Micro Glossary

absolute advantage

A person or a country has an absolute advantage in the production of a particular good if, given a set of available inputs, they can produce more of it than another person or country. A person or country has this in the production of a good if the inputs it uses to produce this good are less than in some other person or country (Micro, Macro, TE1, TESA). Introduced in Unit 2 Technology and incentives, TE1, TE1. See also: comparative advantage.

adverse selection, hidden attributes

A hidden-attributes or adverse-selection problem occurs when some characteristic of a product or service being exchanged is not known to the other parties. For example, someone purchasing health insurance knows their own health status, but the insurance company does not. The lack of information affects the price at which the uninformed party is willing to buy or sell, and this can lead to an ‘adverse selection’ of goods in the market: for example, only the least healthy people wanting to buy health insurance (Micro, Macro). Introduced in 10.10 Asymmetric information: Hidden attributes and adverse selection, Macro, TE1, TESA, ESPP.

allocation

In an economic interaction, an allocation is a particular distribution of goods or other things of value to all participants. A description of who does what, the consequences of their actions, and who gets what as a result (for example in a game, the strategies adopted by each player and their resulting payoffs). A description of who does what, the consequences of their actions, and who gets what as a result (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, 5.2 Institutions and power, TE1, TESA, ESPP.

altruism

Altruism is a social preference: a person who is willing to bear a cost to benefit somebody else is said to be altruistic. The willingness to bear a cost in order to help another person. Altruism is a social preference. The willingness to bear a cost in order to benefit somebody else (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.1 Climate negotiations: Conflicts and common interests, TE1, TE1, TESA, TESA, ESPP. See also: social preferences.

artificially scarce

A good is artificially scarce if it is non-rival (can be supplied to more users at no additional cost) but some users are excluded from using it, either directly or because the price is greater than their willingness to pay (Micro, Macro). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions. See also: excludable public good.

asset

An asset is something that is owned and has value. Anything of value that is owned (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.3 Other people’s money: The separation of ownership and control, Macro, Macro, Macro, TE1, TE1, TESA, TESA, ESPP. See also: balance sheet, liability.

asymmetric information, asymmetry of information

Information that is relevant to the parties in an economic interaction, but is known by some but not by others (Micro, Macro). Introduced in Unit 6 The firm and its employees, Unit 10 Market successes and failures: The societal effects of private decisions, Unit 10 Market successes and failures: The societal effects of private decisions, Macro, TE1, TE1, TE1, TE1, TESA, TESA, TESA, ESPP, ESPP. See also: adverse selection, moral hazard.

average cost

The total cost of producing the firm’s output divided by the total number of units of output produced. The total cost of the firms’s output divided by the total number of units of output (Micro, Macro, TE1, TESA). Introduced in 7.4 Production and costs: The cost function for Beautiful Cars, Macro, TESA.

average product

The average product of an input is total output divided by the total amount of the input. For example, the average product of a worker (also known as labour productivity) is total output divided by the number of workers employed to produce it. Total output divided by a particular input, for example per worker (divided by the number of workers) or per worker per hour (total output divided by the total number of hours of labour put in) (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 1 Prosperity, inequality, and planetary limits, Unit 2 Technology and incentives, Unit 5 The rules of the game: Who gets what and why, Macro, Macro, TE1, TE1, TE1, TESA, TESA, ESPP, ESPP.

bargaining power

The extent of a person or firm’s advantage in securing a larger share of the economic rents made possible by an interaction. The extent of a person’s advantage in securing a larger share of the economic rents made possible by an interaction (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.3 Economies of scale and the cost advantages of large-scale production, Unit 7 The firm and its customers, TE1, TE1, TE1, TESA, ESPP.

barriers to entry, entry barriers

The term barriers to entry refers to anything making it difficult for new firms to enter a market, such as intellectual property rights or economies of scale in production (Micro, Macro). Introduced in Unit 8 Supply and demand: Markets with many buyers and sellers.

best response

In game theory, a player’s best response is the strategy that will bring about the player’s most-preferred outcome, given the strategies adopted by the other players. In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.3 Best responses in the rice–cassava game: Nash equilibrium, TE1, TESA, ESPP.

bond

A financial asset where the government (or a company) borrows for a set period of time and promises to make regular fixed payments to the lender (and to return the money when the period is at an end). A type of financial asset for which the issuer promises to pay a given amount over time to the holder. Also known as: corporate bonds (Micro, Macro, TE1, TESA). Introduced in Unit 9 Lenders and borrowers and differences in wealth, Macro, Macro, TE1, TESA.

budget constraint

An equation that represents all combinations of goods and services one could acquire that would exactly exhaust one’s budgetary resources. An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one’s budgetary resources (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.4 The feasible set, TE1, TE1, TESA, TESA.

capital goods, capital

Capital goods (sometimes shortened to ‘capital’) are the durable and costly non-labour inputs used in production (e.g. machinery, equipment, buildings). They do not include some essential inputs (e.g. air, water, knowledge) that are used in production at zero cost to the user (Micro, Macro). Introduced in 1.8 Capitalist institutions, 6.3 Other people’s money: The separation of ownership and control, Macro, Macro, TE1, TE1, TESA, ESPP.

capitalism

An economic system in which the main form of economic organization is the firm, where the private owners of capital goods hire labour to produce goods and services to be sold in markets with the intent of making a profit. The main economic institutions in a capitalist economic system are private property, markets, and firms. An economic system in which the main form of economic organization is the firm, in which the private owners of capital goods hire labour to produce goods and services for sale on markets with the intent of making a profit. The main economic institutions in a capitalist economic system, then, are private property, markets, and firms. An economic system in which private property, markets, and firms play an important role (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.8 Capitalist institutions, Macro, TE1, TESA, ESPP.

cartel

A group of firms that collude (work together) to set output and/or prices in order to raise their joint profits. A group of firms that collude in order to increase their joint profits (Micro, Macro, ESPP, TE1, TESA). Introduced in 8.8 Application: Market dynamics in the oil market, TE1, TE1, TESA, ESPP.

causal, causality, causation

We can say that a relationship between two variables is causal if we can establish that a change in one variable produces a change in the other. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept (Micro, Macro). Introduced in 1.10 Capitalism, causation, and history’s hockey stick, Macro, TE1, TESA, ESPP, DE, DE, DE, DE. See also: natural experiment, correlation.

central planning

In a centrally-planned economy, decisions about what to produce and how are taken by the government, rather than by firms responding to market prices (Micro, Macro). Introduced in 8.1 How the American Civil War rocked global cotton prices.

ceteris paribus

Economists often simplify analysis by setting aside things that are thought to be of less importance to the question of interest. The literal meaning of the expression is ‘other things equal’. In an economic model, it means an analysis ‘holds other things constant’. Economists often simplify analysis by setting aside things that are thought to be of less importance to the question of interest. The literal meaning of the expression is ‘other things equal’. In an economic model it means an analysis ‘holds other things constant’ (Micro, Macro, ESPP, TE1, TESA).

collateral

An asset that a borrower pledges to a lender as a security for a loan. If the borrower is not able to make the loan payments as promised, the lender becomes the owner of the asset (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 9 Lenders and borrowers and differences in wealth, 10.9 Hidden actions and risk: Market failure in insurance and credit markets, Macro, Macro, Macro, TE1, TE1, TESA, TESA, ESPP, ESPP.

common-pool resource

A resource that is rival or partially rival (more people using it reduces the benefits to others) but non-excludable within a community of users. All members of the community are able (and in some cases have a legal right) to use it, but outsiders can be excluded. A rival good that one cannot prevent others from enjoying. Also known as: common property resource (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TESA, ESPP. See also: rival good.

comparative advantage

A person or a country has a comparative advantage in the production of a particular good if the cost to them of producing it, relative to the cost of another good, is lower than for another person or a country. A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods (Micro, Macro, TE1, TESA). Introduced in Unit 2 Technology and incentives, TE1, TE1. See also: absolute advantage.

competition policy, antitrust policy

Government policies and laws to limit market power and prevent cartels, or to otherwise regulate the process of competition, are collectively known as competition policy or antitrust policy (Micro, Macro). Introduced in 7.12 Influencing market power, and competition policy, TE1, TESA, ESPP.

competitive equilibrium

A market is in competitive equilibrium if the quantity supplied is equal to the quantity demanded at the prevailing price, and all buyers and sellers are price-takers, so that no-one can benefit from attempting to trade at a different price. A market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplied is equal to the quantity demanded (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 8 Supply and demand: Markets with many buyers and sellers, TE1, TESA, ESPP.

complete contract

A contract is complete if it a) covers all of the aspects of the exchange in which any party to the exchange has an interest, and b) is enforceable (by the courts) at close to zero cost to the parties (Micro, Macro). Introduced in Unit 8 Supply and demand: Markets with many buyers and sellers.

concave, concave function

A function, \(f(x)\), is said to be concave if its second derivative is negative for all values of x (Micro, Macro). Introduced in Unit 5 The rules of the game: Who gets what and why, TE1, TE1, TE1, TESA.

conflict of interest

The situation that arises in an interaction if, in order for one party to gain more, another party must do less well. The situation which arises if in order for one party to gain more from the interaction, another party must do less well (Micro, Macro, ESPP). Introduced in Unit 4 Strategic interactions and social dilemmas, 9.8 Conflicts over the gains made possible by borrowing and lending, Unit 10 Market successes and failures: The societal effects of private decisions, Macro, ESPP.

congestible public goods

If a public good becomes partially rival as more people use it, it may be described as a congestible public good (Micro, Macro). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions.

conspicuous consumption

The purchase of goods and services to publicly display one’s social and economic status. The purchase of goods or services to publicly display one’s social and economic status (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.10 Application: Work hours, free time, and inequality, TE1, TESA, ESPP.

constant returns to scale

When production exhibits constant returns to scale, increasing all of the inputs to a production process by the same proportion increases output by the same proportion. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. These occur when doubling all of the inputs to a production process doubles the output. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 2 Technology and incentives, 7.3 Economies of scale and the cost advantages of large-scale production, Macro, TE1, TESA, ESPP. See also: increasing returns to scale, decreasing returns to scale.

constrained choice problem

A problem in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit, or utility) subject to a constraint that determines the feasible set (such as the demand curve, or budget constraint). This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.5 Decision-making and scarcity, Unit 7 The firm and its customers, Macro, TE1, TE1, TESA, ESPP, ESPP. See also: constrained optimization problem.

consumer good

Any good that can be bought by consumers, including both short-lived goods and long-lived goods, which are called consumer durables (Micro, Macro). Introduced in 3.3 Goods and preferences.

consumer surplus

Each consumer who buys a good receives a surplus equal to their willingness to pay minus the price. The term ‘consumer surplus’ normally refers to the sum of these surpluses across all consumers. The consumer’s willingness to pay for a good minus the price at which the consumer bought the good, summed across all units sold (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, Unit 8 Supply and demand: Markets with many buyers and sellers, TE1, TESA, ESPP.

consumption

Expenditure on consumer goods. Consumer goods include both short-lived goods and services and long-lived goods, which are called consumer durables (Micro, Macro). Introduced in 3.2 A problem of choice and scarcity, Macro.

consumption smoothing

Actions taken by an individual, family, or other group in order to sustain their customary level of consumption. Actions include borrowing or reducing savings to offset negative shocks, such as unemployment or illness; and increasing saving or reducing debt in response to positive shocks, such as promotion or inheritance (Micro, Macro, ESPP). Introduced in Unit 9 Lenders and borrowers and differences in wealth, Macro, ESPP.

contract

A legal document or understanding that specifies a set of actions that parties to the contract must undertake (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TE1, TESA, TESA, ESPP.

convex, convex function

A function, \(f(x)\), is said to be convex if its second derivative is positive for all values of x (Micro, Macro). Introduced in Unit 5 The rules of the game: Who gets what and why.

