GLOSSARY OF SELECTED ECONOMICS, MATHEMATICS

AND STATISTICS TERMS

difficult or impossible for a new firm
to enter a given industry. Examples:
patents, economies of scale, accepted
brand names.

absolute value (math): The numerical

value of any real number after its sign
is removed, symbolized by x.
accounting: The system of recording and
summarizing business and financial
transactions of a company.

base of exponential function (math):

b in the function y = b x .

acid rain: Emissions of sulfur dioxide,

primarily from coal-burning electric
power plants, which stay in the air and
become acidic when combined with
moisture. Acid rain causes the
destruction of lakes, agricultural
crops, forests and so on.

break-even point: (1) The output to

which costs (including opportunity
costs) just equal revenues and
therefore profits are zero. (2) The level
of disposable income at which
consumption just equals disposable
income and therefore saving is zero.

allocative efficiency: A situation in

which no reorganization of production
or consumption could raise the utility
of one person without lowering the
utility of another person.

budget constraint: Same as budget line.

budget line (or income line): The line on
a diagram which shows the various
combinations of commodities which
can be bought with a given income at
a given set of prices.

arc elasticity of demand: The elasticity

of demand between two points on a
demand curve, calculated by the
formula:

capital: (1) Real capital - buildings,

equipment and other materials used in
the production process which have
themselves been produced in the past.
(2) Financial capital - either funds
available for acquiring real capital or
financial assets such as bonds or
common stock. (3) Human capital the education, training and experience
which make human beings more
productive.

Q
P
1
2
2
Q +Q p + p
1

arithmetic mean (stat): The sum total of

a set of figures, divided by the total
number of figures; symbolized by X .
asymmetric information: A situation in
which a seller (or buyer) has more
information about a product or service
than the buyer (or seller).

capital-output ratio: The value of

capital divided by the value of the
annual output produced with this
capital.

average (math): A ratio that summarizes

the general significance of a set of
unequal values.

cartel: A group of producers who set

prices and/or divide the market in
order to make monopoly-like profits.

axis (math): A horizontal or vertical line

of the (x, y) plane.

coefficient (math): The value of a' in the

function y = ax.

barriers to entry: Factors that make it

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collective bargaining: Negotiations

between a union and management,
over wages and working conditions.
collusion: An agreement among sellers
regarding prices and/or market
shares. The agreement may be
explicit or tacit.
commodity: Any economic good or
service.
comparative statics (math): The method
of comparing different equilibrium
states.
competition, imperfect: A market in
which some buyers or sellers are
large enough to have a noticeable
effect on price.
competition, monopolistic: A market
structure with many firms selling a
differentiated product, with low
barriers to entry.
competition, perfect: A market for a
standardized product, in which there
are many buyers and sellers, with no
single buyer or seller having any
(noticeable) influence over price. That
is, every buyer and every seller is a
price taker. There are no barriers to
entry (such as government licensing).
concentration ratio: Usually, the
fraction of an industry's total sales
made by the four largest firms.
Sometimes a different number of
firms (like eight) is used and
sometimes a different measure of size
(like assets) is used.
constant (math): A number whose value
does not change.
consumer surplus: The net benefit that
consumers get from being able to
purchase a good at the prevailing
price; the difference between the
maximum amounts that consumers

would be willing to pay and what they

actually do pay. It is approximately
the triangular area under the demand
curve and above the market price.
consumption: (1) The purchase of
consumer goods and services. (2) The
act of using goods and services to
satisfy wants. (3) The using up of
goods.
continuous (math):
without gaps.

