TESA Glossary

abatement

Practices to limit or reverse environmental damages (TE1, TESA). See also: abatement policy.

abatement policy

A policy designed to reduce environmental damages (TE1, TESA). Introduced in TE1. See also: abatement.

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 Micro, TE1, TE1. See also: comparative advantage.

accountability

The obligation of a decision-maker (or body) to be responsive to the needs and wishes of people affected by his, her or its decisions (ESPP, TE1, TESA).

acyclical

No tendency to move either in the same or opposite direction to aggregate output and employment over the business cycle (TE1, TESA). Introduced in TE1.

adjustment gap

The lag between some outside change in labour market conditions and the movement of the economy to the neighbourhood of the new equilibrium (TE1, TESA). Introduced in TE1.

administratively feasible

Policies for which the government has sufficient information and staff for implementation (ESPP, TE1, TESA). Introduced in TE1, ESPP.

adverse selection

The problem faced by parties to an exchange in which the terms offered by one party will cause some exchange partners to drop out. Example: The problem of asymmetric information in insurance. If the price is sufficiently high, the only people who will seek to purchase medical insurance are people who know they are ill (but the insurer does not). This will lead to further price increases to cover costs. Also referred to as the ‘hidden attributes’ problem (the state of already being ill is the hidden attribute), to distinguish it from the ‘hidden actions’ problem of moral hazard. The problem faced by parties to an exchange in which the terms offered by one party will cause some exchange partners to drop out. An example is the problem of asymmetric information in insurance: if the price is sufficiently high, the only people who will seek to purchase medical insurance are people who know they are ill (but the insurer does not). This will lead to further price increases to cover costs. Also referred to as the ‘hidden attributes’ problem (the state of already being ill is the hidden attribute), to distinguish it from the ‘hidden actions’ problem of moral hazard (ESPP, TE1, TESA). Introduced in 12.5 Public goods, TE1, ESPP. See also: incomplete contract, moral hazard, asymmetric information.

aggregate demand

The total of the components of planned spending in the economy: AD = C + I + G + X – M. It is the total amount of demand for (or planned expenditure on) goods and services produced in the economy. The total of the components of spending in the economy, added to get GDP: Y = C + I + G + X – M. It is the total amount of demand for (or expenditure on) goods and services produced in the economy (Macro, TE1, TESA). Introduced in 13.4 Measuring the aggregate economy: The components of GDP, 14.1 The transmission of shocks: The multiplier process, Macro, Macro, TE1, TE1, TE1. See also: consumption, investment, government spending, exports, imports.

aggregate output

The total output in an economy, across all sectors and regions (TE1, TESA). Introduced in 13.3 Measuring the aggregate economy, TE1.

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 5.2 Evaluating institutions and outcomes: The Pareto criterion, Micro, Micro, TE1, 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 Unit 4 Social interactions, 13.5 How households cope with fluctuations, Micro, TE1, TE1, ESPP. See also: social preferences.

antitrust policy

Government policy and laws to limit monopoly power and prevent cartels. Also known as: competition policy (ESPP, TE1, TESA). Introduced in 7.9 Price-setting, market power, and public policy, ESPP.

arbitrage

The practice of buying a good at a low price in one market to sell it at a higher price in another. Traders engaging in arbitrage take advantage of the price difference for the same good between two countries or regions. As long as the trade costs are lower than the price gap, they make a profit. The practice of buying a good at a low price in a market to sell it at a higher price in another. Traders engaging in arbitrage take advantage of the price difference for the same good between two countries or regions. As long as the trade costs are lower than the price gap, they make a profit (ESPP, TE1, TESA). Introduced in 10.9 The central bank, the money market, and interest rates, TE1, TE1, ESPP. See also: price gap.

artificially scarce good

A public good for which it is possible to exclude some people from enjoying. Also known as: club good. A public good that it is possible to exclude some people from enjoying. Also known as: club good (ESPP, TE1, TESA). Introduced in 12.5 Public goods, TE1, ESPP. See also: 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 10.7 Assets, liabilities, and net worth, 11.4 The value of an asset: Basics, Micro, Macro, Macro, Macro, TE1, TE1, ESPP. See also: balance sheet, liability.

asset price bubble

An asset price bubble is an episode in which the market price of an asset rises substantially and continuously over time, fuelled by expectations of future price increases (that is, people want to hold the asset because they believe that its price will be higher in future). Eventually the bubble bursts and the price drops suddenly. A sustained and significant rise in the price of an asset, fuelled by expectations of future price increases. Sustained and significant rise in the price of an asset fuelled by expectations of future price increases (Macro, ESPP, TE1, TESA). Introduced in 11.6 Asset market bubbles, Macro, TE1, ESPP.

asymmetric information

Information that is relevant to all the parties in an economic interaction, but is known by some and not by others. Information that is relevant to the parties in an economic interaction, but is known by some but not by others (ESPP, TE1, TESA). Introduced in 6.1 Firms, markets, and the division of labour, 12.4 Property rights, contracts, and market failures, 14.5 The multiplier model: Including the government and net exports, TE1, TE1, TE1, TE1, ESPP, ESPP. See also: adverse selection, moral hazard.

austerity

A term used to describe policies through which a government tries to improve its budgetary position in a recession by increasing its saving. A policy where a government tries to improve its budgetary position in a recession by increasing its saving (Macro, TE1, TESA). Introduced in Macro, TE1. See also: paradox of thrift.

automatic stabilizers

Automatic stabilizers are tax and transfer policies that have the effect of offsetting an expansion or contraction of the economy. For example, spending on unemployment benefits rises during a recession. Characteristics of the tax and transfer system in an economy that have the effect of offsetting an expansion or contraction of the economy. An example is the unemployment benefits system (Macro, TE1, TESA). Introduced in 14.5 The multiplier model: Including the government and net exports, Macro, TE1.

automation

The use of machines that are substitutes for labour (TE1, TESA). Introduced in TE1.

autonomous consumption

In a model of consumption demand, autonomous consumption is planned consumption expenditure that does not depend on other variables in the model (such as income, or the interest rate). Con­sumption that is independent of current income (Macro, TE1, TESA). Introduced in 14.1 The transmission of shocks: The multiplier process, Macro, Macro, TE1.

autonomous demand

In a model of demand for goods and services, autonomous demand is planned expenditure that does not depend on other variables in the model (such as income, or the interest rate). Components of aggregate demand that are independent of current income (Macro, TE1, TESA). Introduced in 14.1 The transmission of shocks: The multiplier process, Macro, TE1.

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 7.8 Costs and Output, Micro, Macro.

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 3.2 Labour and production, 3.1.1 Average and marginal productivity, Micro, Micro, Micro, Macro, Macro, TE1, TE1, TE1, ESPP, ESPP.

average product of labour

Total output divided by by the number of units of labor employed (TESA). Introduced in 2.7 Malthusian Economics: Modelling output growth.

balance of payments (BP)

This records the sources and uses of foreign exchange. This account records all payment transactions between the home country and the rest of the world, and is divided into two parts: the current account and the capital and financial account. Also known as: balance of payments account. This records the sources and uses of foreign exchange. This account records all payment transactions between the home country and the rest of the world, and is divided into two parts: the current account and the capital and financial account. Also known as: balance of payments account (TE1, TESA).

balance sheet

A record of all the current assets and liabilities, and the net worth, of an economic actor such as a household, bank, firm, or government. A record of the assets, liabilities, and net worth of an economic actor such as a household, bank, firm, or government (Macro, ESPP, TE1, TESA). Introduced in 10.7 Assets, liabilities, and net worth, Macro, Macro, Macro, TE1, ESPP. See also: net worth, liability.

bank

A firm that creates money in the form of bank deposits in the process of supplying credit (ESPP, TE1, TESA). Introduced in 10.8 Banks, money, and the central bank, TE1, ESPP.

bank bailout

The government buys an equity stake in a bank or some other intervention to prevent it from failing (TE1, TESA). Introduced in TE1.

bank money

Money in the form of deposits in commercial banks. The bank allows bank deposits, created for example when the bank makes a loan, to be used as a means of exchange, debiting the buyer’s deposit and crediting the seller with a new deposit. Money in the form of bank deposits created by commercial banks when they extend credit to firms and households (Macro, ESPP, TE1, TESA). Introduced in Macro, ESPP.

bank run

A situation in which depositors withdraw funds from a bank because they fear that it may go bankrupt and not honour its liabilities (that is, not repay the funds owed to depositors) (Macro, ESPP, TE1, TESA). Introduced in 10.8 Banks, money, and the central bank, Macro, TE1, ESPP.

bargaining gap

The difference between the real wage that firms wish to offer in order to recruit/retain workers and provide them with incentives to work, and the real wage that allows firms the markup that maximizes profits given the degree of competition. The difference between the real wage that firms wish to offer in order to provide workers with incentives to work, and the real wage that allows firms the markup that maximizes profits given the degree of competition (Macro, TE1, TESA). Introduced in 15.3 Inflation, the business cycle, and the Phillips curve, Macro, TE1.