convex preferences

A person whose indifference curves have a convex shape—they get flatter as you move along the curve to the right of the diagram—is said to have convex preferences. This typical shape arises because when someone has more of one good (relative to another) they are willing to give up more of it in exchange for a unit of the other good: their marginal rate of substitution falls along the curve (Micro, Macro). Introduced in 3.3 Goods and preferences, Unit 5 The rules of the game: Who gets what and why.

cooperation

Participating in a common project that is intended to produce mutual benefits (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP.

cooperative firm, worker-owned cooperative

A cooperative is a business organization whose members together own the assets of the organization; they share the income resulting from their activities and jointly determine how the organization will be run. A worker-owned cooperative is a firm that is mostly or entirely owned by its workers, who hire and fire the managers (Micro, Macro). Introduced in Unit 6 The firm and its employees, TE1, ESPP.

coordination game

A game in which there are two Nash equilibria, one of which may be Pareto superior to the other. Also known as: assurance game. A game in which there are two Nash equilibria, of which one may be Pareto superior to the other. Also known as: assurance game (Micro, Macro, TE1, TESA). Introduced in 4.13 Coordination games and conflicts of interest, Macro, TE1, TESA.

copyright

Ownership rights over the use and distribution of an original work (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TE1, TESA, ESPP, ESPP.

correlation

Two variables in a sample of data are said to be correlated if we observe that they tend to change together. If high values of one variable (e.g. people’s earnings) commonly occur along with high values of another variable (e.g. years of education) the variables are positively correlated. When high values of one variable (e.g. ice cream sales) are associated with low values of the other variable (e.g. number of people wearing winter coats) there is a negative correlation. If variables are correlated, it doesn’t mean that there is a causal relationship between them: higher ice cream sales might not have caused fewer people to wear winter coats. A statistical association in which knowing the value of one variable provides information on the likely value of the other, for example high values of one variable being commonly observed along with high values of the other variable. It can be positive or negative (it is negative when high values of one variable are observed with low values of the other). It does not mean that there is a causal relationship between the variables. A measure of how closely related two variables are. Two variables are correlated if knowing the value of one variable provides information on the likely value of the other, for example high values of one variable being commonly observed along with high values of the other variable. Correlation can be positive or negative. It is negative when high values of one variable are observed with low values of the other. Correlation does not mean that there is a causal relationship between the variables. Example: When the weather is hotter, purchases of ice cream are higher. Temperature and ice cream sales are positively correlated. On the other hand, if purchases of hot beverages decrease when the weather is hotter, we say that temperature and hot beverage sales are negatively correlated (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in 1.2 History’s hockey stick, Macro, Macro, TE1, TESA, DE, DE, DE, DE. See also: causality, correlation coefficient.

cost function

The relationship between a firm’s total costs and its quantity of output. The cost function C(Q) tells you the total cost of producing Q units of output (including the opportunity cost of capital) (Micro, Macro). Introduced in 7.4 Production and costs: The cost function for Beautiful Cars.

costs of entry

Startup costs that are incurred when a seller enters a market or an industry. These would usually include the cost of acquiring and equipping new premises, research and development, the necessary patents, and initial costs of finding staff. Startup costs that would be incurred when a seller enters a market or an industry. These would usually include the cost of acquiring and equipping new premises, research and development, the necessary patents, and the cost of finding and hiring staff (Micro, Macro, TE1, TESA). Introduced in 8.7 Short-run and long-run equilibria, TE1.

creative destruction

Joseph Schumpeter’s name for the process by which old technologies and the firms that do not adapt are swept away by the new, because they cannot compete in the market. In his view, the failure of unprofitable firms is creative because it releases labour and capital goods for use in new combinations (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.6 Modelling a dynamic economy: Innovation and profit, Macro, TE1, TE1, TESA, ESPP.

credit market constrained

A description of individuals who are limited in how much they can borrow or can borrow only on unfavourable terms (Micro, Macro). Introduced in Unit 9 Lenders and borrowers and differences in wealth. See also: credit market excluded.

credit market excluded

A description of individuals who are unable to borrow on any terms (Micro, Macro). Introduced in Unit 9 Lenders and borrowers and differences in wealth, Macro. See also: credit market constrained.

crowding out, crowded out

There are two quite distinct uses of the term. One is a negative effect that is observed when economic incentives displace people’s ethical or social motivations. In studies of individual behaviour, incentives may have a crowding out effect on social preferences. The second use of the term is to refer to the effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest rate (Micro, Macro). Introduced in 4.9 Using experiments to study economic behaviour, Macro, TE1, TE1, TESA, TESA, ESPP.

deadweight loss

A measure of the total loss of surplus (that is, potential gains from trade) relative to the maximum available in the market. A loss of total surplus relative to a Pareto-efficient allocation (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, 10.6 Public goods, non-rivalry, and excludability: A model of radio broadcasting, TE1, TE1, TESA, ESPP.

decile, decile groups

Deciles split a set of observations into ten equally-sized groups. The full set of observations is ordered according to a particular variable (e.g. income). The first decile group is the observations in the bottom 1% (e.g. the 1% with the lowest incomes), the second is the next lowest 1%, and the tenth or top decile group is the highest 1%. The deciles are the cutoff values that separate the groups; the first decile is the cutoff between the first and second decile groups, and so on (Micro). Introduced in 1.4 Inequality in global income, Macro, Macro, ESPP, ESPP.

decreasing returns to scale, diseconomies of scale, decreasing returns

When production exhibits decreasing returns to scale, increasing all of the inputs to a production process by the same proportion increases output by a lower proportion. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs (Micro, Macro). Introduced in 7.3 Economies of scale and the cost advantages of large-scale production, ESPP, TE1, TESA. See also: increasing returns to scale, constant returns to scale.

demand curve

A demand curve shows the number of units of a good that buyers would wish to buy at any given price. Also known as: demand function. The curve that gives the quantity consumers will buy at each possible price (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, TE1, TESA, ESPP.

democracy

A political system that ideally gives equal political power to all citizens, and which is defined by individual rights such as freedom of speech, assembly, and the press; and fair elections in which virtually all adults are eligible to vote, and the government leaves office if it loses. A political system, that ideally gives equal political power to all citizens, defined by individual rights such as freedom of speech, assembly, and the press; fair elections in which virtually all adults are eligible to vote; and in which the government leaves office if it loses (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.12 Varieties of capitalism: Institutions, government, and politics, Macro, TE1, TE1, TESA, ESPP, ESPP.

depreciation (of an asset)

The loss in value of a form of wealth that occurs either through use (wear and tear) or the passage of time (obsolescence) (Micro). Introduced in Unit 9 Lenders and borrowers and differences in wealth, Macro, TE1, TE1, TESA, ESPP.

developmental state

A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education, and other public policies. A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education and other public policies (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.12 Varieties of capitalism: Institutions, government, and politics, Macro, TE1, TESA, ESPP.

differentiated product

A product produced by a single firm that has some unique characteristics compared to similar products of other firms (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.5 Demand, elasticity, and revenue, TE1, TESA, ESPP.

diminishing average product of labour

A property of a production process in which, as the input of labour is increased, the amount of output per unit of labour (the average product) falls. A situation in which, as more labour is used in a given production process, the average product of labour typically falls (Micro, Macro, TE1, TESA). Introduced in Unit 2 Technology and incentives, TE1, TESA.

diminishing marginal utility

If the value to the individual of an additional unit of some good declines the more that is consumed, holding constant the amount of other goods, we say that the good has diminishing marginal utility. A property of some utility functions according to which each additional unit of a given variable results in a smaller increment to total utility than did the previous additional unit. Also known as: diminishing marginal returns to consumption (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 9 Lenders and borrowers and differences in wealth.

discount rate

A measure of someone’s impatience: how much the person values an additional unit of consumption now relative to an additional unit of consumption later. It is equal to the slope of the indifference curve for consumption now and consumption later, minus one. Also known as: subjective discount rate. A measure of a person’s impatience: how much that person values an additional unit of consumption now relative to an additional unit of consumption later. It is the absolute value of the slope of a person’s indifference curve for consumption now and consumption later, minus one. Also known as: subjective discount rate. A measure of the person’s impatience: how much the person values an additional unit of consumption now relative to an additional unit of consumption later. It is the slope of the person’s indifference curve for consumption now and consumption later, minus one. Also known as: subjective discount rate (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 9 Lenders and borrowers and differences in wealth, TE1, ESPP.

disequilibrium rent

The economic rent that arises when a market is not in equilibrium, for example when there is excess demand or excess supply in a market for some good or service. In contrast, rents that arise in equilibrium are called equilibrium rents (Micro, Macro, TE1, TESA). Introduced in Unit 8 Supply and demand: Markets with many buyers and sellers, TE1, TESA.

division of labour

The specialization of producers to carry out different tasks in the production process. The specialization of producers to carry out different tasks in the production process. Also known as: specialization (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 2 Technology and incentives, TE1, TE1, TESA, TESA, ESPP, ESPP.

dominant strategy

A strategy is dominant if it yields the highest pay-off for the player, no matter what strategies the other players choose. Strategy that yields the highest payoff for a player, no matter what the other players do. Action that yields the highest payoff for a player, no matter what the other players do (Micro, Macro, ESPP, TE1, TESA). Introduced in TE1, TESA, ESPP.

dominant strategy equilibrium

A dominant strategy equilibrium is a Nash equilibrium in which the strategies of all players are dominant stategies. An outcome of a game in which every player plays his or her dominant strategy (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, TE1, TE1, TESA, ESPP.

earnings

Wages, salaries, and other income from labour (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 9 Lenders and borrowers and differences in wealth, TE1, TESA, ESPP.

economic cost

The direct costs of an action (including monetary costs and costs of effort, for example), plus the opportunity cost. The out-of-pocket cost of an action, plus the opportunity cost (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, TE1, TESA, ESPP.

economic rent

Economic rent is the difference between the net benefit (monetary or otherwise) that an individual receives from a chosen action, and the net benefit from the next best alternative (or reservation option). A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option) (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, Unit 4 Strategic interactions and social dilemmas, Unit 5 The rules of the game: Who gets what and why, Unit 6 The firm and its employees, Unit 7 The firm and its customers, Macro, TE1, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA, TESA, ESPP, ESPP, ESPP. See also: reservation option.

economic system

A way of organizing the economy that is distinctive in its basic institutions. Economic systems of the past and present include: central economic planning (e.g. the Soviet Union in the twentieth century), feudalism (e.g. much of Europe in the early Middle Ages), slave economy (e.g. the US South and the Caribbean plantation economies prior to the abolition of slavery in the nineteenth century), and capitalism (most of the world’s economies today). A way of organizing the economy that is distinctive in its basic institutions. Economic systems of the past and present include: central economic planning (e.g. the Soviet Union in the 2th century), feudalism (e.g. much of Europe in the early Middle Ages), slave economy (e.g. the US South and the Caribbean plantation economies prior to the abolition of slavery in the 19th century), and capitalism (most of the world’s economies today). The institutions that organize the production and distribution of goods and services in an entire economy (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.8 Capitalist institutions, TE1, TESA, ESPP.

economics

Economics is the study of how people interact with each other and with their natural environment in producing and acquiring their livelihoods, and how this changes over time and differs across societies. The study of how people interact with each other and with their natural surroundings in providing their livelihoods, and how this changes over time (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.13 Economics, the economy, and the biosphere, 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1, TESA, ESPP, ESPP.

economies of scope

Cost savings that occur when two or more products are produced jointly by a single firm, rather being produced in separate firms (Micro, Macro, TE1, TESA). Introduced in 7.4 Production and costs: The cost function for Beautiful Cars, TE1.