Uninterrupted;

cooperative equilibrium: In game

theory, an outcome in which the
parties act together to find strategies
that will maximize their joint payoffs.
corporation: A business organization
owned by individuals or other
corporations, having the same rights to
buy, sell and make contracts as a
person would have. It is legally
separate from those who own it, so
that owners have limited liability. At
worst, they can lose their investment
in the corporation; beyond that they
are not responsible for its liabilities.
cost, average: Total cost divided by the
quantity of goods produced.
cost, average fixed: Total fixed cost
divided by the number of units
produced.
cost, average variable: Total variable
cost divided by the number of units
produced.
cost, explicit: A cost created by a firm's
transactions with other economic units
from which factors of production are
bought.
cost, fixed: A cost that does not vary
with output.
cost, implicit: The opportunity cost of
using an input that is already owned
by the producer.

Glossary
cost, marginal: The increment in total
cost required to produce one extra unit
of output.
cost, minimum: The lowest attainable
cost per unit (whether average,
variable or marginal).
cost, total: The minimum attainable total
cost, given a particular level of
technology and set of input prices.
Short-run total cost takes existing
plant and other fixed costs as given.
Long-run total cost is the cost that
would be incurred if the firm had
complete flexibility with respect to all
inputs and decisions.
cost, variable: Total cost incurred minus
fixed cost. That is, the costs which
vary with the level of output, such as
raw materials, wages and fuel costs.
cost-benefit analysis: A method of
deciding whether or not to employ
resources, and also the quantity of
resources to employ, for the
production of a good or service, by
comparing the marginal benefits with
the marginal costs.
cross elasticity of demand: Measure of
the extent to which demand for a
consumer good or for an input is
influenced by other prices. Example:
How the demand for cameras is
influenced by the price of film.
demand curve: A curve showing how
much of a good or service would be
demanded at various possible prices.
demand curve, kinked: A demand curve
which an oligopoly firm faces if its
competitors follow any price cut it
makes but do not follow any of its
price increases.
demand, derived: The demand for an
input that depends on the demand for
the product or products it is used to

125
make. Example: The demand for flour
is derived from the demand for bread.

demand, elastic: Demand with an

elasticity of more than one. A fall in
price causes an increase in total
expenditure on the product in
question, because the percentage
change in quantity demanded is
greater than the percentage change in
price.
demand, excess: The amount by which
the quantity demanded exceeds the
quantity supplied at the existing price
- that is, shortage.
demand, inelastic: Demand with an
elasticity that is less than one. (See
demand, elastic.)
deregulation: Removal of regulations
regarding (mainly) prices. (See
opposite at regulation.)
derivative (math): The rate of change of
a dependent variable y' with respect
to an independent variable x' (dy/dx).
determinant (math): A square array of
numbers uniquely defining a number.

| A |=

a11 a12
a 21

a 22

differential (math): The change of a

dependent variable y' caused by a
corresponding
change
of
an
independent variable x'.
[ dy = f (x) dx]

diminishing marginal utility: The law

which says that as more of any one
commodity is consumed, its marginal
utility declines.
diminishing returns: The law which
says that if technology is unchanged

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then the use of more and more units of

a variable input (together with one or
more fixed inputs) must eventually
lead to a declining marginal product
for the variable input.
discrete (math): Consisting of elements
which are distinct or unconnected;
noncontinuous.
diseconomies of scale: The opposite of
economies of scale.
distribution: The manner in which total
output is distributed among factors or
individuals. An example is the
distribution of income between labor
and capital.
duopoly: A market structure in which
there are only two sellers. (Compare
with oligopoly.)
economies of scale: A situation in which
average cost of production declines
when plant size and output is
increased.
More
precisely,
a
production function in which, when all
inputs are doubled, output more than
doubles.
economy, capitalist: Same as market
economy.
economy, command: An economic
system in which the key economic
questions (how, what and for whom)
are principally decided by the
government. Also called planned
economy.
economy, market: An economic system
characterized by private or corporation
ownership of capital goods; and by
prices, production and distribution of
goods that are determined mainly in a
free market. Also called capitalist
economy.
economy, mixed: An economic system
in which the private market and the
government share the decisions as to