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 5.1 Institutions and power, Micro, Micro, TE1, TE1, TE1, ESPP.

base money

Cash held by households, firms, and banks, and the balances held by commercial banks in their accounts at the central bank, known as reserves. Also known as: high-powered money. Cash and the balances held by commercial banks in their accounts at the central bank, known as reserves. Also known as: legal tender, high-powered money (ESPP, TE1, TESA). Introduced in ESPP.

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 4.2 Equilibrium in the invisible hand game, Micro, TE1, ESPP.

Beveridge curve

The inverse relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labour force). Named after the British economist of the same name (TE1, TESA). Introduced in TE1.

biodiversity loss (rate of)

Proportion of species that become extinct every year (TE1, TESA). Introduced in TE1.

biological survival constraint

This shows all the points that are ‘biologically feasible’ (TE1, TESA). See also: biologically feasible.

biologically feasible

An allocation that is capable of sustaining the survival of those involved is biologically feasible (ESPP, TE1, TESA). Introduced in 5.5 Technically feasible allocations, TE1, 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 11.4 The value of an asset: Basics, Micro, Macro, Macro, TE1.

Bretton Woods system

An international monetary system of fixed but adjustable exchange rates, established at the end of the Second World War. It replaced the gold standard that was abandoned during the Great Depression (TE1, TESA). Introduced in TE1.

broad money

The stock of money in circulation, which is defined as the sum of bank money and the base money that is in the hands of the non-bank public. The stock of money in circulation, which is the sum of base money (excluding legal tender held by banks) and bank money (TE1, TESA). See also: legal tender, bank money.

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 3.8 Income and substitution effects on hours of work and free time, 3.5.1 Optimal allocation of free time: MRT meets MRS, Micro, TE1, TE1.

business cycle

Alternating periods of faster and slower (or even negative) growth rates. The economy goes from boom to recession and back to boom. Alternating periods of faster and slower (or even negative) growth rates. The economy goes from boom to recession and back to boom (Macro, DE, TE1, TESA). Introduced in Unit 13 Economic fluctuations and unemployment, Macro, TE1, DE. See also: short-run equilibrium.

cap and trade

A policy through which a limited number of permits to pollute are issued, and can be bought and sold on a market. It combines a quantity-based limit on emissions, and a price-based approach that places a cost on environmentally damaging decisions (TE1, TESA). Introduced in TE1.

capacity constrained, capacity-constrained

A situation in which a firm has more orders for its output than it can fill (Macro, TE1, TESA). Introduced in 15.10 Demand shocks and demand-side policies, Macro, TE1. See also: low capacity utilization.

capacity utilization rate

A measure of the extent to which a firm, industry, or entire economy is producing as much as the stock of its capital goods and current knowledge would allow (TE1, TESA). Introduced in 13.7 Why is investment volatile?, 14.1 The transmission of shocks: The multiplier process, TE1, TE1.

capital goods

The durable and costly non-labour inputs used in production (machinery, buildings) not including some essential inputs, e.g. air, water, knowledge that are used in production at zero cost to the user. The durable and costly non-labour inputs used in production (machinery, buildings) not including some essential inputs, e.g. air, water, knowledge that are used in production at zero cost to the user. The equipment, buildings, raw materials, and other inputs used in producing goods and services, including where applicable any patents or other intellectual property that is used (ESPP, TE1, TESA). Introduced in 1.6 Capitalism defined: Private property, markets, and firms, TE1, TE1, ESPP.

capital intensity (of production)

The amount of capital goods per worker (TE1, TESA). Introduced in Macro.

capital-intensive

Making greater use of capital goods (for example machinery and equipment) as compared with labour and other inputs (TE1, TESA). Introduced in TE1. See also: labour-intensive.

capital productivity

Output per unit of capital good (TE1, TESA). See also: labour productivity.

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 1.6 Capitalism defined: Private property, markets, and firms, Micro, Macro, TE1, ESPP.

capitalist firm

A business organization which pays wages and salaries to employ people, and purchases inputs to produce and market goods and services with the intention of making a profit (TESA). Introduced in Unit 6 The firm: Owners, managers, and employees.

capitalist revolution

Rapid improvements in technology combined with the emergence of a new economic system (ESPP, TE1, TESA). Introduced in TE1, ESPP.

caring labour

Labour which is undertaken out of affection or a sense of responsibility for other people, with no expectation of immediate pecuniary reward (TESA). Introduced in 3.1 Work and its forms.

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 7.9 Price-setting, market power, and public policy, Micro, TE1, TE1, ESPP.

casual labour

People who are employed on a temporary, rather than a permanent or regular basis (TESA). Introduced in 3.1 Work and its forms, Unit 6 The firm: Owners, managers, and employees.

catch-up growth

When an economy with relatively low GDP experiences a period of rapid growth that brings incomes closer to those in high-income countries, this is described as catch-up growth. The process by which many (but far from all) economies in the world close the gap between the world leader and their own economy (Macro, TE1, TESA). Introduced in Macro, TE1. See also: convergence.

categorical inequality

Inequality between particular social groups (identified, for instance, by a category such as race, nation, caste, gender or religion). Also known as: group inequality (TE1, TESA). Introduced in TE1.

causality

A direction from cause to effect, establishing that a change in one variable produces a change in another. 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 (ESPP, TE1, TESA). Introduced in 1.8 Capitalism, causation and history’s hockey stick, TE1, ESPP. See also: natural experiment, correlation.

central bank

The only bank that can create base money. Usually part of the government. Commercial banks have accounts at this bank, holding base money. The only bank that can create a country’s legal tender. Usually part of the government. Commercial banks have accounts at this bank, holding legal tender (ESPP, TE1, TESA). Introduced in 10.8 Banks, money, and the central bank, TE1, ESPP. See also: base money.

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).

club good

See: artificially scarce good, public good (ESPP, TE1, TESA). Introduced in ESPP. See also: artificially scarce good, public good.

co-insurance

A co-insurance scheme enables households to pool savings so that individual households can maintain consumption when they experience a temporary fall in income or the need for greater expenditure. A means of pooling savings across households in order for a household to be able to maintain consumption when it experiences a temporary fall in income or the need for greater expenditure (Macro, ESPP, TE1, TESA). Introduced in 13.5 How households cope with fluctuations, 14.5 The multiplier model: Including the government and net exports, Macro, Macro, TE1, TE1, TE1.

codified knowledge

Knowledge that can be written down in a form that would allow it to be understood by others and reproduced, such as the chemical formula for a drug (TE1, TESA). Introduced in TE1. See also: tacit knowledge.

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 10 Banks, money, and the credit market, 12.7 Incomplete contracts and external effects in credit markets, Micro, Micro, Macro, Macro, Macro, TE1, TE1, ESPP, ESPP.

collateralized debt obligation (CDO)

A structured financial instrument (a derivative) consisting of a bond or note backed by a pool of fixed-income assets. The collapse in the value of the instruments of this type that were backed by subprime mortgage loans was a major factor in the financial crisis of 27–28 (TE1, TESA). Introduced in TE1.

commodities

Physical goods traded in a manner similar to shares. They include metals such as gold and silver, and agricultural products such as coffee and sugar, oil and gas. Sometimes more generally used to mean anything produced for sale. Physical goods traded in a manner similar to stocks. They include metals such as gold and silver, and agricultural products such as coffee and sugar, oil and gas. Sometimes more generally used to mean anything produced for sale (ESPP, TE1, TESA). Introduced in 11.6 Asset market bubbles, TE1, ESPP. See also: share.

common currency area

A group of countries that use the same currency. This means there is just one monetary policy for the group. Also known as: currency union (TE1, TESA). Introduced in 15.8 Monetary policy, TE1.