employment contract

A system in which producers are paid for the time they work for their employers (Micro, Macro). Introduced in Unit 6 The firm and its employees.

employment rent

The economic rent a worker receives when the net value of their job exceeds the net value of their next best alternative (that is, being unemployed). The economic rent a worker receives when the net value of their job exceeds the net value of their next best alternative (that is, being unemployed). Also known as: cost of job loss. The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative (that is, being unemployed). Also known as: cost of job loss (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 6 The firm and its employees, Unit 6 The firm and its employees, Macro, Macro, TE1, TE1, TESA, TESA, ESPP, ESPP. See also: economic rent.

endogenous

Endogenous means ‘generated by the model’. In an economic model, a variable is endogenous if its value is determined by the workings of the model (rather than being set by the modeller). Produced by the workings of a model rather than coming from outside the model (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Unit 2 Technology and incentives, 7.4 Production and costs: The cost function for Beautiful Cars, TE1, TESA, DE, DE, DE, DE. See also: exogenous.

endowment

A person’s endowments are the things they have that enable them to receive income. They include physical wealth (for example: land, housing, machinery); financial wealth (for example: savings, stocks/shares, bonds); intellectual property (for example: patents, copyrights); knowledge, skills, abilities, and experience that affect labour income; citizenship and rights to work. They can include characteristics such as nationality, gender, race, and social class, if these affect their income. The facts about an individual that may affect his or her income, such as the physical wealth a person has, either land, housing, or a portfolio of shares (stocks). Also includes level and quality of schooling, special training, the computer languages in which the individual can work, work experience in internships, citizenship, whether the individual has a visa (or green card) allowing employment in a particular labour market, the nationality and gender of the individual, and even the person’s race or social class background (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.11 The distribution of income: Endowments, technology, and institutions, TE1, ESPP, ESPP. See also: human capital.

enforceable contract

A contract is enforceable if it is legally binding. For a contract to be enforceable, a court must be able to establish whether the both parties complied with its terms (Micro, Macro). Introduced in 6.6 Getting the work done: Contracts, principals, and agents.

entrepreneur

A person who creates or is an early adopter of new technologies, organizational forms, and other opportunities (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.6 Modelling a dynamic economy: Innovation and profit, TE1, TESA, ESPP.

equilibrium

An equilibrium is a situation or model outcome that is self-perpetuating: if the outcome is reached it does not change, unless an external force disturbs it. By an ‘external force’, we mean something that is determined outside the model. A model outcome that does not change unless an outside or external force is introduced that alters the model’s description of the situation. A model outcome that is self-perpetuating. In this case, something of interest does not change unless an outside or external force is introduced that alters the model’s description of the situation (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 1 Prosperity, inequality, and planetary limits, Unit 2 Technology and incentives, 4.3 Best responses in the rice–cassava game: Nash equilibrium, Unit 8 Supply and demand: Markets with many buyers and sellers, Macro, TE1, TE1, TE1, TESA, TESA, ESPP, ESPP, ESPP.

equilibrium price

This term normally refers to the price at which supply and demand for a good are equalized, so that the market is in equilibrium (also known as the market-clearing price). But it could refer to the level of the price in the equilibrium of other economic models (Micro, Macro). Introduced in Unit 8 Supply and demand: Markets with many buyers and sellers. See also: market-clearing price.

equity

Shares (stocks) in a business are known collectively as equity. The total value of the equity held by the shareholders is equal to the net worth of the business, and an individual shareholder’s equity in the business is the total value of the shares they own. The term equity is also used more generally for a share of ownership of any asset, and for the net worth of any household, business, or project. There is a second entirely different use of the term, meaning fairness, as in ‘an equitable division of the pie’. An individual’s own investment in a project. This is recorded in an individual’s or firm’s balance sheet as net worth. An individual’s own investment in a project. This is recorded in an individual’s or firm’s balance sheet as net worth. An entirely different use of the term is synonymous with fairness (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 9 Lenders and borrowers and differences in wealth, Unit 9 Lenders and borrowers and differences in wealth, 10.9 Hidden actions and risk: Market failure in insurance and credit markets, Macro, Macro, Macro, TE1, TE1, TE1, TESA, TESA, TESA, ESPP, ESPP. See also: net worth.

evolutionary economics

An approach that studies the process of economic change, which includes technological innovation, the diffusion of new social norms, and the development of novel institutions. An approach that studies the process of economic change, including technological innovation, the diffusion of new social norms, and the development of novel institutions (Micro, Macro, TE1, TESA). Introduced in 2.6 Modelling a dynamic economy: Innovation and profit, TE1, TESA.

excess demand

A situation in which the quantity of a good demanded is greater than the quantity supplied at the current price (Micro, Macro, ESPP, TE1, TESA). Introduced in 8.1 How the American Civil War rocked global cotton prices, Unit 8 Supply and demand: Markets with many buyers and sellers, Macro, TE1, TESA, ESPP, ESPP. See also: excess supply.

excess supply

A situation in which the quantity of a good supplied is greater than the quantity demanded at the current price (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 8 Supply and demand: Markets with many buyers and sellers, Macro, TE1, TE1, TESA, TESA, ESPP, ESPP. See also: excess demand.

excludable, excludability

A good is excludable if (at zero or low cost) a potential user may be denied access to the good (Micro, Macro). Introduced in 10.6 Public goods, non-rivalry, and excludability: A model of radio broadcasting. See also: non-rival.

excludable public good, club good

A good that is non-rival (can be supplied to more users at no additional cost) but excludable (it is possible to prevent people from using it) may be called an excludable public good, or a club good (Micro, Macro). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, ESPP.

exogenous

Exogenous means ‘generated outside the model’. In an economic model, a variable is exogenous if its value is set by the modeller, rather than being determined by the workings of the model itself. Coming from outside the model rather than being produced by the workings of the model itself (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Unit 2 Technology and incentives, 7.4 Production and costs: The cost function for Beautiful Cars, Unit 8 Supply and demand: Markets with many buyers and sellers, Macro, Macro, TE1, TE1, TE1, TESA, TESA, TESA, ESPP, DE, DE, DE, DE. See also: endogenous.

exogenous shock

An exogenous shock (for example a demand shock or a supply shock) is a change in one or more of the exogenous variables in a model—that is, variables that are othewise held constant by the modeller. A sharp change in external conditions affecting a model (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 8 Supply and demand: Markets with many buyers and sellers, Macro.

external benefit, positive externality, external economy

A positive external effect: that is, a positive effect of an economic decision on other people, that is not taken into account by the decision-maker. It may be described as an external benefit, a positive externality, or an external economy (Micro, Macro). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TESA, ESPP, TE1, TESA, ESPP. See also: external effect.

external cost, negative externality, external diseconomy

A negative external effect: that is, a negative effect of an economic decision on other people, that is not taken into account by the decision-maker. It may be described as an external cost, or a negative externality, or an external diseconomy (Micro, Macro). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, Unit 10 Market successes and failures: The societal effects of private decisions, ESPP, TE1, TESA, ESPP. See also: external effect.

external effect, externality

An external effect occurs when a person’s action confers a benefit or imposes a cost on others and this cost or benefit is not taken into account by the individual taking the action. External effects are also called externalities (Micro, Macro). Introduced in Unit 4 Strategic interactions and social dilemmas, Unit 5 The rules of the game: Who gets what and why, Unit 8 Supply and demand: Markets with many buyers and sellers, 10.1 Bananas, fish, and cancer, Unit 10 Market successes and failures: The societal effects of private decisions, Macro, Macro, Macro, Macro, TE1, TE1, TESA, ESPP, ESPP, ESPP, ESPP, ESPP.

factor of production

Any input into a production process is called a factor of production. Factors of production may include labour, machinery and equipment (usually referred to as capital), land, energy, and raw materials (Micro, Macro). Introduced in Unit 1 Prosperity, inequality, and planetary limits, Unit 2 Technology and incentives, Macro.

fairness

A way to evaluate an allocation based on one’s conception of justice (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, Unit 5 The rules of the game: Who gets what and why, Macro, TE1, TE1, TESA, TESA, ESPP.

feasible frontier

The curve or line made of points that defines the maximum feasible quantity of one good for a given quantity of the other. The curve made of points that defines the maximum feasible quantity of one good for a given quantity of the other (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.4 The feasible set, Unit 5 The rules of the game: Who gets what and why, 9.3 Borrowing: Bringing consumption forward in time to the present, Macro, TE1, TESA, ESPP, ESPP, ESPP. See also: feasible set.

feasible set

All of the combinations of goods or outcomes that a decision-maker could choose, given the economic, physical, or other constraints that they face. All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.4 The feasible set, Unit 5 The rules of the game: Who gets what and why, Unit 6 The firm and its employees, 9.3 Borrowing: Bringing consumption forward in time to the present, Macro, TE1, TE1, TESA, TESA, ESPP. See also: feasible frontier.

firm

An economic organization in which private owners of capital goods hire and direct labour to produce goods and services for sale on markets to make a profit. Economic organization in which private owners of capital goods hire and direct labour to produce goods and services for sale on markets to make a profit (Micro, Macro, TE1, TESA). Introduced in 1.8 Capitalist institutions, TE1.

firm-specific asset

An asset is something that is owned and has value. It is firm-specific if it is only of value within a particular firm. Firm-specific assets include any knowledge or skills that are only valuable while a person remains employed in a particular firm. Something that a person owns or can do that has more value in the individual’s current firm than in their next best alternative (Micro, Macro, TE1, TESA). Introduced in 6.4 Finding jobs and filling vacancies, TE1, TESA. See also: relationship-specific asset.

fixed costs

Costs of production that do not vary with the number of units produced (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.3 Economies of scale and the cost advantages of large-scale production, TE1, TESA, ESPP.

fixed investment, gross fixed capital formation

In the national accounts, fixed investment, also known as gross fixed capital formation, refers to investment by firms and government in new capital goods (equipment and buildings), plus spending on new residential buildings (Micro, Macro). Introduced in Macro, Macro. See also: investment.

fixed-proportions technology

A technology that requires inputs in fixed proportions to each other. To increase the amount of output, all inputs must be increased by the same percentage so that they remain in the same fixed proportions to each other (Micro, Macro). Introduced in Unit 2 Technology and incentives.

flow

A quantity measured per unit of time, such as weekly income, or annual carbon emissions. A quantity measured per unit of time, such as annual income or hourly wage (Micro, Macro, TE1, TESA). Introduced in Unit 2 Technology and incentives, Unit 9 Lenders and borrowers and differences in wealth, TE1, TE1, TE1, TESA, TESA. See also: stock.

free rider, free riding, free ride

Someone who benefits from the contributions of others to some cooperative project without contributing themselves is said to be free riding, or to be a free rider (Micro, Macro). Introduced in 4.1 Climate negotiations: Conflicts and common interests, 6.3 Other people’s money: The separation of ownership and control, 10.6 Public goods, non-rivalry, and excludability: A model of radio broadcasting, Macro, TE1, TE1, TESA, TESA, ESPP, ESPP.

gains from trade, gains from exchange

The benefits that each party gains from a transaction compared to how they would have fared without the transaction (Micro, Macro). Introduced in 1.8 Capitalist institutions, 5.7 Case 2: A take-it-or-leave-it contract, Unit 7 The firm and its customers, Unit 8 Supply and demand: Markets with many buyers and sellers, TE1, TE1, TE1, TESA, TESA, ESPP, ESPP.

game

A model of strategic interaction that describes the players, the feasible strategies, the order of play, the information that the players have, and their pay-offs. A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP, ESPP. See also: game theory.

game theory

A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows that the benefits they receive depend on the actions taken by all (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP. See also: game.

gender division of labour

The ways men and women differ in how they spend their (paid and unpaid) work time. The ways men and women differ in how they spend their work time (Micro, Macro, ESPP). Introduced in 3.11 Explaining our working hours: Gender and working time, ESPP.