what shall be produced, how and for

whom.
economy, planned: Same as command
economy.
elasticity: The responsiveness of one
variable to changes in another. Thus
the elasticity of y' with respect to x'
means the percentage change in y' for
every one percent change in x'. (See
also price elasticity of demand and
price elasticity of supply.)
entrepreneurship: The human resource
which combines other resources to
start a new firm, produce a new
product, make decisions, innovate and
bear risk.
equation (math): A statement of the
equality of mathematical expressions.
equation, quadratic (math): An equation
in the form of:

a x2 + bx + c = 0
equilibrium point: The point at which an
economic unit is at rest, or at which
the forces operating on the unit are in
balance so that there is no tendency
for change.
equilibrium, for a business firm: The
level of output at which the firm is
maximizing its profit, and therefore
has no incentive to change its output
or price level.
equilibrium, for the individual
consumer: The position in which the
consumer is maximizing utility. That
is, the consumer has chosen the group
of goods which (given income and
prices) best satisfies the consumer's
wants.
estimation (stat): The process of finding
the values of an unknown parameter.
expenditure: Expense.

Glossary
exponent (math): x' in the function
y = bx .
externality (or spillover): A direct effect
- good or bad - of the production or
consumption activities of one person
or firm on the welfare of another
person or firm that hasn't paid or been
paid for the activity. Externalities exist
when private costs (or benefits) do
not equal social costs (or benefits).
factors of production: The resources
used to produce a good or service.
Land, labor and capital are the three
basic categories of factors.
finite (math): Having
definable limits.

definite

or

fixed input (or factor): An input such as

plant or equipment for which the
quantity used can be changed in the
long run, but not in the short run.
fossil fuels: Fuels such as coal, oil and
gas created from the fossilization of
organic materials.
free riding: Participating in the benefits
of something without contributing to
its cost.
freedom of entry: The absence of
barriers that make it difficult or
impossible for a new firm to enter an
industry.
frequency distribution (stat): An
arrangement of statistical data that
shows the number of occurrences of
the values of a variable in a given
population.
function (math): A rule by which each
element of set X is associated with a
unique element of set Y, symbolized
by y = f (x) . A convex function is one
whose points on a graph form a valley,
while a concave function is one whose
points form a hill.

127

function, implicit (math): A function

written in the form:
f(y,x) = 0
game theory: An analysis of situations
involving two or more parties who
must, in making decisions, anticipate
the reactions of their competitors to
their own moves (just as in games of
strategy such as chess).
general equilibrium: The equilibrium
state for the economy as a whole in
which the markets for all goods and
services are simultaneously in
equilibrium.
global warming: The possibility of a
gradual warming of the earth's climate
due to a cumulative build-up of carbon
dioxide (CO2) in the atmosphere (the
greenhouse effect).
goods, complementary: Pairs of goods
such that a rise in the price of one
causes a reduction in the quantity
demanded of the other. Example:
cameras and film.
goods, consumption: Goods designed to
directly satisfy human wants.
Example: food. (Compare with
investment goods.)
goods, durable: Equipment or machines
that are normally expected to last
longer than three years. Examples:
cars, washing machines.
goods, final: Products that have been
acquired for final use and not for
resale or for further processing.
Example: clothes. (Compare with
intermediate goods.)
goods, free: Goods or services whose
price is zero, because at that price the
quantity supplied is at least as great as
the quantity demanded. Example: air.

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goods, inferior: Goods for which the