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 12.5 Public goods, Micro, TE1, 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 Micro, TE1, TE1. See also: absolute advantage.

competition policy

Government policy and laws to limit monopoly power and prevent cartels. Also known as: antitrust policy (ESPP, TE1, TESA). Introduced in 7.9 Price-setting, market power, and public policy, TE1, 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 8.2 The market and the equilibrium price, Micro, TE1, ESPP.

complements

Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other (ESPP, TE1, TESA). Introduced in TE1. See also: substitutes.

concave function

A function of two variables for which the line segment between any two points on the function lies entirely below the curve representing the function (the function is convex when the line segment lies above the function) (TE1, TESA). Introduced in 3.1.3 Concave and convex functions, TE1, TE1, TE1.

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 Explaining our working hours: Changes over time, Micro, TE1, ESPP.

constant prices

To compare the value of goods and services bought or sold at different times we need to allow for changes in the value of the currency in which they are measured (inflation or deflation). To do this, we choose a base year, and then calculate the value of goods and services in other years using the prices in the base year: that is, at constant prices. Prices corrected for increases in prices (inflation) or decreases in prices (deflation) so that a unit of currency represents the same buying power in different periods of time (Macro, ESPP, TE1, TESA). Introduced in 1.2 Measuring income and living standards, Macro, TE1, ESPP. See also: purchasing power parity.

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 7.3 Profits, costs, and the isoprofit curve, Micro, Micro, Macro, TE1, 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 3.6 Decision making and scarcity, Micro, Micro, Macro, TE1, TE1, ESPP, ESPP. See also: constrained optimization problem.

constrained optimization problem

Problems in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit) subject to a constraint that determines the feasible set (such as the demand curve) (ESPP, TE1, TESA). Introduced in 3.5.1 Optimal allocation of free time: MRT meets MRS, TE1, ESPP.

consumer durables

Consumer goods with a life expectancy of more than three years such as home furniture, cars, and fridges (ESPP, TE1, TESA).

consumer price index (CPI)

A measure of the general level of prices that consumers have to pay for goods and services, including consumption taxes (Macro, ESPP, TE1, TESA). Introduced in 13.8 Measuring the economy: Inflation, Macro, Macro, TE1, ESPP.

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 7.6 Gains from trade, Micro, Micro, TE1, ESPP.

consumption (C)

Expenditure on both short-lived goods and services and long-lived goods, which are called consumer durables. Expenditure on consumer goods including both short-lived goods and services and long-lived goods, which are called consumer durables (ESPP, TE1, TESA). Introduced in Micro, Macro. See also: consumer durables.

consumption function (aggregate)

A relationship that shows how consumption spending in the economy as a whole depends on other variables. For example, in the multiplier model, aggregate consumption depends on current disposable income and autonomous consumption. An equation that shows how consumption spending in the economy as a whole depends on other variables. For example, in the multiplier model, the other variables are current disposable income and autonomous consumption (Macro, TE1, TESA). Introduced in 14.1 The transmission of shocks: The multiplier process, Macro, TE1. See also: disposable income, autonomous consumption.

consumption good

A good or service that satisfies the needs of consumers over a short period (ESPP, TE1, TESA). Introduced in 3.3 Preferences, TE1, ESPP.

contingent valuation

A survey-based technique used to assess the value of non-market resources. Also known as: stated-preference model (DE, TE1, TESA). Introduced in TE1, DE.

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 6.1 Firms, markets, and the division of labour, Unit 12 Markets, efficiency, and public policy, Micro, TE1, TE1, ESPP.

cooperation

Participating in a common project that is intended to produce mutual benefits (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.9 Cooperation, negotiation, conflicts of interest, and social norms, Micro, TE1, ESPP.

cooperative firm

A firm that is mostly or entirely owned by its workers, who hire and fire the managers (ESPP, TE1, TESA). Introduced in 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 14.9 Fiscal policy and the rest of the world, Micro, Macro, TE1.

copyright

Ownership rights over the use and distribution of an original work (Micro, Macro, ESPP, TE1, TESA). Introduced in 12.5 Public goods, Micro, TE1, TE1, 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 Unit 13 Economic fluctuations and unemployment, Micro, Macro, Macro, TE1, DE, DE, DE, DE. See also: causality, correlation coefficient.

correlation coefficient

A measure of how closely associated two variables are and whether they tend to take similar or dissimilar values, ranging from a value of 1 indicating that the variables take similar values (‘are positively correlated’) to –1 indicating that the variables take dissimilar variables (‘negative’ or ‘inverse’ correlation). A value of 1 or –1 indicates that knowing the value of one of the variables would allow you to perfectly predict the value of the other. A value of 0 indicates that knowing one of the variables provides no information about the value of the other. A numerical measure, ranging between 1 and −1, of how closely associated two variables are—whether they tend to rise and fall together, or move in opposite directions. A positive coefficient indicates that when one variable takes a high (low) value, the other tends to be high (low) too, and a negative coefficient indicates that when one variable is high the other is likely to be low. A value of 1 or −1 indicates that knowing the value of one of the variables would allow you to perfectly predict the value of the other. A value of indicates that knowing one of the variables provides no information about the value of the other (ESPP, DE, TE1, TESA). Introduced in DE, DE, DE, DE, DE, DE, DE, DE. See also: correlation, causality.

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 Micro, TE1.

countercyclical

Tending to move in the opposite direction to aggregate output and employment over the business cycle (TE1, TESA). Introduced in 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 2.5 Modelling a dynamic economy: Innovation and profit, Micro, Macro, TE1, TE1, ESPP.

credit-constrained, credit constrained

A description of individuals who are able to borrow only on unfavourable terms (ESPP, DE, TE1, TESA). Introduced in 10.12 Credit market constraints: A principal–agent problem, 12.7 Incomplete contracts and external effects in credit markets, TE1, TE1, ESPP. See also: credit-excluded.

credit-excluded, credit excluded

A description of individuals who are unable to borrow on any terms (ESPP, DE, TE1, TESA). Introduced in 10.12 Credit market constraints: A principal–agent problem, 12.7 Incomplete contracts and external effects in credit markets, TE1, TE1, ESPP. See also: credit-constrained.

credit ratings agency

A firm which collects information to calculate the credit-worthiness of individuals or companies, and sells the resulting rating for a fee to interested parties (TE1, TESA). Introduced in TE1.

credit rationing

The process by which those with less wealth borrow on unfavourable terms, compared to those with more wealth (ESPP, TE1, TESA). Introduced in 10.12 Credit market constraints: A principal–agent problem, TE1, ESPP.

crowding out

There are two quite distinct uses of the term. One is the observed negative effect when economic incentives displace people’s ethical or other-regarding motivations. In studies of individual behaviour, incentives may have a crowding-out effect on social preferences. A 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. There are two quite distinct uses of the term. One is the observed negative effect when economic incentives displace people’s ethical or other-regarding motivations. In studies of individual behaviour, incentives may have a crowding out effect on social preferences. A 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 (ESPP, TE1, TESA). Introduced in 4.8 Behavioural experiments in the lab and in the field, 14.7 The multiplier and economic policymaking, TE1, TE1, ESPP.

current account (CA)

The sum of all payments made to a country minus all payments made by the country (TE1, TESA). See also: current account deficit, current account surplus.

current account deficit

The excess of the value of a country’s imports over the combined value of its exports plus its net earnings from assets abroad (TE1, TESA). Introduced in TE1. See also: current account, current account surplus.

current account surplus

The excess of the combined value of its exports and net earnings from assets abroad over the value of its imports (TE1, TESA). Introduced in TE1. See also: current account, current account deficit.

cyclical unemployment

The additional unemployment above the equilbrium level that is caused by a fall in aggregate demand associated with the business cycle. Also known as: demand-deficient unemployment. The increase in unemployment above equilibrium unemployment caused by a fall in aggregate demand associated with the business cycle. Also known as: demand-deficient unemployment (Macro, ESPP, TE1, TESA). Introduced in 9.7 How changes in demand for goods and services affect unemployment, 14.10 Aggregate demand and unemployment, Macro, TE1, TE1, ESPP. See also: equilibrium unemployment.

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 7.6 Gains from trade, Micro, Micro, TE1, TE1, ESPP.

decreasing returns to scale

These occur when doubling all of the inputs to a production process less than doubles the output. Also known as: diseconomies of scale (ESPP, TE1, TESA). Introduced in ESPP. See also: increasing returns to scale.

default risk

The risk that credit given as loans will not be repaid (ESPP, TE1, TESA). Introduced in 10.8 Banks, money, and the central bank, TE1, ESPP.

deflation

A decrease in the general price level (Macro, ESPP, DE, TE1, TESA). Introduced in 13.8 Measuring the economy: Inflation, 15.1 What’s wrong with inflation?, Macro, TE1, TE1, TE1. See also: inflation.