Gini coefficient

A measure of inequality of a quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of it). It is the average difference in, say, income between every pair of individuals in the population relative to the mean income, multiplied by one-half. Other than for small populations, a close approximation to the Gini coefficient can be calculated from a Lorenz curve diagram. A measure of inequality of any quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of it) (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Unit 5 The rules of the game: Who gets what and why, Unit 9 Lenders and borrowers and differences in wealth, Macro, Macro, TE1, TESA, ESPP, ESPP, DE. See also: Lorenz curve.

goods

Economists sometimes use this word in a very general way, to mean anything an individual cares about and would like to have more of. As well as goods that are sold in a market, it can include (for example) ‘free time’ or ‘clean air’ (Micro, Macro). Introduced in 3.3 Goods and preferences, Unit 5 The rules of the game: Who gets what and why.

government bond

A financial asset where the government borrows for a set period of time and promises to make regular fixed payments to the lender (and to return the money when the period is at an end). A financial instrument issued by governments that promises to pay flows of money at specific intervals (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 9 Lenders and borrowers and differences in wealth, TE1, TE1, TESA, TESA, ESPP.

gross domestic product (GDP)

A measure of the market value of the output of final goods and services in the economy in a given period. GDP combines in a single number all the output (or production) carried out by the firms, non-profit institutions, and government bodies within a government’s territory. Output of intermediate goods that are inputs to final production is excluded to prevent double counting. Household production is part of GDP if it is sold. GDP is measured monthly, quarterly, and annually. A measure of the market value of the output of final goods and services in the economy in a given period. Output of intermediate goods that are inputs to final production is excluded to prevent double counting. A measure of the market value of the output of the economy in a given period (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.2 History’s hockey stick, Macro, Macro, TE1, TE1, TESA, TESA.

hawk-dove game

A coordination game in which the players want to coordinate on the opposite action from their opponent, and in each of the Nash equilibria, (Hawk, Dove) and (Dove, Hawk), the Hawk obtains the higher pay-off; but both players choosing Hawk is the worst outcome for both. A game in which there is conflict (when hawks meet), sharing (when doves meet), and taking (by a hawk when it meets a dove) (Micro, Macro, ESPP, TESA). Introduced in 4.14 Modelling the global climate change problem, TESA, ESPP.

homo economicus

Latin for ‘economic man’, used to describe an economic actor who is assumed to make decisions entirely in pursuit of their own self-interest. Latin for ‘economic man’, used to describe an economic actor who is assumed to make decisions entirely in pursuit of their own of self-interest. Latin for ‘economic man’, referring to an actor assumed to adopt behaviours based on an amoral calculation of self-interest (Micro, Macro, ESPP).

human capital

The stock of knowledge, skills, behavioural attributes, and personal characteristics that determine the labour productivity or labour earnings of an individual. Investment in human capital, through education, training, and socialization can increase the stock. Human capital is part of an individual’s endowment. The stock of knowledge, skills, behavioural attributes, and personal characteristics that determine the labour productivity or labour earnings of an individual. It is part of an individual’s endowments. Investment in this through education, training, and socialization can increase the stock, and such investment is one of the sources of economic growth. The stock of knowledge, skills, behavioural attributes, and personal characteristics that determine the labour productivity or labour earnings of an individual. Investment in this through education, training, and socialization can increase the stock, and such investment is one of the sources of economic growth. Part of an individual’s endowments (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.11 The distribution of income: Endowments, technology, and institutions, Unit 9 Lenders and borrowers and differences in wealth, Macro, TE1, TE1, TE1, TESA, TESA, ESPP. See also: endowment.

impatience

A preference for consuming something sooner rather than later. Impatience may by situational (because the person has little now and will have more later); or intrinsic, in which case they would prefer to consume more now rather than the same amounts now and later. Any preference to move consumption from the future to the present. This preference may be derived either from pure impatience or diminishing marginal returns to consumption (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 9 Lenders and borrowers and differences in wealth, ESPP.

incentive

An economic reward or punishment, which influences the benefits and costs of alternative courses of action. Economic reward or punishment, which influences the benefits and costs of alternative courses of action (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, 5.2 Institutions and power, 6.6 Getting the work done: Contracts, principals, and agents, TE1, TE1, TESA, TESA, ESPP.

income, disposable income

A household or individual’s disposable income is the maximum they can spend (‘dispose of’) without borrowing or using savings, after paying tax and receiving transfers (such as unemployment insurance and pensions) from the government. It is also the maximum amount a household or individual could consume over a given time period while leaving their wealth unchanged. Disposable income is measured over a period of time, such as a year (Micro). Introduced in 3.2 A problem of choice and scarcity, 3.12 Explaining our working hours: Differences between countries, Unit 9 Lenders and borrowers and differences in wealth, TE1, TESA, ESPP, Macro, TE1, TE1, TESA, TESA, ESPP.

income effect

The effect that an increase in income has on an individual’s demand for a good (the amount that the person chooses to buy) because it expands the feasible set of purchases. When the price of a good changes, this has an income effect because it expands or shrinks the feasible set, and it also has a substitution effect. The effect, for example, on the choice of consumption of a good that a change in income would have if there were no change in the price or opportunity cost. The effect that the additional income would have if there were no change in the price or opportunity cost (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.6 Hours of work and technological progress, 3.7 Income and substitution effects on hours of work and free time, Unit 9 Lenders and borrowers and differences in wealth, Macro, TE1, TE1, TE1, TESA, ESPP, ESPP. See also: substitution effect.

incomplete contract

A contract that does not specify, in a way that can be enforced by a court, every aspect of the exchange that affects the interests of parties to the exchange (or of others). A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of any others affected by the exchange). A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of others) (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Unit 6 The firm and its employees, 6.6 Getting the work done: Contracts, principals, and agents, Unit 10 Market successes and failures: The societal effects of private decisions, Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TE1, TE1, TESA, TESA, TESA, ESPP, ESPP, ESPP.

increasing returns to scale, economies of scale, increasing returns

When production exhibits increasing returns to scale, increasing all of the inputs to a production process by the same proportion increases the output by a higher proportion. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs (Micro, Macro). Introduced in Unit 2 Technology and incentives, 7.3 Economies of scale and the cost advantages of large-scale production, TESA, ESPP, TE1, TE1, TE1, TE1, ESPP. See also: decreasing returns to scale, constant returns to scale.

indifference curve

A curve that joins together all the combinations of goods that provide a given level of utility to the individual. A curve of the points which indicate the combina­tions of goods that provide a given level of utility to the individual (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.3 Goods and preferences, Unit 5 The rules of the game: Who gets what and why, Unit 6 The firm and its employees, Unit 7 The firm and its customers, 9.3 Borrowing: Bringing consumption forward in time to the present, Macro, TE1, TE1, TESA, TESA, ESPP, ESPP, ESPP.

Industrial Revolution

A wave of technological advances and organizational changes that began in Britain in the eighteenth century; it transformed an agricultural and craft-based economy into a commercial and industrial economy. A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.5 The continuous technological revolution, 3.9 Explaining our working hours: Changes over time, TE1, TE1, TESA, TESA, ESPP.

inequality aversion

A preference for more equal outcomes and a dislike of outcomes in which some individuals (even if they include oneself) receive more than others. A dislike of outcomes in which some individuals receive more than others. It is considered a social preference (Micro, Macro, ESPP, TE1, TESA). Introduced in TE1, TE1, TESA, ESPP. See also: social preferences

innovation rent

Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form, or marketing strategy (Micro, Macro). Introduced in 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, Macro, Macro.

institution

An institution is a set of laws and informal rules that regulate social interactions among people, and between people and the biosphere; sometimes also termed ‘the rules of the game’. The laws and informal rules that regulate social interactions among people and between people and the biosphere, sometimes also termed the rules of the game. The laws and social customs governing the way people interact in society (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.8 Capitalist institutions, 5.2 Institutions and power, Macro, TE1, TESA, ESPP, ESPP.

interest rate, rate of interest

The price of bringing buying power forward in time, by borrowing. Interest is the additional amount that the borrower promises to repay. The rate of interest is the amount of interest to be repaid per period, as a proportion of the loan (Micro, Macro). Introduced in 9.3 Borrowing: Bringing consumption forward in time to the present, Macro, Macro, TE1, TESA, ESPP. See also: nominal interest rate, real interest rate.

intertemporal choice model

A model representing decision making concerning borrowing, lending, and investing as ways of moving purchasing power forward (to the present) or backward (to the future) in time (Micro, Macro). Introduced in 9.3 Borrowing: Bringing consumption forward in time to the present.

inventories

Inventories are goods held by a firm prior to sale or use, including raw materials, and partially-finished or finished goods intended for sale (Micro, Macro). Introduced in Macro.

inventory investment

Increases in the inventories held by firms are a form of investment, since they are assets that will bring a return to the firm at a later date. Decreases in inventories correspond to negative inventory investment (a reduction in assets) (Micro, Macro). Introduced in Macro. See also: investment, inventories.

investment

Investment is expenditure undertaken in order to generate a return in future: for example, buying financial assets that will generate income in future, or a house that will provide accommodation, or capital goods to be used by a firm to produce output. In the national accounts, investment expenditure refers more specifically to fixed investment (gross fixed capital formation) together with inventory investment (Micro, Macro). Introduced in Unit 9 Lenders and borrowers and differences in wealth. See also: fixed investment, inventory investment.

invisible hand game

A game in which there is a single Nash equilibrium that is Pareto efficient may be called an invisible hand game. A game in which there is a single Nash equilibrium and where there is no other outcome in which both players would be better off or at least one better off and the other not worse off (Micro, Macro, ESPP). Introduced in 4.3 Best responses in the rice–cassava game: Nash equilibrium, ESPP. See also: Nash equilibrium, Pareto efficient.

involuntary unemployment

A person is involuntarily unemployed if they are seeking work, and willing to accept a job at the going wage for people of their level of skill and experience, but unable to secure employment. A person who is seeking work, and willing to accept a job at the going wage for people of their level of skill and experience, but unable to secure employment is involuntarily unemployed (Micro, Macro, ESPP). Introduced in 6.11 Putting the wage-setting model to work: Wages, employment, and the rate of unemployment, Macro, ESPP, ESPP.

isocost line

A line that represents all combinations of inputs that cost a given total amount. A line that represents all combinations that cost a given total amount (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 2 Technology and incentives, TE1, TESA, ESPP.

isoprofit curve

A curve that joins together the combinations of prices and quantities of a good that provide equal profits to a firm. A curve on which all points yield the same profit (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 6 The firm and its employees, Unit 7 The firm and its customers, TESA, ESPP.

joint surplus

The sum of the economic rents of all involved in an economic interaction. The sum of the economic rents of all involved in an interaction. Also known as: gains from exchange. The sum of the economic rents of all involved in an interaction. Also known as: total gains from exchange or trade (Micro, Macro, ESPP, TE1). Introduced in 5.7 Case 2: A take-it-or-leave-it contract, Unit 7 The firm and its customers, TE1, ESPP.

labour discipline problem, labour discipline model

Employers face a labour discipline problem when they need to give employees an incentive to ensure that they work hard and well. In the labour discipline model, they do this by setting wages that include an economic rent (employment rent), which will be lost if the job is terminated (Micro, Macro). Introduced in 6.9 Getting employees to work hard: The labour discipline model, Unit 6 The firm and its employees, TE1, TESA, ESPP, ESPP. See also: employment rent.

labour force

The number of people in the population of working age who are, or wish to be, in work outside the household. They are either employed (including self-employed) or unemployed. The number of people in the population of working age who are, or wish to be, in work outside the household. They are either employed (including self-employed) or unemployed (Micro, Macro, ESPP, TE1, TESA). Introduced in Macro, TE1, TESA, ESPP. See also: unemployment rate, employment rate, participation rate.

labour market

The market in which employers offer wages to individuals who may agree to work under their direction. Economists say that employers are on the demand side of this market, while employees are on the supply side. In this market, employers offer wages to individuals who may agree to work under their direction. Economists say that employers are on the demand side of this market, while employees are on the supply side (Micro, Macro, TE1, TESA). Introduced in 1.8 Capitalist institutions, TE1, TESA. See also: labour force.

labour market power

A firm has labour market power (sometimes called monopsony power) if it can reduce the wage it needs to pay its workers by lowering the number of workers that it employs (Micro, Macro). Introduced in Unit 6 The firm and its employees, Unit 6 The firm and its employees, Macro. See also: monopsony power

labour productivity, productivity of labour

A measure of the effectiveness of the labour input in a production process. Typically it is total output divided by the number of units of labour (e.g. hours, or workers) used to produce it, or in other words the average product of labour (Micro, Macro). Introduced in Macro, Macro, TE1, TE1, TESA, ESPP.