quantity demanded declines as income
rises. Example: beans. (Compare with
normal goods.)
goods, intermediate: Goods which are
used as inputs in producing other
goods or services. Example: wood
pulp. (Compare with final goods.)
goods, investment: Produced goods used
to produce other goods and services in
the future, rather than being consumed
today. Example: tractors. (Compare
with consumption goods.)
goods, normal: Goods for which the
quantity demanded rises as income
rises. Example: meat. (Compare with
inferior goods.)
goods, public: Commodities whose
benefits may be provided to all people
(in a nation or a city) at no more cost
than that required to provide them for
one person. The benefits of the good
are indivisible and people cannot be
excluded. This is contrasted with
private goods, such as bread, which, if
consumed by one person, cannot be
consumed by another person.
goods, substitute: Pairs of goods such
that a rise in the price of one causes an
increase in the quantity demanded of
the other. Examples: coffee and tea;
wine and beer.
income: The flow of wages, interest,
dividends and other receipts accruing
to an individual or nation.
income distribution: The way in which
income and wealth are shared in a
society.
income effect: Change in the quantity of
a good demanded because the change
in its price has the effect of changing
a consumer's real income. Thus it

supplements the substitution effect of a

price change.
income elasticity of demand: The
demand for a given good is influenced
not only by the good's price but by the
buyers' incomes. Income elasticity
measures this responsiveness. It is the
percentage change in quantity
purchased divided by the percentage
change in income. (Compare with
price elasticity of demand.)
indifference curve: A curve that shows
different combinations of consumer
goods that yield the same level of
utility.
infinite (math): Without definable limits.
innovation: A change in products or in
the techniques of production.
input: A material or service used in the
process of production.
integer (math): Any of the natural
numbers (1, 2, 3...), their negatives,
and zero.
intercept (math): The point where a line
cuts the vertical axis.
interest: Payment made for the use of
money.
interval (math): A set of real numbers
between two numbers. A closed
interval is an interval including its
endpoints (a x b), while an open
interval is an interval not including its
endpoints (a < x < b).
inventory: The stock of raw materials,
intermediate goods or final goods held
by a producer or organization.
investment: Increase of capital stock.
invisible hand: Adam Smith's phrase
expressing the idea that the pursuit of
self-interest by individuals will lead to

Glossary
a desirable outcome for society as a
whole.
irrational numbers (math): Numbers
that cannot be expressed as a ratio of
two integers. Example: 2
isoquant: A curve that shows different
combinations of capital and labor that
yield the same level of output.
labor: A factor of production consisting
of all physical and mental efforts of
people.
land: A factor of production consisting of
all land used for agricultural or
industrial purposes as well as all
natural resources taken from above or
below the soil.
linear function (math): A function
defined as y = a + bx.
long run: (1) A period long enough for
the quantity of capital to be adjusted to
the desired level. (2) A period of time
long enough for equilibrium to be
reached.
losses: 1) In accounting terms, when the
costs properly charged against the
goods sold exceed total revenue. 2) In
economic theory, when total costs including the full opportunity cost of
the resources used - exceed total
revenue (called economic losses).
marginal rate of substitution: The slope
of the indifference curve. The ratio of
the marginal utilities of two goods.
marginal revenue product (MRP):
Equals the marginal revenue
multiplied by the marginal product. It
is the extra revenue a firm would earn
if it were to buy one extra unit of
input, put it to work, and sell the extra
product it produced.
market: An institution in which
purchases and sales are made.

129

market, factor: A market for factors of

production (land, labor and capital).
market, product: A market for goods
and services.
market structure: Characteristics which
affect the behavior of firms in a
market, such as the number of firms,
the possibility of collusion, the degree
of product differentiation, and the ease
of entry.
matrix (math): A rectangular array of
numbers,

a11 a12

.
a 21 a 22

median (stat): The figure in the exact

middle of a series of numbers ranked
or ordered from lowest to highest.
Thus, for the numbers l, 3, 6, 10, 20,
the median is 6.
microeconomics: The study of individual
units within the economy (such as
households, firms, and industries) and
the interrelationships between them.
The study of the allocation of
resources and the distribution of
income.
mode (stat): The value of the variable
that occurs most frequently in a
distribution.
model: The essential features of a
complex system explained in terms of
a few central relationships. Models
can use graphs, equations, computer
programs or words, or a combination
of any of them.
monopoly: A market in which there is
only one seller, producing a good for
which there is no substitute.
monopsony: A market in which there is
only one buyer.
Nash (or noncooperative) equilibrium :
In game theory, a set of strategies for