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 7.2 The demand curve and willingness to pay, Micro, TE1, ESPP.

demand shock

An unexpected or exogenous change in demand. In macroconomics a demand shock means a change in aggregate demand, such as a rise or fall in autonomous consumption, investment, or exports. In microeconomics it refers to an exogenous shift in the demand curve for a particular good. An unexpected change in aggregate demand, such as a rise or fall in autonomous consumption, investment, or exports (Macro, TE1, TESA). Introduced in 15.7 Supply shocks and inflation, Macro, Macro, Macro, TE1. See also: supply shock.

demand side

The side of a market on which those participating are offering money in return for some other good or service (for example, those purchasing bread) (TE1, TESA). Introduced in 1.6 Capitalism defined: Private property, markets, and firms, TE1. See also: supply side.

demand side (aggregate economy)

How spending decisions generate demand for goods and services, and as a result, employment and output. It uses the multiplier model (TE1, TESA). Introduced in 14.10 Aggregate demand and unemployment, 1.6 Capitalism defined: Private property, markets, and firms, TE1, TE1, TE1. See also: supply side (aggregate economy).

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 1.9 Varieties of capitalism: Institutions, government, and the economy, Micro, Macro, TE1, TE1, ESPP, ESPP.

democratic accountability

Political accountability by means of elections and other democratic processes (TE1, TESA). Introduced in TE1. See also: accountability, political accountability.

demographic transition

A slowdown in population growth as a fall in death rate is more than balanced by a fall in birth rates (TE1, TESA).

depreciation

The loss in value of a form of wealth that occurs either through use (wear and tear) or the passage of time (obsolescence) (Macro, ESPP, TE1, TESA). Introduced in 10.1 Money and wealth, Macro, TE1, TE1, ESPP.

derivative

A financial instrument in the form of a contract that can be traded, whose value is based on the performance of underlying assets such as shares, bonds or real estate (TE1, TESA). Introduced in TE1. See also: collateralized debt obligation.

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 1.9 Varieties of capitalism: Institutions, government, and the economy, Micro, Macro, TE1, 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 7.2 The demand curve and willingness to pay, Micro, TE1, ESPP.

diffusion

The spread of the invention throughout the economy (TE1, TESA). Introduced in TE1. See also: diffusion gap.

diffusion gap

The lag between the first introduction of an innovation and its general use (TE1, TESA). Introduced in TE1. See also: diffusion.

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 2.7 Malthusian Economics: Modelling output growth, Micro, TE1.

diminishing marginal product

A property of some production functions according to which each additional unit of input results in a smaller increment in total output than did the previous unit (ESPP, TE1, TESA). Introduced in ESPP.

diminishing marginal returns to consumption

The value to the individual of an additional unit of consumption declines, the more consumption the individual has. Also known as: diminishing marginal utility (ESPP, TE1, TESA). Introduced in 10.2 Borrowing: Bringing consumption forward in time, TE1, ESPP.

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 Micro.

diminishing returns

A situation in which the use of an additional unit of a factor of production results in a smaller increase in output than the previous increase. Also known as: diminishing marginal returns in production (TE1, TESA). Introduced in 3.2 Labour and production, TE1.

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 Micro, TE1, ESPP.

discounting future generations' costs and benefits

A measure of how we currently value the costs and benefits experienced by people who will live in the future. Note that this is not a measure of individual impatience about one’s own future benefits and costs (TE1, TESA). Introduced in TE1.

diseconomies of scale

These occur when doubling all of the inputs to a production process less than doubles the output. Also known as: decreasing returns to scale (ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, TE1, ESPP. See also: economies of scale.

disequilibrium

A situation in which at least one of the actors can benefit by altering his or her actions and therefore changing the situation, given what everybody else is doing (ESPP, TESA). Introduced in 8.5 Changes in supply and demand, ESPP.

disequilibrium process

An economic variable may change either because the things that determine the equilibrium value of that variable have changed (an equilibrium process), or because the system is not in equilibrium so that there exist forces for change that are internal to the model in question (a disequilibrium process). The latter process applies when the economy moves towards a stable equilibrium or away from a tipping point (an unstable equilibrium) (TE1, TESA).

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 11 Rent-seeking, price-setting, and market dynamics, Micro, TE1.

disinflation

A decrease in the rate of inflation (Macro, ESPP, DE, TE1, TESA). Introduced in 15.1 What’s wrong with inflation?, Macro, TE1. See also: inflation, deflation.

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. Income available after paying taxes and receiving transfers from the government (Macro, ESPP, TE1, TESA). Introduced in 1.2 Measuring income and living standards, 5.12 Measuring economic inequality, Macro, TE1, TE1, ESPP, ESPP.

distributionally neutral

A policy that is neither progressive or regressive so that it does not alter the distribution of income (TE1, TESA). Introduced in TE1. See also: progressive (policy), regressive (policy).

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 4.1 Social interactions: Game theory, 6.1 Firms, markets, and the division of labour, Micro, TE1, TE1, 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 4.2 Equilibrium in the invisible hand game, TE1, 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 4.2 Equilibrium in the invisible hand game, Micro, TE1, TE1, ESPP.

dominant technology

A technology that produces the same amount at lower cost than alternative technologies irrespective of the prices of inputs. It is capable of producing the same amount of output as the alternative technology with less of at least one input, and not more of any input (TE1, TESA).

dominated

We describe an outcome in this way if more of something that is positively valued can be attained without less of anything else that is positively valued. In short: an outcome is dominated if there is a win-win alternative (TE1, TESA). Introduced in 2.4 Modelling a dynamic economy: Technology and costs, TE1, TE1.

dual economy

The existence of two sectors within an economy: one made up of capitalist firms and the other, the informal sector, made up of own account work, work in families and other productive activities not involving employers hiring workers (TESA). Introduced in Unit 6 The firm: Owners, managers, and employees.

earnings

Wages, salaries, and other income from labour (Micro, Macro, ESPP, TE1, TESA). Introduced in 10.1 Money and wealth, Micro, TE1, ESPP.

economic accountability

Accountability achieved by economic processes, notably competition among firms or other entities in which failure to take account of those affected will result in losses in profits or in business failure (ESPP, TE1, TESA). Introduced in TE1, ESPP. See also: accountability, political accountability.

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 3.4 Opportunity costs, Micro, TE1, ESPP.

economic profit

A firm’s revenue minus its total costs (including the opportunity cost of capital) (ESPP, TE1, TESA). Introduced in TE1, 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 2.3 Basic concepts: Prices, costs, and innovation rents, 3.4 Opportunity costs, 4.10 Dividing a pie (or leaving it on the table), 5.6 Allocations imposed by force, 7.6 Gains from trade, Micro, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TE1, TE1, TE1, 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 1.6 Capitalism defined: Private property, markets, and firms, Micro, TE1, ESPP.

economically feasible

Policies for which the desired outcomes are a Nash equilibrium, so that once implemented private economic actors will not undo the desired effects (ESPP, TE1, TESA). Introduced in TE1, 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 1.11 Economics and the economy, Micro, Micro, TE1, ESPP, ESPP.

economies of agglomeration

The advantages that firms may enjoy when they are located close to other firms in the same or related industries (TE1, TESA). See also: economies of scale.

economies of scale

These occur when doubling all of the inputs to a production process more than 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. Also known as: increasing returns to scale (ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, TE1, TE1, TE1, TE1, ESPP, ESPP. See also: diseconomies of scale.

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 Micro, TE1.

effective tax rate on profits

This is calculated by taking the before-tax profit rate, subtracting the after-tax profit rate, and dividing the result by the before-tax profit rate. This fraction is usually multiplied by 1 and reported as a percentage (TE1, TESA). Introduced in TE1.

efficiency wages

The payment an employer makes that is higher than an employee’s reservation wage, so as to motivate the employee to provide more effort on the job than he or she would otherwise choose to make (ESPP, TE1, TESA). Introduced in 6.7 Wages, effort, and profits in the labour discipline model, TE1, ESPP. See also: labour discipline model, employment rent.

employment protection legislation

Laws making job dismissal more costly (or impossible) for employers (TE1, TESA). Introduced in TE1.

employment rate

The employment rate is the fraction of the population of working age that is employed. The ratio of the number of employed to the population of working age (Macro, ESPP, TE1, TESA). Introduced in 9.2 Measuring the economy: Employment and unemployment, Macro, TE1, ESPP. See also: population of working age.