Law of One Price, law of one price

The Law of One Price states that in equilibrium, identical goods or services will be traded at the same price by all buyers and sellers. Holds when a good is traded at the same price across all buyers and sellers. If a good were sold at different prices in different places, a trader could buy it cheaply in one place and sell it at a higher price in another (Micro, Macro, TE1, TESA). Introduced in 8.10 Supply, demand, and competitive equilibrium: Is this a good model?, TE1, TE1, TE1, TE1, TESA. See also: arbitrage.

long run

The term does not refer to a specific length of time, but instead to what is held constant and what can vary within a model. The short run refers to what happens while some variables (such as prices, wages, or capital stock) are held constant (taken to be exogenous). The long run refers to what happens when these variables are allowed to vary and be determined by the model (they become endogenous). A long-run cost curve, for example, refers to costs when the firm can fully adjust all of the inputs including its capital goods (Micro, Macro). Introduced in 7.4 Production and costs: The cost function for Beautiful Cars, 8.7 Short-run and long-run equilibria.

Lorenz curve

A graphical representation of the inequality of some quantity such as income or wealth. Taking income as an example, individuals in the population are arranged in ascending order of income. First we calculate the total income of the population. Then for each level of income, we plot the percentage of total income held by people at this income level or lower, against the percentage of people at this income level or lower. The area between the Lorenz curve and the 45-degree line, expressed as a fraction of the total area below the 45-degree line, is a measure of inequality. Other than for small populations, it is a close approximation to the Gini coefficient. A graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have, and the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, it would be a straight line with a slope of one. The extent to which the curve falls below this perfect equality line is a measure of inequality (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Macro, TE1, TESA, ESPP, ESPP, DE. See also: Gini coefficient.

marginal change

When two variables, x and y, are related to each other, the effect of a marginal change is the change in y that occurs in response to a small increase in x. If y is a continuous function of x, the marginal change in y is the rate of change of y with respect to x: that is, the derivative of the function (Micro, Macro). Introduced in 3.3 Goods and preferences.

marginal cost

The increase in total cost when one additional unit of output is produced. It corresponds to the slope of the total cost function at each point. The addition to total costs associated with producing one additional unit of output. The effect on total cost of producing one additional unit of output. It corresponds to the slope of the total cost function at each point (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.4 Production and costs: The cost function for Beautiful Cars, 8.2 Buying and selling: Demand, supply, and the market-clearing price, Macro, TE1, TE1, TE1, TESA, TESA, TESA, ESPP, ESPP.

marginal external benefit, MEB

The marginal external benefit (MEB) is the beneft of an additional unit of a good for someone other than the decision-maker (or the sum of these benefits if several others are affected). The marginal social benefit is the sum of the MEB and the marginal private benefit to the decision-maker: MSB = MEB + MPB (Micro, Macro).

marginal external cost, MEC, marginal external cost (MEC)

The marginal external cost (MEC) is the cost of an additional unit of output that is incurred by someone other than the producer (or the sum of these costs if several others are affected). The marginal social cost is the sum of the MEC and the marginal private cost to the producer: MSC = MEC + MPC. The cost of producing an additional unit of a good that is incurred by anyone other than the producer of the good (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TESA, ESPP. See also: marginal private cost, marginal social cost.

marginal private benefit, MPB, marginal private benefit (MPB)

The benefit for a producer or consumer of producing or consuming an additional unit of a good. It is called the marginal private benefit, or MPB, to emphasise that it doesn’t include any external benefits conferred on others. The benefit (in terms of profit, or utility) of producing or consuming an additional unit of a good for the individual who decides to produce or consume it, not taking into account any benefit received by others.  (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, Macro, TE1, TESA, ESPP. See also: marginal external benefit, marginal social benefit.

marginal private cost, MPC, marginal private cost (MPC)

The cost for the producer of producing an additional unit of output. It is called the marginal private cost, or MPC (rather than simply the marginal cost) when we want to emphasise that it doesn’t include any external costs that production imposes on others. The cost for the producer of producing an additional unit of a good, not taking into account any costs its production imposes on others (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TESA, ESPP. See also: marginal external cost, marginal social cost.

marginal product

The marginal product of an input to production (for example, the marginal product of labour) is the additional amount of output produced in response to a 1-unit increase in the input. The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 5 The rules of the game: Who gets what and why, TE1, TE1, TESA, TESA, ESPP.

marginal rate of substitution (MRS)

The trade-off that a person is willing to make between two goods. At any point, the MRS is the absolute value of the slope of the indifference curve. The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.3 Goods and preferences, Unit 5 The rules of the game: Who gets what and why, Unit 7 The firm and its customers, Unit 9 Lenders and borrowers and differences in wealth, Macro, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA, ESPP, ESPP, ESPP, ESPP, ESPP. See also: marginal rate of transformation.

marginal rate of transformation (MRT)

The quantity of a good that must be sacrificed to acquire one additional unit of another good. At any point, it is the absolute value of the slope of the feasible frontier. A measure of the trade-offs a person faces in what is feasible. Given the constraints (feasible frontier) a person faces, the MRT is the quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier. The quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.4 The feasible set, Unit 5 The rules of the game: Who gets what and why, Unit 7 The firm and its customers, 9.3 Borrowing: Bringing consumption forward in time to the present, Macro, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA, ESPP, ESPP, ESPP, ESPP, ESPP, ESPP. See also: marginal rate of substitution.

marginal revenue

The change in revenue obtained by increasing the quantity sold by one unit. The change in revenue obtained by increasing the quantity from Q to Q + 1. The increase in revenue obtained by increasing the quantity from Q to Q + 1 (Micro, Macro, TE1, TESA). Introduced in 7.5 Demand, elasticity, and revenue, TE1, TE1, TESA, TESA.

marginal social benefit, MSB, marginal social benefit (MSB)

The marginal social benefit (MSB) is the benefit of the production or consumption of an additional unit of a good, including both the benefit for the producer or consumer (marginal private benefit) and the benefits conferred on others. MSB = MPB + MEB. The benefit (in terms of utility) of producing or consuming an additional unit of a good, taking into account both the benefit to the individual who decides to produce or consume it, and the benefit to anyone else affected by the decision (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, Unit 10 Market successes and failures: The societal effects of private decisions, Macro, TE1, TESA, ESPP.

marginal social cost, MSC, marginal social cost (MSC)

The marginal social cost (MSC) is the cost of producing an additional unit of output, including both the cost for the producer (marginal private cost) and the costs imposed on others (the MEC). MSC = MPC + MEC. The cost of producing an additional unit of a good, taking into account both the cost for the producer and the costs incurred by others affected by the good’s production. Marginal social cost is the sum of the marginal private cost and the marginal external cost (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, Macro, TE1, TESA, ESPP.

marginal utility

The additional utility resulting from a one-unit increase in the amount of a good. The additional utility resulting from a one-unit increase of a given variable (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.3 Goods and preferences, Unit 5 The rules of the game: Who gets what and why, Unit 5 The rules of the game: Who gets what and why, 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1, TESA, ESPP.

market

A market enables people to exchange goods and services by means of directly reciprocated transfers (unlike gifts), voluntarily entered into for mutual benefit (unlike theft, taxation), in a way that is often impersonal (unlike transfers among friends, family). A way that people exchange goods and services by means of directly reciprocated transfers (unlike gifts), voluntarily entered into for mutual benefit (unlike theft, taxation), that is often impersonal (unlike transfers among friends, family). A market is a way of connecting people who may mutually benefit by exchanging goods or services through a process of buying and selling (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.8 Capitalist institutions, ESPP.

market clearing

A market clears when the amount of the good supplied is equal to the amount demanded (Micro, Macro).

market-clearing price

The price at which the amount of the good demanded is equal to the amount supplied. At this price there is no excess supply or excess demand (Micro, Macro, ESPP, TE1, TESA). Introduced in 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1, TESA, ESPP. See also: equilibrium.

market failure

If the allocation resulting from market interactions is not Pareto efficient, we describe the situation as a market failure. The term may be used loosely to refer to any interaction resulting in a Pareto-inefficient allocation, whether or not a specific market is concerned. When markets allocate resources in a Pareto-inefficient way (Micro, Macro, ESPP, TE1, TESA). Introduced in 10.1 Bananas, fish, and cancer, Unit 10 Market successes and failures: The societal effects of private decisions, Macro, TE1, TE1, TESA, TESA, ESPP, ESPP, ESPP, ESPP.

market power

A firm has market power if it can sell its product at a range of feasible prices, so that it can benefit by acting as a price-setter (rather than a price-taker). An attribute of a firm that can sell its product at a range of feasible prices, so that it can benefit by acting as a price-setter (rather than a price-taker) (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, Unit 7 The firm and its customers, TE1, TESA, ESPP.

market share

A firm’s proportion of the market in which its product is sold. It may be measured as its share of the total revenue in the market, or of the total quantity sold in the market (Micro, Macro). Introduced in 7.1 Winning brands, Unit 7 The firm and its customers.

matching market

A market for interactions between two distinct groups, in which the members have different characteristics from other members of their own group, and would benefit from matching with particular members of the other group. For example, firms and workers in the labour market, men and women in what is sometimes called the marriage market. Also known as a two-sided market. A market that matches members of two distinct groups of people. Each person in the market would benefit from being connected to the right member of the other group. Also known as: two-sided market (Micro, Macro, TE1, TESA). Introduced in 6.4 Finding jobs and filling vacancies, Macro, TE1.

merit good

A good or service that should be available to everyone on moral grounds, irrespective of their ability to pay (Micro, Macro). Introduced in 10.11 The limits of markets, Macro.

minimum acceptable offer

In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. More generally in bargaining situations, it is the least favourable offer that would be accepted. In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. Generally applied in bargaining situations to mean the least favourable offer that would be accepted (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, 10.3 Solving the problem: Private bargaining and property rights, TE1, TE1, TESA, TESA, ESPP.

minimum wage

A minimum level of pay laid down by law or regulation, for workers in general or of some specified type. The intention of a minimum wage is to guarantee living standards for the low-paid. Many countries, including the UK and the US, enforce this with legislation (Micro, Macro). Introduced in Unit 6 The firm and its employees.

missing market

When there is no market within which a potentially beneficial exchange or trade could occur, because of asymmetric or non-verifiable information, we say that the market for the good is missing. A market in which there is some kind of exchange that, if implemented, would be mutually beneficial. This does not occur due to asymmetric or non-verifiable information (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, 10.10 Asymmetric information: Hidden attributes and adverse selection, TE1, TESA, ESPP.

monopoly

A firm that is the only seller of a product without close substitutes. Also refers to a market with only one seller (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, TE1, TE1, TESA, ESPP, ESPP. See also: monopoly power, natural monopoly.

monopsony power

A firm has labour market power (sometimes called monopsony power) if it can reduce the wage it needs to pay its workers by lowering the number of workers that it employs. It is sometimes called monopsony power because it applies, in particular, to a firm that is the only employer in a particular labour market (Micro, Macro). Introduced in Unit 6 The firm and its employees.

moral hazard, hidden actions

If there is a conflict of interest between a principal and an agent over the agent taking some action that cannot be observed or cannot be verified by a court, then the principal faces a problem of hidden actions; also known as moral hazard (Micro, Macro). Introduced in Unit 9 Lenders and borrowers and differences in wealth, Unit 10 Market successes and failures: The societal effects of private decisions, Macro, Macro, TE1, TE1, TESA, TESA, ESPP.