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the players where no player can

improve his or her payoff given the
other player's strategy.
normal profits: The opportunity cost of
capital and/or entrepreneurship.
normative economics: Considers what
ought to be' - value judgments or goals
of public policy. (Compare with
positive economics.)
null: Zero; empty.
objective function (math): A function in
which the dependent variable
represents the object of maximization
or minimization.
oligopoly: A market in which there are
only a few sellers who sell either a
standardized or a differentiated
product. A natural oligopoly occurs
when the average total costs of
individual firms fall over a large
enough range that a few firms can
produce the total quantity sold at the
lowest average cost.
opportunity cost: The amount that an
input could earn in its best alternative
use. The alternative that must be
foregone when something is produced.
optimum (math): The point at which the
objective function obtains a minimum
or a maximum.
output: Whatever is produced.
parameters: (1) (math) An arbitrary
constant, each of whose values
characterize a member of a family of
curves. (2) (stat) A quantity that
describes a statistical population.
partial derivative (math): The derivative
of a function of many variables, with
respect to one of them, when the
others
are
kept
constant.
y/ x i = 1 , ... , n .
perfect information: A situation in

which all buyers and sellers have full

information about the goods and
services they buy and sell.
positive economics: The analysis of facts
and data that show the way things are.
(Compare with normative economics.)
price discrimination: The sale of the
same good or service at different prices
to different customers or in different
markets, provided the price differences
are not justified by cost differences,
such as differences in transportation
costs.
price elasticity of demand: A measure of
the degree to which quantity demanded
by buyers responds to a price change.
Percentage change in quantity divided
by percentage change in price.
price elasticity of supply: A measure of
the supply responsiveness to a price
increase. Percentage change in quantity
supplied divided by percentage change
in price.
price leader: A firm in an oligopolistic
market, often the largest in the industry,
which makes pricing decisions,
expecting that the other firms will
quickly follow. Considered to be a form
of tacit collusion.
price taker: A seller or buyer who is
unable to affect the price and whose
market decision is limited to the
quantity to be sold or bought at the
existing market price. A buyer or seller
in perfect competition.
producer surplus: Net benefit that
producers get from being able to sell a
good at the existing price. Returns to
capital and entrepreneurship in excess
of the opportunity costs. Approximated
by the area left of the supply curve
between the break-even price and the
existing price.

Glossary
product, average: Total product divided
by the number of units of the variable
input used.
product, marginal (MP): The extra
product resulting from the use of one
extra unit of the specified input when
all other inputs are held constant.
product, total: The total amount of a
commodity produced, measured in
physical units.
production function: The relationship
showing the maximum output that can
be
produced
with
various
combinations of inputs.
production-possibility frontier: A curve
showing the alternate combinations of
the maximum outputs that can be
produced if all production resources
are used.
productive efficiency: Production of any
output at the lowest attainable cost for
that level of output.
productivity: Output per unit of input.
profits: 1) In accounting terms, total
revenue minus all costs properly
charged against the goods sold. 2) In
economic theory, the difference
between sales revenue and the full
opportunity cost of the resources used,
also called economic profits.
random variable (stat): A variable with
probabilities associated with its
values.
rate of change: The amount of change
over a given time period.
rate of return on capital: (1) Annual
profit as a percent of net worth. (2)
Additional annual revenue from the
sale of goods or services produced by
plant or equipment, less depreciation
and operating costs, expressed as a
percent of the depreciated value of the

131
plant or equipment.