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 6.4 Employment rents, Unit 9 The labour market: Wages, profits, and unemployment, Micro, Micro, Macro, Macro, TE1, TE1, 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 11 Rent-seeking, price-setting, and market dynamics, Micro, Micro, TE1, 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 Micro, TE1, ESPP, ESPP. See also: human capital.

entitlement

Entitlements are resources that a person can command given the rights and opportunities provided by his or her society (TESA). Introduced in Unit 2 Technology, population, and growth.

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 2.5 Modelling a dynamic economy: Innovation and profit, Micro, TE1, ESPP.

environment-consumption indifference curve

A curve on which all points are combinations of environmental quality and consumption that are equally valued by an individual or policymaker. The slope of the indifference curve is the ratio of the marginal disutility of lost consumption due to the cost of abating and of the marginal utility of environmental quality (a public good shared by all) (TE1, TESA).

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 2.2 Economic models: How to see more by looking at less, 8.2 The market and the equilibrium price, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TE1, ESPP, ESPP, ESPP.

equilibrium (of a market)

A state of a market in which there is no tendency for the quantities bought and sold, or the market price, to change, unless there is some change in the underlying costs, preferences, or other determinants of the behaviour of market actors (TE1, TESA). Introduced in 8.2 The market and the equilibrium price, 2.2 Economic models: How to see more by looking at less, TE1, Micro, Micro, Micro, Micro, Macro, TE1, TE1, ESPP, ESPP, ESPP.

equilibrium rent

Rent in a market that is in equilibrium. Also known as: stationary or persistent rents (TE1, TESA). Introduced in 11.10 The role of economic rents, TE1.

equilibrium unemployment

The number of people seeking work but without jobs, which is determined by the intersection of the wage-setting and price-setting curves. This is the Nash equilibrium of the labour market and product market where neither employers nor workers could do better by changing their behaviour. The number of people seeking work but without jobs, which is determined by the intersection of the wage-setting and price-setting curves. This is the Nash equilibrium of the labour market where neither employers nor workers could do better by changing their behaviour (ESPP, TE1, TESA). Introduced in 9.6 Wages, profits, and unemployment in the whole economy, TE1, ESPP. See also: involuntary unemployment, cyclical unemployment, wage-setting curve, price-setting curve, inflation-stabilizing rate of unemployment.

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 10.10 The business of banking and bank balance sheets, 12.7 Incomplete contracts and external effects in credit markets, 14.3 Household target wealth, collateral, and consumption spending, Micro, Micro, Micro, Macro, Macro, Macro, TE1, TE1, TE1, 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 2.5 Modelling a dynamic economy: Innovation and profit, Micro, TE1.

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 Unit 8 Supply and demand: Price-taking and competitive markets, Micro, Micro, Macro, TE1, 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 8.2 The market and the equilibrium price, 9.6 Wages, profits, and unemployment in the whole economy, Micro, Macro, TE1, TE1, ESPP, ESPP. See also: excess demand.

exchange rate

The number of units of home currency that can be exchanged for one unit of foreign currency. For example, Australia’s exchange rate between the Australian dollar (AUD) and the US dollar (USD) is defined as the number of AUD per USD. An increase in this number is a depreciation of the AUD, and a decrease is an appreciation of the AUD. The number of units of home currency that can be exchanged for one unit of foreign currency. For example, the number of Australian dollars (AUD) needed to buy one US dollar (USD) is defined as number of AUD per USD. An increase in this rate is a depreciation of the AUD and a decrease is an appreciation of the AUD (Macro, TE1, TESA). Introduced in 14.5 The multiplier model: Including the government and net exports, 15.9 The exchange rate channel of monetary policy, Macro, Macro, TE1, TE1.

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 8.5 Changes in supply and demand, Unit 11 Rent-seeking, price-setting, and market dynamics, 14.5 The multiplier model: Including the government and net exports, Micro, Micro, Micro, Macro, Macro, TE1, TE1, TE1, 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 Micro, Macro.

expected inflation

The belief formed by wage-setters and price-setters about the level of inflation in the next period. The opinion that wage- and price-setters form about the level of inflation in the next period (Macro, TE1, TESA). Introduced in 15.6 Expected inflation and the Phillips curve, Macro, TE1. See also: inflation.

exports (X)

Goods and services produced in a particular country and sold to households, firms and governments in other countries (TE1, TESA). Introduced in Macro.

expropriation risk

The probability that an asset will be taken from its owner by the government or some other actor (TE1, TESA). Introduced in 14.3 Household target wealth, collateral, and consumption spending, TE1, TE1.

external benefit

A positive external effect: that is, a positive effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit in a contract. Also known as: external economy (ESPP, TE1, TESA). Introduced in 12.3 External effects: Policies and income distribution, TE1, ESPP. See also: external effect.

external cost

A negative external effect: that is, the negative effect of production, consumption, or other economic decisions on another person or party, which is not specified as a liability in a contract. Also known as: external diseconomy (ESPP, TE1, TESA). Introduced in ESPP. See also: external effect.

external diseconomy

A negative effect of a production, consumption, or other economic decision, that is not specified as a liability in a contract. Also known as: external cost, negative externality (ESPP, TE1, TESA). Introduced in 12.4 Property rights, contracts, and market failures, TE1, ESPP. See also: external effect.

external economy

A positive effect of a production, consumption, or other economic decision, that is not specified as a benefit in a contract. Also known as: external benefit, positive externality. A positive effect of a production, consumption, or other economic decision, that is not specified as a benefit in a contract. Also known as: external benefit, positive externality (ESPP, TE1, TESA). Introduced in 12.4 Property rights, contracts, and market failures, TE1, ESPP. See also: external effect.

external effect

When a person’s action confers a benefit or cost on some other individual, and this effect is not taken account of by the person in deciding to take the action. It is external because it is not included in the decision-making process of the person taking the action. Positive effects refer to benefits, and negative effects to costs, that are experienced by others. A person breathing second-hand smoke from someone else’s cigarette is a negative external effect. Enjoying your neighbour’s beautiful garden is a positive external effect. Also known as: externality. A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in a contract. It is called an external effect because the effect in question is outside the contract. Also known as: externality (ESPP, TE1, TESA). Introduced in 12.1 Market failure: External effects of pollution, TE1, TE1, ESPP, ESPP, ESPP, ESPP, ESPP. See also: incomplete contract, market failure, external benefit, external cost.

factors of production

The labour, machinery and equipment (usually referred to as capital), land, and other inputs to a production process (TE1, TESA). Introduced in 2.7 Malthusian Economics: Modelling output growth, TE1.

fairness

A way to evaluate an allocation based on one’s conception of justice (Micro, Macro, ESPP, TE1, TESA). Introduced in 4.9 Cooperation, negotiation, conflicts of interest, and social norms, 14.8 The government’s finances, Micro, Micro, Macro, TE1, TE1, ESPP.

fallacy of composition

Mistaken assumption that what is true of the parts (such as households) must be true of the whole (such as the economy as a whole). For an example see: paradox of thrift. Mistaken inference that what is true of the parts (for example a household) must be true of the whole (in this case the economy as a whole) (Macro, TE1, TESA). Introduced in 14.5 The multiplier model: Including the government and net exports, Macro, TE1. See also: paradox of thrift.

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 3.5 The feasible set, Micro, Micro, Micro, Macro, TE1, 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 3.5 The feasible set, 15.4 Inflation and unemployment: Constraints and preferences, Micro, Micro, Micro, Micro, Macro, TE1, TE1, ESPP. See also: feasible frontier.

fertility rate

The average number of children per woman (TESA). Introduced in 2.10 Escaping from Malthusian stagnation.

final income

A measure of the value of goods and services a household can consume from its disposable income. This is equal to disposable income minus VAT paid, plus the value of public services received (TE1, TESA).

financial accelerator

When an asset (such as housing) is used as collateral for loans, an increase in price raises the value of the collateral enabling more borrowing, raising demand, and causing further price rises. This amplification process is called a financial accelerator. The mechanism through which firms’ and households’ ability to borrow increases when the value of the collateral they have pledged to the lender (often a bank) goes up (Macro, TE1, TESA). Introduced in 14.3 Household target wealth, collateral, and consumption spending, Macro, TE1, TE1.

financial deregulation

Policies allowing banks and other financial institutions greater freedom in the types of financial assets they can sell, as well as other practices (ESPP, TE1, TESA). Introduced in TE1, ESPP.

fire sale

The sale of something at a very low price because of the seller’s urgent need for money (Macro, TE1, TESA). Introduced in Macro, TE1.