Nash equilibrium

A Nash equilibrium is an economic outcome where none of the individuals involved could bring about an outcome they prefer by unilaterally changing their own action. More formally, in game theory it is defined as a set of strategies, one for each player in the game, such that each player’s strategy is a best response to the strategies chosen by everyone else. A set of strategies, one for each player in the game, such that each player’s strategy is a best response to the strategies chosen by everyone else (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.3 Best responses in the rice–cassava game: Nash equilibrium, 6.9 Getting employees to work hard: The labour discipline model, 7.10 Markets with few firms: Strategic price setting, Unit 8 Supply and demand: Markets with many buyers and sellers, Macro, Macro, Macro, Macro, Macro, TE1, TE1, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA, TESA, ESPP, ESPP, ESPP, ESPP, ESPP. See also: game theory.

natural experiment

An empirical study that exploits a difference in the conditions affecting two populations (or two economies), that has occurred for external reasons: for example, differences in laws, policies, or weather. Comparing outcomes for the two populations gives us useful information about the effect of the conditions, provided that the difference in conditions was caused by a random event. But it would not help, for example, in the case of a difference in policy that occurred as a response to something else that might affect the outcome. An empirical study exploiting naturally occurring statistical controls in which researchers do not have the ability to assign participants to treatment and control groups, as is the case in conventional experiments. Instead, differences in law, policy, weather, or other events can offer the opportunity to analyse populations as if they had been part of an experiment. The validity of such studies depends on the premise that the assignment of subjects to the naturally occurring treatment and control groups can be plausibly argued to be random (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in 1.10 Capitalism, causation, and history’s hockey stick, Unit 6 The firm and its employees, Macro, Macro, Macro, TE1, TE1, TE1, TESA, TESA, TESA, ESPP, ESPP, ESPP, ESPP, DE, DE, DE, DE, DE.

natural monopoly

A production process in which the average cost curve is sufficiently downward-sloping, even in the long run, that a single firm can supply the whole market at lower average cost than two firms, making it impossible to sustain competition. A production process in which the long-run average cost curve is sufficiently downward-sloping to make it impossible to sustain competition among firms in this market (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.11 Firms and markets with decreasing long-run average costs, TE1, TE1, TESA, ESPP.

net worth

The net worth (or equivalently, wealth) of an individual, household, or organization is the difference between the total value of its assets and the total value of its liabilities. Assets less liabilities (Micro, Macro, ESPP, TE1, TESA). Introduced in Macro, Macro, TE1, TESA, ESPP. See also: balance sheet, equity.

network economies of scale

A firm experiences network economies of scale when an increase in the number of users of an output of the firm implies an increase in the value of the output to each of them, because they are connected to each other. These exist when an increase in the number of users of an output of a firm implies an increase in the value of the output to each of them, because they are connected to each other (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.3 Economies of scale and the cost advantages of large-scale production, TE1, TESA, ESPP.

no-shirking condition

The condition that must be satisfied by the wage to ensure that the worker’s pay-off from exerting the level of effort required by the employer is greater than or equal to the pay-off from shirking (Micro, Macro). Introduced in 6.9 Getting employees to work hard: The labour discipline model. See also: no-shirking wage

no-shirking wage

The wage that is just sufficient to motivate a worker to provide effort at the level specified by their employer (Micro, Macro). Introduced in 6.9 Getting employees to work hard: The labour discipline model, Unit 6 The firm and its employees, Macro. See also: no-shirking condition

nominal interest rate

An interest rate is nominal if it is not corrected for inflation. The rates quoted by high-street banks on loans and savings accounts are nominal interest rates. The price of bringing some spending power (in dollars or other nominal terms) forward in time. The policy rate and the lending rate quoted by commercial banks are examples of nominal interest rates. The interest rate uncorrected for inflation. It is the interest rate quoted by high-street banks (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.3 Borrowing: Bringing consumption forward in time to the present, Macro, Macro, TE1, TESA, ESPP, ESPP. See also: real interest rate, interest rate.

non-excludable, non-excludability

A good is non-excludable if it is impossible to prevent anyone from having access to it (Micro, Macro).

non-rival, non-rivalry

A good is non-rival if, when it is made available to one person, it can be made available to everyone else at no additional cost. Non-rivalry is the primary characteristic of a public good (Micro, Macro). Introduced in 10.6 Public goods, non-rivalry, and excludability: A model of radio broadcasting.

non-verifiable information, unverifiable information

Information is verifiable if it can be verified by a court and hence used to enforce a contract (Micro, Macro). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions.

normal profits

Normal profits are the returns on investment that the firm must pay to the shareholders to induce them to hold shares. The normal profit rate is equal to the opportunity cost of capital and is included in the firm’s costs. Any additional profit (revenue greater than costs) is called economic profit. A firm making normal profits is making zero economic profit. Corresponds to zero economic profit and means that the rate of profit is equal to the opportunity cost of capital (Micro, Macro, TE1, TESA). Introduced in Unit 7 The firm and its customers, 8.7 Short-run and long-run equilibria, TE1. See also: economic profit, opportunity cost of capital.

open-access resource

A resource that is rival or partially rival (more people using it reduces the benefits to others) but non-excludable (it is impossible to exclude anyone from using it) (Micro, Macro). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions.

opportunity cost

What you lose when you choose one action rather than the next best alternative. Example: ‘I decided to go on vacation rather than take a summer job. The job was boring and badly paid, so the opportunity cost of going on vacation was low.’ The opportunity cost of some action A is the foregone benefit that you would have enjoyed if instead you had taken some other action B. This is called an opportunity cost because by choosing A you give up the opportunity of choosing B. It is called a cost because the choice of A costs you the benefit you would have experienced had you chosen B. When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, 3.4 The feasible set, Unit 5 The rules of the game: Who gets what and why, 7.4 Production and costs: The cost function for Beautiful Cars, 9.3 Borrowing: Bringing consumption forward in time to the present, Macro, Macro, TE1, TE1, TE1, TE1, TESA, TESA, TESA, ESPP, ESPP.

opportunity cost of capital

The opportunity cost of capital is the amount of income an investor could have received, per unit of investment spending, by investing elsewhere. The amount of income an investor could have received by investing the unit of capital elsewhere (Micro, Macro, TE1, TESA). Introduced in 7.4 Production and costs: The cost function for Beautiful Cars, 8.7 Short-run and long-run equilibria, Macro, TE1.

Pareto criterion

The Pareto criterion is a way of comparing two allocations, A and B. It states that A is an improvement on B if at least one person would be strictly better off with A than B (in other words, would strictly prefer A to B) and nobody would be worse off. We say that A Pareto dominates B. According to the Pareto criterion, a desirable attribute of an allocation is that it be Pareto efficient. According to the Pareto criterion, a desirable attribute of an allocation is that it be Pareto-efficient (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, Unit 5 The rules of the game: Who gets what and why, TE1, TESA, ESPP, ESPP. See also: Pareto dominant.

Pareto dominate, Pareto dominant

Allocation A Pareto dominates allocation B if it is better according to the Pareto criterion. That is, at least one person would be strictly better off with A than B, and nobody would be worse off (Micro, Macro). Introduced in Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP. See also: Pareto criterion.

Pareto efficiency curve

The set of all allocations that are Pareto efficient. The Pareto efficiency curve is sometimes called the ‘contract curve’, even though it is not necessary for any contract to be involved. The set of all allocations that are Pareto efficient. Often referred to as the contract curve, even in social interactions in which there is no contract, which is why we avoid the term (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.9 Case 3 continued: Negotiating to a Pareto-efficient sharing of the surplus, TE1, TESA, ESPP. See also: Pareto efficient.

Pareto efficient, Pareto efficiency

An allocation is Pareto efficient if there is no feasible alternative allocation in which at least one person would be better off, and nobody worse off (Micro, Macro). Introduced in Unit 4 Strategic interactions and social dilemmas, Unit 5 The rules of the game: Who gets what and why, Unit 5 The rules of the game: Who gets what and why, 5.9 Case 3 continued: Negotiating to a Pareto-efficient sharing of the surplus, Unit 7 The firm and its customers, Unit 8 Supply and demand: Markets with many buyers and sellers, 10.1 Bananas, fish, and cancer, Macro, Macro, TE1, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA, ESPP, ESPP, ESPP, ESPP.

Pareto improvement

A change that benefits at least one person without making anyone else worse off (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, 5.9 Case 3 continued: Negotiating to a Pareto-efficient sharing of the surplus, Unit 7 The firm and its customers, TE1, TE1, TE1, TESA, TESA, TESA, ESPP, ESPP. See also: Pareto dominant.

patent

A right of exclusive ownership of an idea or invention, which lasts for a specified length of time. During this time, it effectively allows the owner to be a monopolist or exclusive user. A right of exclusive ownership of an idea or invention, which lasts for a specified length of time. During this time it effectively allows the owner to be a monopolist or exclusive user (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TE1, TESA, ESPP, ESPP.

pay-off

The pay-off for an individual player in a game is the benefit that the player receives as a result of the joint actions of all the players (Micro, Macro). Introduced in Unit 4 Strategic interactions and social dilemmas.

perfect competition

Perfect competition is the type of interaction between buyers and sellers that takes place in the equilibrium of a market when (i) there are many buyers and sellers of identical goods, and (ii) supply equals demand and all participants act as price-takers (Micro, Macro). Introduced in 8.10 Supply, demand, and competitive equilibrium: Is this a good model?.

perfectly competitive

A market may be described as perfectly competitive if (i) there are many buyers and many sellers of identical goods, all acting independently, who are aware of prices and always choose the best price they can get, and (ii) the market is in competitive equilibrium, with supply equal to demand and all buyers and sellers acting as price-takers (Micro, Macro). Introduced in 8.10 Supply, demand, and competitive equilibrium: Is this a good model?.

piece rate

Under a piece rate contract, a worker is paid a fixed amount for each unit (‘piece’) of the product made (Micro, Macro). Introduced in 6.6 Getting the work done: Contracts, principals, and agents.