ratio (math): The quotient of two

mathematical expressions (x/ y) .
rational numbers (math): All numbers
that can be expressed as a ratio of two
integers.
raw material: A material used in the
production of other goods.
real numbers (math): The set of rational
and irrational numbers.
regulation: Government laws or rules
designed to change the behavior of
firms. The major kinds are economic
regulation (which affects the prices,
entry or services of a single industry,
such as airlines) and social regulation.
relation (math): Any collection of
ordered pairs between y' and x'.
rent: Payment made for the use of land,
which has been extended in economics
to mean the return paid to any factor in
fixed supply.
research and development (R&D): The
process of advancing knowledge and
technology.
resource allocation: The manner in
which an economy distributes its
resources (factors of production)
among the various occupations in
which they could be used, so as to
produce a particular set of final goods.
retained earnings: The part of a
corporation's profit (net income) not
paid out as dividends to shareholders,
but instead retained by the
corporation, usually to expand its
operations.
returns to scale: The rate at which
output increases as all inputs are
increased together. For example, if all
the inputs double and the output is
exactly doubled, we have constant

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returns to scale. If the output grows by

only 75% when inputs are doubled, we
have decreasing returns to scale. If the
output more than doubles, we have
increasing returns to scale.
revenue: Income from sales.
revenue, marginal (MR): The additional
revenue a firm would obtain if it sold
one extra unit of output.
revenue, total: Total receipts from the
sale of a product. Price times the
quantity sold.
sample (stat): A part of a statistical
population whose characteristics are
studied to gain information about the
whole population.
sampling (stat): The
collecting a sample.

process

social cost: The cost of producing a

good, to the society as a whole.
standard deviation (stat): The square
root of the variance, symbolized by .
subsistence wage: Minimum living
wage.
substitution effect: The change in the
quantity of a good demanded because
of a change in its relative price, when
real income is held constant. That is, a
change in the quantity demanded as a
result of movement along a single
indifference curve. (Compare with
income effect.)
sum of squares (stat): Symbolized by
x2 .

of

summation (math): The process of

adding, symbolized by .

scarcity law: The principle that most

things that people want are available
only in limited supply (except for free
goods). Thus goods are generally
scarce and must somehow be rationed,
either by price or by some other
means.

supply curve: The curve showing how

the price of a good or service
influences the quantity supplied.

set (math): A collection of distinct

objects.
short run: (1) The period in which the
quantity of plant and equipment
cannot change. (2) The time period
taken to move to equilibrium.
shortage: An excess of quantity
demanded over quantity supplied.
slope (math): (of a straight line) The ratio
of the vertical change to the horizontal
change. (of a curved line) The slope
of the straight line that is tangent to
the curve at a given point.
social benefit: The contribution that an
activity makes to the welfare of
society as a whole.

supply, elastic: Supply with an elasticity

of more than one.
supply, excess: The amount by which
quantity supplied exceeds quantity
demanded at the existing price (that is,
a surplus).
surplus: (1) The amount by which
quantity supplied exceeds quantity
demanded at the existing price. (2)
Any excess or amount left over.
sustainability: The concept that, at a
minimum, future generations should
be left no worse off than current
generations.
tangent (math): A straight line that has
only one common point with a curve.
technological change: A change in the
process of production, or introduction
of new products, such that more or
improved output can be obtained

Glossary
from the same bundle of inputs. It
results in an outward shift of the
production possibility frontier.
transaction: A business deal in which
money is exchanged for goods or
services.
unit elasticity: Elasticity of one. If a
demand curve has unit elasticity, total
revenue remains the same as price
changes.
utility: The satisfaction derived from the
consumption of a commodity.
utility, marginal: The satisfaction an
individual receives from consuming
one additional unit of a good or
service.
utility, total: The total satisfaction
resulting from the consumption of a
given commodity.

133

variable (math): Something whose value

can change.
variable input (or factor): An input such
as labor for which the quantity used
can change in the short run.
variance (stat): The average of the
squared deviations from the mean,
symbolized by 2 .
vector (math): A matrix that has either
one column or one row.
wages: Payment made for the use of
labor.
weighted average (math): A type of
average in which each item is not
given equal weight. Symbolized by
wi xi / wi , where wi are the
i

weights.