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 Micro, 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 6.1 Firms, markets, and the division of labour, Micro, TE1. See also: relationship-specific asset.

first copy costs

The fixed costs of the production of a knowledge-intensive good or service (TE1, TESA). Introduced in TE1.

fiscal capacity

The ability of a government to impose and collect substantial taxes from a population at low administrative and other costs. One measure of this is the amount collected divided by the cost of administering the tax system (ESPP, TE1, TESA). Introduced in TE1, ESPP.

fiscal multiplier

The total (direct and indirect) change in output caused by an initial change in government spending (TE1, TESA). See also: fiscal stimulus, fiscal policy, aggregate demand.

fiscal policy

Changes in taxes or government spending in order to stabilize the economy (TE1, TESA). Introduced in 9.7 How changes in demand for goods and services affect unemployment, 14.5 The multiplier model: Including the government and net exports, TE1, TE1. See also: fiscal stimulus, fiscal multiplier, aggregate demand.

fiscal stimulus

The use by the government of fiscal policy (via a combination of tax cuts and spending increases) with the intention of increasing aggregate demand (TE1, TESA). Introduced in 14.5 The multiplier model: Including the government and net exports, TE1. See also: fiscal multiplier, fiscal policy, aggregate demand.

Fisher equation

The relation that gives the real interest rate as the difference between the nominal interest rate and expected inflation: real interest rate = nominal interest rate – expected inflation (Macro, ESPP, TE1, TESA). Introduced in 15.1 What’s wrong with inflation?, Macro, TE1, ESPP.

fixed costs

Costs of production that do not vary with the number of units produced (Micro, Macro, ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, Micro, TE1, ESPP.

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 2.2 Economic models: How to see more by looking at less, 10.1 Money and wealth, Micro, Micro, TE1, TE1, TE1. See also: stock.

foreign direct investment (FDI)

Ownership and substantial control over assets in a foreign country (TE1, TESA). Introduced in TE1. See also: foreign portfolio investment.

foreign portfolio investment

The acquisition of bonds or shares in a foreign country where the holdings of the foreign assets are not sufficiently great to give the owner substantial control over the owned entity. Foreign direct investment (FDI), by contrast, entails ownership and substantial control over the owned assets (TE1, TESA). Introduced in TE1. See also: foreign direct investment.

free ride

Benefiting from the contributions of others to some cooperative project without contributing oneself (ESPP, TE1, TESA). Introduced in Unit 4 Social interactions, 6.2 Other people’s money: The separation of ownership and control, TE1, TE1, ESPP, ESPP.

fundamental value

See: fundamental value of a share (TE1, TESA). See also: fundamental value of a share.

fundamental value of a share

The share price based on anticipated future earnings and the level of risk. The share price based on anticipated future earnings and the level of systematic risk, which can be interpreted as a measure of the benefit today of holding the asset now and in the future (ESPP, TE1, TESA). Introduced in 11.4 The value of an asset: Basics, 11.8.1 Price bubbles, TE1, TE1, ESPP.

gains from exchange

The benefits that each party gains from a transaction compared to how they would have fared without the exchange. Also known as: gains from trade (ESPP, TE1, TESA). Introduced in 5.6 Allocations imposed by force, 7.6 Gains from trade, TE1, TE1, TE1, ESPP, ESPP. See also: economic rent.

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 4.1 Social interactions: Game theory, Micro, TE1, 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 Social interactions, Micro, TE1, ESPP. See also: game.

GDP deflator

A measure of the change in the level of prices for domestically produced output, based on price changes of consumption, investment, government expenditure, and exports. A measure of the level of prices for domestically produced output. This is the ratio of nominal (or current price) GDP to real (or constant price) GDP (Macro, TE1, TESA). Introduced in 13.8 Measuring the economy: Inflation, Macro, TE1.

general-purpose technologies

Technological advances that can be applied to many sectors, and spawn further innovations. Information and communications technology (ICT), and electricity are two common examples (TE1, TESA). Introduced in Unit 2 Technology, population, and growth, TE1, TE1.

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 5.12 Measuring economic inequality, Micro, Micro, Macro, Macro, TE1, ESPP, ESPP, DE. See also: Lorenz curve.

global financial crisis

This began in 27 with the collapse of house prices in the US, leading to the fall in prices of assets based on subprime mortgages and to widespread uncertainty about the solvency of banks in the US and Europe, which had borrowed to purchase such assets. The ramifications were felt around the world, as global trade was cut back sharply. Goverments and central banks responded aggressively with stabilization policies (ESPP, TE1, TESA). Introduced in TE1, ESPP.

global greenhouse gas abatement cost curve

This shows the total cost of abating greenhouse gas emissions using abatement policies ranked from the most cost-effective to the least (TE1, TESA). Introduced in TE1. See also: abatement policy.

globalization

A process by which the economies of the world become increasingly integrated by the freer flow across national boundaries of goods, investment, finance, and to a lesser extent, labour. The term is sometimes applied more broadly to include ideas, culture, and even the spread of epidemic diseases (TE1, TESA). Introduced in TE1.

Globalization I and II

Two separate periods of increasing global economic integration: the first extended from before 1870 until the outbreak of the First World War in 1914, and the second extended from the end of the Second World War into the twenty-first century (TE1, TESA). Introduced in TE1. See also: globalization.

gold standard

The system of fixed exchange rates, abandoned in the Great Depression, by which the value of a currency was defined in terms of gold, for which the currency could be exchanged (TE1, TESA). Introduced in TE1. See also: Great Depression.

golden age (of capitalism)

The period of high productivity growth, high employment, and low and stable inflation extending from the end of the Second World War to the early 197s (TE1, TESA). Introduced in TE1.

goods market equilibrium

A goods market is in equilibrium when the supply of goods is equal to the demand. In the multiplier model, aggregate demand for goods and services, AD, depends on income, Y, and income is equal to the output that firms supply. Goods market equilibrium is at the value of Y where aggregate demand is equal to output: AD = Y. The point at which output equals the aggregate demand for goods produced in the home economy. The economy will continue producing at this output level unless something changes spending behaviour (Macro, TE1, TESA). Introduced in 14.1 The transmission of shocks: The multiplier process, Macro, Macro, TE1. See also: aggregate demand.

governing elite

Top government officials such as the president, cabinet officials, and legislative leaders, unified by a common interest such as membership in a particular party (ESPP, TE1, TESA). Introduced in TE1, ESPP.

government

Within a given territory, the government is the only body that can legitimately use force (or threats of force) to control the behaviour of citizens. Also known as: the state. Within a given territory, the only body that can dictate what people must do or not do, and can legitimately use force and restraints on an individual’s freedom to achieve that end. Also known as: state (Macro, ESPP, TE1, TESA). Introduced in Macro, TE1, ESPP, ESPP.

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 10.9 The central bank, the money market, and interest rates, 11.4 The value of an asset: Basics, Micro, TE1, TE1, ESPP.

government budget balance

The difference between government tax revenue and government spending (including government purchases of goods and services, investment spending, and spending on transfers such as pensions and unemployment benefits) (TE1, TESA). Introduced in 14.5 The multiplier model: Including the government and net exports, TE1. See also: government budget deficit, government budget surplus.

government budget deficit

If government spending exceeds its tax revenue in the same year, the government budget is in deficit and the size of the deficit is the difference between spending and tax revenue. When the government budget balance is negative (Macro, TE1, TESA). Introduced in 14.5 The multiplier model: Including the government and net exports, Macro, Macro, TE1. See also: government budget balance, government budget surplus.

government budget surplus

When the government budget balance is positive (TE1, TESA). Introduced in 14.5 The multiplier model: Including the government and net exports, TE1. See also: government budget balance, government budget deficit.

government debt

The total amount of money owed by the government at a specific point in time. The sum of all the bonds the government has sold over the years to finance its deficits, minus the ones that have matured (TE1, TESA). Introduced in 14.8 The government’s finances, TE1.

government failure

A failure of political accountability. (This term is widely used in a variety of ways, none of them strictly analogous to market failure, for which the criterion is simply Pareto inefficiency) (ESPP, TE1, TESA). Introduced in TE1, ESPP. See also: political accountability.

government spending (G)

Expend­iture by the government to purchase goods and services. When used as a component of aggregate demand, this does not include spending on transfers such as pensions and unemployment benefits (TE1, TESA). Introduced in Macro. See also: government transfers.

government transfers

Spending by the government in the form of payments to households or individuals. Unemployment benefits and pensions are examples. Transfers are not included in government spending (G) in the national accounts (Macro, TE1, TESA). Introduced in 13.4 Measuring the aggregate economy: The components of GDP, Macro, TE1. See also: government spending (G).