Pigouvian subsidy

A government subsidy on activities that generate positive external effects, so as to correct an inefficient outcome. A government subsidy to encourage an economic activity that has positive external effects. Example: subsidizing basic research. A government subsidy to encourage an economic activity that has positive external effects. (For example, subsidizing basic research.) A government subsidy to encourage an economic activity that has positive external effects. (For example, subsidizing basic research) (Micro, Macro, ESPP, TE1, TESA). See also: external effect, Pigouvian tax

Pigouvian tax

A tax levied on activities that generate negative external effects so as to correct an inefficient market outcome (Micro, Macro, ESPP, TE1, TESA). Introduced in 10.4 Solving the problem: Regulation, taxation, and compensation, TE1, TESA, ESPP. See also: external effect, Pigouvian subsidy.

political system

A political system determines how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population. A set of principles, laws, and procedures that determine how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.12 Varieties of capitalism: Institutions, government, and politics, TE1, TESA, ESPP.

power

The ability to do (and get) the things one wants in opposition to the intentions of others. The ability to do (and get) the things one wants in opposition to the intentions of others, ordinarily by imposing or threatening sanctions (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.2 Institutions and power, TE1, TESA, ESPP.

preferences

A description of the relative values a person places on each possible outcome of a choice or decision they have to make. A description of the benefit or cost we associate with each possible outcome (Micro, Macro, TE1, TESA). Introduced in 3.3 Goods and preferences, 4.7 Social preferences: Altruism, Unit 5 The rules of the game: Who gets what and why, 9.3 Borrowing: Bringing consumption forward in time to the present, Macro, TE1, TESA, ESPP, ESPP, ESPP, ESPP.

price discrimination

A selling strategy in which different prices are set for different buyers or groups of buyers based on the buyers’ differing willingness to pay. A selling strategy in which different prices for the same product are set for different buyers or groups of buyers, or per-unit prices vary depending on the number of units purchased. A selling strategy in which different prices are set for different buyers or groups of buyers, or prices vary depending on the number of units purchased (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, TE1, TESA, TESA, ESPP.

price elasticity of demand

The percentage change in demand that would occur in response to a 1% increase in price. We express this as a positive number. Demand is elastic if this is greater than 1, and inelastic if less than 1 (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.5 Demand, elasticity, and revenue, Macro, Macro, TE1, TESA, ESPP, ESPP, ESPP.

price markup

The price minus the marginal cost divided by the price. In other words, the profit margin as a proportion of the price. If the firm sets the price to maximize its profits, the markup is inversely proportional to the elasticity of demand for the good at that price. The price minus the marginal cost, divided by the price. It is inversely proportional to the elasticity of demand for this good. The price minus the marginal cost divided by the price. It is inversely proportional to the elasticity of demand for this good (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, Macro, TE1, TESA, ESPP, ESPP.

price-taker

A buyer or seller acts as a price-taker if they cannot benefit from attempting to trade at any other price than the prevailing market price. A price-taker has no power to influence the market price, but can buy or sell as many items as they wish at that price. Characteristic of producers and consumers who cannot benefit by offering or asking any price other than the market price in the equilibrium of a competitive market. They have no power to influence the market price (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 8 Supply and demand: Markets with many buyers and sellers, TE1, TESA, ESPP.

principal-agent relationship, principal-agent problem

A principal–agent relationship or problem exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute, that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract (Micro, Macro). Introduced in 6.6 Getting the work done: Contracts, principals, and agents, Unit 9 Lenders and borrowers and differences in wealth, Macro, TE1, TE1, TE1, TE1, TE1, TE1, TESA, TESA, TESA, TESA, ESPP, ESPP, ESPP, ESPP, ESPP, DE. See also: incomplete contract.

prisoners' dilemma

A prisoners’ dilemma is a game that has a dominant strategy equilibrium, but also has an alternative outcome that gives a higher pay-off to all players. So the Nash equilibrium is not Pareto efficient. A game in which the payoffs in the dominant strategy equilibrium are lower for each player, and also lower in total, than if neither player played the dominant strategy (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP, ESPP, ESPP.

private good

A good that is rival (when one person consumes a unit of the good, that unit is not available to others) and excludable (people can be prevented from consuming it). A good that is both rival, and from which others can be excluded (Micro, Macro, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TESA.

private property

Something is private property if the person possessing it has the right to exclude others from it, to benefit from the use of it, and to exchange it with others. The right and expectation that one can enjoy one’s possessions in ways of one’s own choosing, exclude others from their use, and dispose of them by gift or sale to others who then become their owners (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.8 Capitalist institutions, Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TE1, TESA, TESA, ESPP, ESPP.

procedural judgement of fairness

An evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself (for example, how unequal it is) (Micro, Macro). Introduced in Unit 5 The rules of the game: Who gets what and why. See also: substantive judgement of fairness.

producer surplus

The producer of a good receives a surplus on each unit, equal to the price minus the marginal cost of producing it. The term ‘producer surplus’ normally refers to the sum of these surpluses across all units sold. The price at which a firm sells a good minus the minimum price at which it would have been willing to sell the good, summed across all units sold (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, Unit 8 Supply and demand: Markets with many buyers and sellers, TE1, TESA, ESPP.

production function

A production function is a graphical or mathematical description of the relationship between the quantities of the inputs to a production process and the amount of output produced. When used to represent output in the whole economy, it is described as an aggregate production function. A graphical or mathematical expression describing the amount of output that can be produced by any given amount or combination of input(s). The function describes differing technologies capable of producing the same thing (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 1 Prosperity, inequality, and planetary limits, Unit 2 Technology and incentives, Unit 5 The rules of the game: Who gets what and why, Macro, Macro, TE1, TE1, TESA, TESA, TESA, ESPP.

profit, economic profit

A firm’s profit is its revenue minus its total costs. We often refer to profit as ‘economic profit’ to emphasise that costs include the opportunity cost of capital (which is not included in ‘accounting profit’) (Micro, Macro). Introduced in 7.1 Winning brands, Unit 7 The firm and its customers, 8.7 Short-run and long-run equilibria, Macro, TE1, ESPP.

profit margin

The difference between the price of a product and its marginal production cost. The difference between the price and the marginal cost (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.1 Winning brands, Unit 7 The firm and its customers, Macro, TE1, TESA, ESPP, ESPP.

property rights

Legal protection of ownership, including the right to exclude others and to benefit from or sell the thing owned. Property rights may cover broadly-defined goods such as clean water, safety, or education, if these are protected by the legal system (Micro, Macro, ESPP, TE1, TESA). Introduced in 5.5 Institutions, and the case of the independent farmer, 10.3 Solving the problem: Private bargaining and property rights, TE1, TESA, ESPP.

public good

A good that, if available to anyone, can be made available to everyone at no additional cost. This characteristic is called non-rivalry. Some economists define public goods more strictly as goods that are both non-rival and non-excludable (non-excludable means that it is impossible to prevent anyone from consuming them). A good for which use by one person does not reduce its availability to others. Also known as: non-rival good (Micro, Macro, ESPP, TE1, TESA). Introduced in 10.6 Public goods, non-rivalry, and excludability: A model of radio broadcasting, Macro, TE1, TE1, TE1, TE1, TESA, TESA, TESA, ESPP. See also: non-excludable public good, artificially scarce good.

public good game

A public good game is a game in which individual players can take an action that would be costly to themselves, but would produce benefits for all players (including themselves) (Micro, Macro). Introduced in 4.6 Public good games and cooperation.

purchasing power parity (PPP)

PPPs are price indices that measure how much it costs to purchase a basket of goods and services compared to how much it costs to purchase the same basket in a reference country in a particular year, such as the United States in 211. A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.4 Inequality in global income, Macro, TE1, TESA, ESPP. See also: constant prices.

quasi-linear, quasi-linear function

A utility function is said to be quasi-linear if it depends linearly on the amount of one good, and non-linearly on another. The marginal rate of substitution between the two goods then depends only on the non-linear variable (Micro, Macro). Introduced in Unit 5 The rules of the game: Who gets what and why.

real interest rate

An interest rate corrected for expected inflation (that is, the nominal interest rate minus the expected rate of inflation). It represents how many goods in the future one gets for the goods not consumed now. The price of bringing some real spending power forward in time. The interest rate corrected for inflation (that is, the nominal interest rate minus the rate of inflation). It represents how many goods in the future one gets for the goods not consumed now (Micro, Macro, ESPP, TE1, TESA). Introduced in 9.3 Borrowing: Bringing consumption forward in time to the present, Macro, Macro, TE1, TESA, ESPP. See also: nominal interest rate, interest rate.

reciprocity

A preference to be kind to or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind. A preference concerning one’s actions towards others that depends on an evaluation of the others’ actions or character, for example, a preference to help those who have helped you or in some other way acted well (in your opinion), and to harm those who have acted poorly. It is considered a social preference. A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP. See also: social preferences.

relationship-specific asset

An asset is something that is owned and has value. It is relationship-specific if it is only of value within an economic relationship (e.g. a contract for one firm to supply another). Relationship-specific assets include any knowledge or skills that are only valuable while a person remains employed in a particular firm (Micro, Macro). Introduced in 6.4 Finding jobs and filling vacancies. See also: firm-specific asset.

relative price

The price of one good or service compared to another (usually expressed as a ratio of the two prices). The price of one good or service compared to another (usually expressed as a ratio) (Micro, Macro, TE1, TESA). Introduced in 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, TE1, TE1, TESA, TESA.

rent ceiling

The maximum legal price a landlord can charge for a rent (Micro, Macro, TE1, TESA). Introduced in 8.13 Price controls, TE1, TESA.

research and development

Expenditures by a private or public entity to create new methods of production, products, or other economically relevant new knowledge (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.3 Economies of scale and the cost advantages of large-scale production, TE1, TESA, ESPP.

reservation indifference curve

A curve that indicates combinations of goods that are as highly valued as one’s reservation option. A curve that indicates allocations (combinations) that are as highly valued as one’s reservation option (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 5 The rules of the game: Who gets what and why, Unit 9 Lenders and borrowers and differences in wealth, TE1, TE1, TESA, TESA, ESPP, ESPP. See also: reservation option.

reservation option

When someone makes a choice amongst the available options in a particular transaction, the reservation option is their next best alternative option. Also known as: fallback option. A person’s next best alternative among all options in a particular transaction. Also known as: fallback option (Micro, Macro, ESPP, TE1, TESA). Introduced in 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, Unit 5 The rules of the game: Who gets what and why, 6.5 Managing hiring and quitting: The reservation wage curve, 10.3 Solving the problem: Private bargaining and property rights, TE1, TE1, TE1, TESA, TESA, TESA, ESPP, ESPP. See also: reservation price.

reservation price

The lowest price at which someone is willing to sell a good. The lowest price at which someone is willing to sell a good (keeping the good is the potential seller’s reservation option) (Micro, Macro, ESPP, TE1, TESA). Introduced in 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1, TESA, ESPP. See also: reservation option.

reservation wage

The reservation wage is the lowest wage a worker is willing to accept to take up a new job. It is the wage available in the worker’s next best job option (the reservation option). For workers whose next best option is unemployment, the reservation wage takes into account the wages they expect to receive when they find a new job as well as any income received while unemployed. What an employee would get in alternative employment, or from an unemployment benefit or other support, were he or she not employed in his or her current job (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.5 Managing hiring and quitting: The reservation wage curve, Unit 6 The firm and its employees, Unit 6 The firm and its employees, Macro, Macro, TE1, TE1, TESA, TESA, ESPP.

residual claimant

The person who receives the income left over from a firm or other project after the payment of all contractual costs (for example, the cost of hiring workers and paying taxes). The person who receives the income left over from a firm or project after the payment of all contractual costs (for example the cost of hiring workers and paying taxes). The person who receives the income left over from a firm or other project after the payment of all contractual costs (for example the cost of hiring workers and paying taxes) (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.3 Other people’s money: The separation of ownership and control, TE1, TESA, ESPP.

risk aversion, risk-averse

A risk-averse person has a preference for certainty (for example, getting $1 for sure) over a risky outcome of the same average value (such as a 5-5 chance of getting $2 or nothing) (Micro, Macro). Introduced in 9.11 How good is the model?, Macro, ESPP.

rival, partially rival

A good is rival if, when one person consumes a unit of the good, no-one else can consume that unit. It is partially rival if more people using the good reduces the benefits available to other users (Micro, Macro). See also: non-rival.

saving

When consumption expenditure is less than net income, saving takes place and wealth rises (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 9 Lenders and borrowers and differences in wealth, TE1, TESA, ESPP. See also: wealth.

scarcity

A good is scarce if it is valued, and there is an opportunity cost of acquiring more of it. A good that is valued, and for which there is an opportunity cost of acquiring more (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.2 A problem of choice and scarcity, TESA, TESA, ESPP.

