subject to taxation
The economic agent who is legally responsible for
payment of the tax
The change in the distribution of income brought about
by the imposition of the tax
The percentage change in the quantity supplied divided
by the percentage change in price

Blocked entry

Market structure
Homogeneous goods

Heterogeneous
suppliers
Ad valorem tax
Unit tax
Statutory incidence
of a tax
Economic incidence
of a tax
Elasticity of supply

Total surplus
Excess burden

The sum of consumer and producer surplus

The amount by which the loss of surplus suffered by
consumers and producers exceeds the tax revenue
collected

Social welfare
function

A function or schedule that shows how the well-being of

society depends upon the utilities of its members

Price maker

An economic decision maker that recognises that its

Inframarginal units

Process innovation
Product innovation
Deadweight loss of
monopoly

quantity choice has an influence on the price at which it

buys or sells a good
The units of output that the firm could have sold at the
old price, but now must sell at the new, lower price that
prevails when it increases its output level
An idea that lowers the cost of producing existing
products
An idea that gives rise to a new good or service
The loss in total surplus that arises because a
monopolist produces less than the total-surplusmaximising amount of output

Heterogeneous or
differentiated
products

A market is said to have heterogeneous products when

consumers view the products of the various producers as
being somewhat different from one another

Mutual
interdependence
Duopoly
Self-enforcing
agreement

The price or output choices made by any one firm affects

the profits of all
A market in which there are only two suppliers
An agreement among firms is self-enforcing when it is in
each firms self-interest to abide by the agreement given
that the other firms are also abiding by it
A situation in which firms come to a common
understanding about how they should behave in a
market without actually discussing it among themselves
A schedule showing a decision makers best course of
action for each set of choices made by other decision
makers
A market is at a Nash equilibrium when each firm is
choosing the strategy that maximises its profit, given the
strategies of the other firms in the market
The firm-specific demand curve faced by a supplier,
given the price or output strategies chosen by its rivals
A schedule showing a decision makers best course of
action for each set of choices made by other decision
makers

Tacit agreement

Best-response curve

Nash equilibrium

Residual demand
curve
Best-response curve
or reaction curve

Game
Non-cooperative
game theory
Players
Strategy
Actions
Payoffs
Game tree
Decision rule

A situation in which strategic behaviour is an important

part of decision making
A set of tools for analysing decision making in situations
where strategic behaviour is important
The decision makers in a game
A players plan of action in a game
The particular things that are done according to a
players strategy for a game
The rewards enjoyed by a player at the end of a game
An extension of a decision tree that provides a graphical
representation of a strategic situation
A strategy that specifies what action will be taken
conditional on what happens earlier in the game

Dominant strategy
Dominant strategy
equilibrium
Perfect equilibrium
Commitment

Game of imperfect
information
Game of incomplete
information
Prisoners dilemma

Pure strategy
Mixed strategy
Limit pricing

Externality

Social marginal cost

Coase Theorem

Effluent fee

A strategy that works at least as well as any other one,

no matter what any other player does
An outcome in a game in which each player follows a
dominant strategy
A set of strategies that satisfies both the Nash condition
and the credibility condition
The process whereby a player irreversibly alters its
payoffs in advance so that it will be in the players selfinterest to carry out a threatened (or promised) action
when the time comes
A game in which some player must make a move but is
unable to observe the earlier or simultaneous move of
some other player
A game in which some player is unsure about some of
the underlying characteristics of the game, such as
another players payoffs
A strategic situation in which the two players each have
a dominant strategy, but playing this pair of strategies
leads to an outcome in which both sides are worse off
than they would be if they cooperated by playing
alternative strategies
A strategy that specifies a specific action at each
decision point
A strategy that allows for randomisation among actions
at some or all decision points
The practice of setting a high output level, or a low price,
to deter entry
A direct effect of the actions of one person or firm on the
welfare of another person or firm, in a way that is not
transmitted by market prices
Incremental cost of production which includes the
opportunity cost of all scarce resources, whether priced
or not
Assuming there are no bargaining costs, once ownership
rights to a resource are established, individuals will
bargain their way to an efficient use of the resource
The price paid for permission to pollute

Gross Domestic
Product
Value added

Imputed value
Nominal GDP
Real GDP
Consumption
Investment

The market value of all final goods and services

produced within an economy in a given period of time
The value added of a firm equals the value of the firms
output less the value of the intermediate goods that the
firm purchases
Estimate value of goods and services that do not have
market prices
Value of goods and services measured at current prices
Value of goods and services measured using a constant
set of prices
Value of all goods and services bought by households
Value of goods bought for future use. It is the spending
on new capital