Great Depression

The period of a sharp fall in output and employment in many countries in the 193s (TE1, TESA). Introduced in 14.3 Household target wealth, collateral, and consumption spending, TE1, TE1.

great moderation

A period of low volatility in aggregate output in advanced economies between the 198s and the 28 financial crisis. The name was suggested by James Stock and Mark Watson, the economists, and popularized by Ben Bernanke, then chairman of the Federal Reserve. Period of low volatility in aggregate output in advanced economies between the 198s and the 28 financial crisis. The name was suggested by James Stock and Mark Watson, the economists, and popularized by Ben Bernanke, then chairman of the Federal Reserve (DE, TE1, TESA). Introduced in Unit 14 Unemployment and fiscal policy, 15.10 Demand shocks and demand-side policies, TE1, TE1, TE1, DE, DE, DE.

great recession

The prolonged recession that followed the global financial crisis of 28 (TE1, TESA). Introduced in TE1.

green adjustment

Accounting adjustment made to conventional measures of national income to include the value of natural capital (TE1, TESA). Introduced in TE1.

greenhouse gas

Gases—mainly water vapour, carbon dioxide, methane and ozone—released in the earth’s atmosphere that lead to increases in atmospheric temperature and changes in climate (TE1, TESA). Introduced in TE1.

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 Measuring income and living standards, Unit 13 Economic fluctuations and unemployment, Micro, Macro, Macro, TE1, TE1.

gross income

Income net of taxes paid. Includes depreciation (ESPP, TE1, TESA). See also: income, net income.

gross unemployment benefit replacement rate

The proportion of a worker’s previous gross (pre-tax) wage that is received (gross of taxation) when unemployed (TE1, TESA). Introduced in TE1.

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 Conflicts of interest in the global climate change problem, Micro, ESPP.

hedge finance

Financing used by firms to fulfil contractual payment obligations using cashflow. Term coined by Hyman Minsky in his Financial Instability Hypothesis (ESPP, TE1, TESA). Introduced in TE1. See also: speculative finance.

hedonic pricing

A method used to infer the economic value of unpriced environmental or perceptual qualities that affect the price of a marketed good. It allows a researcher to put a price on hard-to-quantify characteristics. Estimations are based on people’s revealed preferences, that is, the price they pay for one thing compared to another (TE1, TESA). Introduced in TE1.

hidden actions (problem of)

This occurs when some action taken by one party to an exchange is not known or cannot be verified by the other. For example, the employer cannot know (or cannot verify) how hard the worker she has employed is actually working. Also known as: moral hazard (ESPP, TE1, TESA). Introduced in 6.10 Principals and agents: Interactions under incomplete contracts, 12.5 Public goods, 14.5 The multiplier model: Including the government and net exports, TE1, TE1, TE1, ESPP, ESPP. See also: hidden attributes (problem of).

hidden attributes (problem of)

This occurs when some attribute of the person engaging in an exchange (or the product or service being provided) is not known to the other parties. Example: an individual purchasing health insurance knows her own health status, but the insurance company does not. Also known as: adverse selection. This occurs when some attribute of the person engaging in an exchange (or the product or service being provided) is not known to the other parties. An example is that the individual purchasing health insurance knows her own health status, but the insurance company does not. Also known as: adverse selection (ESPP, TE1, TESA). Introduced in 12.5 Public goods, 14.5 The multiplier model: Including the government and net exports, TE1, TE1, ESPP. See also: hidden actions (problem of).

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 10.1 Money and wealth, 14.3 Household target wealth, collateral, and consumption spending, Micro, Micro, Macro, TE1, TE1, TE1, ESPP. See also: endowment.

hyperglobalization

An extreme (and so far hypothetical) type of globalization in which there is virtually no barrier to the free flows of goods, services, and capital (TE1, TESA). Introduced in TE1. See also: globalization.

idiosyncratic risk

A risk that only affects a small number of assets at one time. Traders can almost eliminate their exposure to such risks by holding a diverse portfolio of assets affected by different risks.  Also known as: diversifiable risk. A risk that only affects a small number of assets at one time. Traders can almost eliminate their exposure to such risks by holding a diverse portfolio of assets affected by different risks. Also known as: diversifiable risk (TE1, TESA). Introduced in 11.4 The value of an asset: Basics, TE1.

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 Micro, ESPP.

imports (M)

Goods and services produced in other countries and purchased by domestic households, firms, and the government (TE1, TESA). Introduced in Macro.

in-kind transfers

Public expenditure in the form of free or subsidized services for households rather than in the form of cash transfers (TE1, TESA). Introduced in TE1.

inactive population

People in the population of working age who are neither employed nor actively looking for paid work. Those working in the home raising children, for example, are not considered as being in the labour force and therefore are classified this way (ESPP, TE1, TESA). Introduced in 9.2 Measuring the economy: Employment and unemployment, TE1, 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 2.3 Basic concepts: Prices, costs, and innovation rents, 5.1 Institutions and power, Micro, Micro, Micro, TE1, TE1, ESPP.

inclusive trade union

A union, representing many firms and sectors, which takes into account the consequences of wage increases for job creation in the entire economy in the long run (TE1, TESA). Introduced in TE1.

income

In general, income refers to any flow of resources (goods, or money) that an individual (or other economic actor) receives over time. It is the amount received per period. It could include labour earnings, profits, rent from property, or interest on assets. Your income is the maximum amount that you could consume per period and leave your wealth unchanged. The amount of labour earnings, dividends, interest, rent, and other payments (including transfers from the government) received by an economic actor, net of taxes paid, measured over a period of time, such as a year. The maximum amount that you could consume and leave your wealth unchanged. Also known as: disposable income. The amount of profit, interest, rent, labour earnings, and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. The maximum amount that you could consume and leave your wealth unchanged. Also known as: disposable income (Macro, ESPP, TE1, TESA). Introduced in 10.1 Money and wealth, TE1, ESPP. See also: pre-tax income.

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 3.8 Income and substitution effects on hours of work and free time, Micro, Micro, Micro, Macro, TE1, TE1, TE1, ESPP, ESPP. See also: substitution effect.

income elasticity of demand

The percentage change in demand that would occur in response to a 1% increase in the individual’s income (ESPP, TE1, TESA). Introduced in 8.6 The world oil market, TE1, ESPP.

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 6.3 Other people’s labour, 9.12 Looking backward: Baristas and bread markets, 12.4 Property rights, contracts, and market failures, Micro, Micro, Micro, Micro, TE1, TE1, TE1, ESPP, ESPP, ESPP.

increasing returns to scale

These occur when doubling all of the inputs to a production process more than 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. Also known as: economies of scale (ESPP, TE1, TESA). Introduced in Unit 7 The firm and its customers, ESPP. See also: decreasing returns to scale, constant returns to scale.

incremental innovation

Innovation that improves an existing product or process cumulatively (TE1, TESA).

index

An index is formed by aggregating the values of multiple items into a single value, and is used as a summary measure of an item of interest. Example: The HDI is a summary measure of wellbeing, and is calculated by aggregating the values for life expectancy, expected years of schooling, mean years of schooling, and gross national income per capita. A measure of the amount of something in one period of time, compared to the amount of the same thing in a different period of time, called the reference period or base period. It is common to set its value at 1 in the reference period (DE, TE1, TESA). Introduced in Unit 2 Technology, population, and growth, DE.

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 Preferences, 3.2.1 Indifference curves and the marginal rate of substitution, Micro, Micro, Micro, Micro, Micro, Macro, TE1, TE1, 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 1.4 The permanent technological revolution, Unit 2 Technology, population, and growth, Micro, Micro, TE1, TE1, ESPP.

industry

Goods-producing business activity: agriculture, mining, manufacturing, and construction. Manufacturing is the most important component (TE1, TESA). Introduced in TE1.