search unemployment

Since workers differ from each other, and so do jobs, unemployed workers and firms with vacancies spend time searching for an employment match that suits them both. Unemployment caused by the search and matching process is called search unemployment (Micro, Macro). Introduced in 6.11 Putting the wage-setting model to work: Wages, employment, and the rate of unemployment.

separation of ownership and control

The attribute of some firms by which managers are a separate group from the owners (Micro, Macro, ESPP, TE1, TESA). Introduced in 6.3 Other people’s money: The separation of ownership and control, TE1, TESA, ESPP.

sequential game

A game in which players do not all choose their strategies at the same time, and players who choose later can see the strategies already chosen by the other players. An example is the ultimatum game. A game in which all players do not choose their strategies at the same time, and players that choose later can see the strategies already chosen by the other players, for example the ultimatum game (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP. See also: simultaneous game.

shares, stocks

Shares (also known as stocks) are financial assets that can be bought and sold, giving their owners (the shareholders) shared ownership of the assets of a firm, and therefore a right to receive a corresponding share of the firm’s profit (Micro, Macro). Introduced in 6.3 Other people’s money: The separation of ownership and control, Unit 9 Lenders and borrowers and differences in wealth, Unit 2 Technology and incentives, Macro, TE1, TE1, TESA, TESA, ESPP, ESPP, TE1, TE1, TESA.

short run

The term does not refer to a specific length of time, but instead to what happens while some things (such as prices, wages, capital stock, technology, or institutions) are assumed to be held constant (they are assumed to be fixed, or exogenous). For example, the firm’s stock of capital goods may be fixed in the short run, but in the longer run the firm could vary it (by selling some, or buying more) (Micro, Macro). Introduced in 7.4 Production and costs: The cost function for Beautiful Cars, 8.7 Short-run and long-run equilibria.

simultaneous game

A game in which the players choose their strategies simultaneously, for example, the prisoners’ dilemma. A game in which players choose strategies simultaneously, for example the prisoners’ dilemma (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP. See also: sequential game.

social dilemma

A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome that is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals. A situation in which actions, taken independently by individuals in pursuit of their own private objectives, may result in an outcome that is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals. A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.1 Climate negotiations: Conflicts and common interests, TE1, TE1, TESA, TESA, ESPP, ESPP.

social interactions

Situations in which the actions taken by each person affect other people’s outcomes as well as their own (Micro, Macro, TE1, TESA). Introduced in 4.1 Climate negotiations: Conflicts and common interests, Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP.

social norm

An understanding that is common to most members of a society about what people should do in a given situation when their actions affect others (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.6 Public good games and cooperation, TE1, TE1, TESA, TESA, ESPP.

social preferences

An individual is said to have social preferences if their individual utility depends on what happens to other people, as well as on their own pay-offs. A person with social preferences cares not only about how her action affects her personally, but also about how it affects other people. Also known as: other-regarding preferences. Preferences that place a value on what happens to other people, even if it results in lower payoffs for the individual. Preferences that place a value on what happens to other people, and on acting morally, even if it results in lower payoffs for the individual (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.7 Social preferences: Altruism, TE1, TE1, TESA, ESPP.

stock

A quantity measured at a point in time, such as a firm’s stock of capital goods, or the amount of carbon dioxide in the atmosphere. Its units do not depend on time. A quantity measured at a point in time. Its units do not depend on time (Micro, Macro, TE1, TESA). Introduced in Unit 2 Technology and incentives, Unit 9 Lenders and borrowers and differences in wealth, TE1, TE1, TESA. See also: flow.

strategic interaction

A social interaction in which the participants are aware of the ways in which their actions affect others (and the ways in which the actions of others affect them). A social interaction in which the participants are aware of the ways that their actions affect others (and the ways that the actions of others affect them) (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP.

strategy

An action (or action plan) that a person may choose, while being aware that the outcomes for themselves and others depend on their own strategy and the strategies chosen by others. An action (or a course of action) that a person may take when that person is aware of the mutual dependence of the results for herself and for others. The outcomes depend not only on that person’s actions, but also on the actions of others (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 4 Strategic interactions and social dilemmas, TE1, TESA, ESPP.

subsistence level

The level of living standards (measured by consumption or income) below which the population will decline. The level of living standards (measured by consumption or income) such that the population will not grow or decline (Micro, Macro, TE1, TESA). Introduced in Unit 1 Prosperity, inequality, and planetary limits, TE1, TESA.

substantive judgement of fairness

An evaluation of an outcome based on the characteristics of the allocation itself, not how it was determined (Micro, Macro). Introduced in Unit 5 The rules of the game: Who gets what and why. See also: procedural judgement of fairness.

substitutes

Two goods (or services) are described as substitutes when consumers would readily replace one with the other if the prices were similar. If the price of one of the goods increased, consumers would be more likely to choose the other (so demand for it would increase). Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, TE1, TE1, TESA, ESPP. See also: complements.

substitution effect

When the price of a good changes, the substitution effect is the change in the consumption of the good that occurs because of the change in the good’s relative price. The price change also has an income effect, because it expands or shrinks the feasible set. The effect for example, on the choice of consumption of a good that is only due to changes in the price or opportunity cost, given the new level of utility. The effect that is only due to changes in the price or opportunity cost, given the new level of utility (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.6 Hours of work and technological progress, 3.7 Income and substitution effects on hours of work and free time, Unit 9 Lenders and borrowers and differences in wealth, Macro, TE1, TE1, TE1, TESA, ESPP, ESPP. See also: income effect.

supply curve

A supply curve shows the number of units of output that would be supplied to the market at any given price. The firm’s supply curve shows the units supplied by an individual firm, and the market (or industry) supply curve shows the total number of units supplied by all sellers in the market (or firms in the industry). Also known as: supply function. The curve that shows the number of units of output that would be produced at any given price. For a market, it shows the total quantity that all firms together would produce at any given price (Micro, Macro, ESPP, TE1, TESA). Introduced in 8.2 Buying and selling: Demand, supply, and the market-clearing price, Unit 8 Supply and demand: Markets with many buyers and sellers, TE1, TESA, ESPP.

tax incidence

The effect of a tax on the surplus of buyers, sellers, or both. The effect of a tax on the welfare of buyers, sellers, or both (Micro, Macro, TE1, TESA). Introduced in 8.12 The effect of a tax, TE1, TESA.

technological progress

A change in technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of the output (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.5 The continuous technological revolution, TE1, TESA, ESPP, ESPP.

technology

The description of a process that uses a set of materials and other inputs, including the work of people and machines, to produce an output. A process taking a set of materials and other inputs, including the work of people and capital goods (such as machines), to produce an output. The description of a process using a set of materials and other inputs, including the work of people and machines, to produce an output. A process taking a set of materials and other inputs, including the work of people and machines, to produce an output (Micro, Macro, ESPP, TE1, TESA). Introduced in 1.5 The continuous technological revolution, Unit 2 Technology and incentives, Unit 5 The rules of the game: Who gets what and why, TE1, TESA, ESPP.

total costs

The sum of all the costs a firm incurs to produce its total output (Micro, Macro). Introduced in Unit 7 The firm and its customers.

total revenue, revenue

A firm’s total revenue is the number of units sold times the price per unit (Micro, Macro). Introduced in Unit 7 The firm and its customers, 7.5 Demand, elasticity, and revenue.

transaction costs

Costs that impede the bargaining process or the agreement of a contract. They include costs of acquiring information about the good to be traded, and costs of enforcing a contract (Micro, Macro, ESPP, TE1, TESA). Introduced in 10.3 Solving the problem: Private bargaining and property rights, TE1, TESA, ESPP.

ultimatum game

A game in which the first player proposes a division of a ‘pie’ with the second player, who may either accept, in which case they each get the division proposed by the first person, or reject the offer, in which case both players receive nothing. An interaction in which the first player proposes a division of a ‘pie’ with the second player, who may either accept, in which case they each get the division proposed by the first person, or reject the offer, in which case both players receive nothing (Micro, Macro, ESPP). Introduced in Unit 4 Strategic interactions and social dilemmas, 5.2 Institutions and power, ESPP.

unemployment benefit

A government transfer that is paid to an unemployed person while they are unemployed (or for part of the unemployment period). Also known as unemployment insurance. A government transfer that is paid to an unemployed person while they are unemployed (or for part of the unemployment period). Also known as: unemployment insurance. A government transfer received by an unemployed person. Also known as: unemployment insurance (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 6 The firm and its employees, Macro, Macro, TE1, TESA, ESPP.

utility

A numerical indicator of the value that one places on an outcome. Outcomes with higher utility will be chosen in preference to lower valued ones when both are feasible. A numerical indicator of the value that one places on an outcome, such that higher-valued outcomes will be chosen over lower-valued ones when both are feasible. A numerical indicator of the value that one places on an outcome, such that higher valued outcomes will be chosen over lower valued ones when both are feasible (Micro, Macro, ESPP, TE1, TESA). Introduced in 3.3 Goods and preferences, 4.7 Social preferences: Altruism, 6.5 Managing hiring and quitting: The reservation wage curve, Unit 6 The firm and its employees, Unit 9 Lenders and borrowers and differences in wealth, Macro, TE1, TE1, TE1, TESA, TESA, TESA, ESPP, ESPP, ESPP.

utility function

A utility function is a mathematical representation of a person’s preferences for one or more goods. It gives a numerical value to the amount of utility the person obtains from each possible combination of goods (Micro, Macro). Introduced in 3.3 Goods and preferences.

variable costs

Costs of production that vary with the number of units produced (Micro, Macro). Introduced in 7.4 Production and costs: The cost function for Beautiful Cars.

Veblen effect

A negative effect on others that arises from a person’s consumption of goods such as luxury housing, clothing, or vehicles, that display or signal social status. A negative external effect that arises from the consumption of a positional good. Examples include the negative external effects imposed on others by the consumption of luxury housing, clothing, or vehicles (Micro, Macro, ESPP). Introduced in 3.10 Application: Work hours, free time, and inequality, ESPP. See also: conspicuous consumption.

verifiable information

Information is verifiable if it can be verified by a court and hence used to enforce a contract. Information that can be used to enforce a contract (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 10 Market successes and failures: The societal effects of private decisions, TE1, TESA, ESPP.

wealth

The stock of things owned, or value of that stock. Wealth may generate income, or contribute to the owner’s wellbeing in some other way. It includes the market value of a home, car, any land, buildings, machinery, or other capital goods that a person may own, and any financial assets such as shares or bonds. To calculate wealth, debts are subtracted—for example, the mortgage owed to the bank. Debts owed to the person are added. Stock of things owned or value of that stock. It includes the market value of a home, car, any land, buildings, machinery, or other capital goods that a person may own, and any financial assets, such as bank deposits, shares, bonds, or loans made to others. Debts to others are subtracted from wealth—for example, the mortgage owed to the bank. Stock of things owned or value of that stock. It includes the market value of a home, car, any land, buildings, machinery or other capital goods that a person may own, and any financial assets such as shares or bonds. Debts are subtracted—for example, the mortgage owed to the bank. Debts owed to the person are added (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 9 Lenders and borrowers and differences in wealth, Macro, Macro, TE1, TESA, ESPP.

willingness to accept (WTA)

An indicator of how much a person values a good, measured by the minimum amount of money they would accept in exchange for a unit of the good (that is, their reservation price). The reservation price of a potential seller, who will be willing to sell a unit only for a price at least this high (Micro, Macro, ESPP, TE1, TESA). Introduced in 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1, TESA, ESPP. See also: willingness to pay.

willingness to pay (WTP)

An indicator of how much a person values a good, measured by the maximum amount they would pay to acquire a unit of the good. An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good (Micro, Macro, ESPP, TE1, TESA). Introduced in 7.5 Demand, elasticity, and revenue, 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1, TE1, TESA, TESA, ESPP. See also: willingness to accept.