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 4.9 Cooperation, negotiation, conflicts of interest, and social norms, TE1, TE1, ESPP. See also: social preferences

infant industry

A relatively new industrial sector in a country that has relatively high costs, because its recent establishment means that it has few benefits from learning by doing, its small size deprives it of economies of scale, or a lack of similar firms means that it does not benefit from economies of agglomeration. Temporary tariff protection of this sector or other support may increase productivity in an economy in the long run (TE1, TESA). Introduced in TE1.

inflation

An increase in the general price level in the economy, usually measured as the percentage increase in prices over the last year. An increase in the general price level in the economy. Usually measured over a year (Macro, ESPP, DE, TE1, TESA). Introduced in 13.8 Measuring the economy: Inflation, 15.1 What’s wrong with inflation?, Macro, TE1, TE1, ESPP, DE, DE, DE, DE. See also: deflation, disinflation.

inflation-adjusted price

Price that takes into account the change in the overall price level (TE1, TESA). Introduced in TE1.

inflation-stabilizing rate of unemployment

The unemployment rate (at labour market equilibrium) at which inflation is constant. Originally known as the ‘natural rate’ of unemployment. Also known as: non-accelerating rate of unemployment, stable inflation rate of unemployment (ESPP, TE1, TESA). Introduced in 15.6 Expected inflation and the Phillips curve, TE1. See also: equilibrium unemployment.

inflation targeting

Monetary policy regime where the central bank changes interest rates to influence aggregate demand in order to keep the economy close to an inflation target, which is normally specified by the government (TE1, TESA). Introduced in Unit 15 Inflation, unemployment, and monetary policy, TE1.

innovation

The process of invention and diffusion considered as a whole (TE1, TESA). Introduced in TE1.

innovation rents

Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form, or marketing strategy. Also known as: Schumpeterian rents (TE1, TESA). Introduced in Unit 11 Rent-seeking, price-setting, and market dynamics, TE1, TE1, TE1, Micro, Macro, Macro.

innovation system

The relationships among private firms, governments, educational institutions, individual scientists, and other actors involved in the invention, modification, and diffusion of new technologies, and the way that these social interac­tions are governed by a combination of laws, policies, know­ledge, and social norms in force (TE1, TESA). Introduced in TE1.

insolvent

An entity is this if the value of its assets is less than the value of its liabilities (ESPP, TE1, TESA). Introduced in 10.10 The business of banking and bank balance sheets, TE1, ESPP, ESPP. See also: solvent.

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 1.6 Capitalism defined: Private property, markets, and firms, Micro, Micro, Macro, TE1, ESPP, ESPP.

intellectual property rights

Patents, trademarks, and copyrights (TE1, TESA). See also: patent, trademark, copyright.

interest rate

The price of bringing some spending power forward in time. The price of bringing some buying power forward in time (ESPP, TE1, TESA). Introduced in 10.2 Borrowing: Bringing consumption forward in time, TE1, ESPP. See also: nominal interest rate, real interest rate.

interest rate (short-term)

The price of borrowing base money. This is a nominal interest rate (ESPP, TE1, TESA). Introduced in 10.9 The central bank, the money market, and interest rates, 10.2 Borrowing: Bringing consumption forward in time, TE1, ESPP, TE1, ESPP.

intergenerational elasticity

When comparing parents and grown offspring, the percentage difference in the second generation’s status that is associated with a 1% difference in the adult generation’s status (TE1, TESA). Introduced in TE1. See also: intergenerational inequality, intergenerational mobility, intergenerational transmission of economic differences.

intergenerational inequality

The extent to which differences in parental generations are passed on to the next generation, as measured by the intergenerational elasticity or the intergenerational correlation (TE1, TESA). Introduced in TE1. See also: intergenerational elasticity, intergenerational mobility, intergenerational transmission of economic differences.

intergenerational mobility

Changes in the relative economic or social status between parents and children. Upward mobility occurs when the status of a child surpasses that of the parents. Downward mobility is the converse. A widely used measure of intergenerational mobility is the correlation between the positions of parents and children (for example, in their years of schooling or income). Another is the intergenerational elasticity (TE1, TESA). Introduced in TE1. See also: intergenerational elasticity, intergenerational transmission of economic differences.

intergenerational transmission of economic differences

The processes by which the economic status of the adult sons and daughters comes to resemble the economic status of the parents (TE1, TESA). Introduced in TE1. See also: intergenerational elasticity, intergenerational mobility.

invention

The development of new methods of production and new products (TE1, TESA). Introduced in TE1.

inventory

Goods held by a firm prior to sale or use, including raw materials, and partially-finished or finished goods intended for sale (TE1, TESA). Introduced in 13.4 Measuring the aggregate economy: The components of GDP, TE1.

investment function (aggregate)

A relationship that shows how investment spending in the economy as a whole depends on other variables, such as the interest rate and profit expectations. An equation that shows how investment spending in the economy as a whole depends on other variables, namely, the interest rate and profit expectations (Macro, TE1, TESA). Introduced in 14.3 Household target wealth, collateral, and consumption spending, Macro, TE1. See also: interest rate, economic profit.

investment (I)

Expenditure on newly produced capital goods (machinery and equipment) and buildings, including new housing (ESPP, TE1, TESA). Introduced in Micro.

irrational exuberance

A process by which assets become overvalued. The expression was first used by Alan Greenspan, then chairman of the US Federal Reserve Board, in 1996. It was popularized as an economic concept by the economist Robert Shiller (ESPP, TE1, TESA). Introduced in 11.6 Asset market bubbles, TE1, 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 2.4 Modelling a dynamic economy: Technology and costs, Micro, TE1, 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 7.3 Profits, costs, and the isoprofit curve, Micro, Micro, ESPP.

isototal benefits curve

The combinations of the probability of innovation and the total benefits to society from a firm’s innovation that yield the same total benefits (TE1, TESA). Introduced in TE1.

Joule

A unit of energy or work, originally defined as the amount of energy necessary to lift a small apple vertically 1 metre (TE1, TESA).

labour discipline model

A model that explains how employers set wages so that employees receive an economic rent (called employment rent), which provides workers an incentive to work hard in order to avoid job termination (ESPP, TE1, TESA). Introduced in 6.7 Wages, effort, and profits in the labour discipline model, TE1, ESPP, ESPP. See also: employment rent, efficiency wages.

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 9.2 Measuring the economy: Employment and unemployment, Macro, TE1, ESPP. See also: unemployment rate, employment rate, participation rate.

labour-intensive

Making greater use of labour as an input in production as compared with machines and other inputs (TE1, TESA). See also: capital-intensive.

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 1.6 Capitalism defined: Private property, markets, and firms, Micro, TE1. See also: labour force.

labour market equilibrium

The combination of the real wage and the level of employment determined by the intersection of the wage-setting and the price-setting curves. This is the Nash equilibrium of the labour market because neither employers nor workers could do better by changing their behaviour (TE1, TESA). Introduced in 9.6 Wages, profits, and unemployment in the whole economy, TE1. See also: equilibrium unemployment, inflation-stabilizing rate of unemployment.

labour market matching

The way in which employers looking for additional employees (that is, with vacancies) meet people seeking a new job (TE1, TESA). Introduced in TE1.

labour productivity

Total output divided by the number of hours or some other measure of labour input (ESPP, TE1, TESA). Introduced in 9.4 The firm’s hiring decision, TE1, TE1, 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 Unit 11 Rent-seeking, price-setting, and market dynamics, Micro, TE1, TE1, TE1, TE1. See also: arbitrage.

learning by doing

This occurs when the output per unit of inputs increases with greater experience in producing a good or service (TE1, TESA). Introduced in TE1, TE1.

legal tender

Coins or banknotes that, according to the law, must be accepted in payment for goods and services. Coins or banknotes that must be accepted in payment of a debt (Macro, TE1, TESA). Introduced in Macro.

lending rate (bank)

The average interest rate charged by commercial banks to firms and households. This rate will typically be above the policy interest rate: the difference is known as the markup or spread on commercial lending. This is a nominal interest rate. Also known as: market interest rate. The average interest rate charged by commercial banks to firms and households. This rate will typically be above the policy interest rate: the difference is the markup or spread on commercial lending. Also known as: market interest rate (ESPP, TE1, TESA). Introduced in 10.9 The central bank, the money market, and interest rates, 15.8 Monetary policy, TE1, TE1, ESPP. See also: interest rate, policy rate.

Leontief paradox

The unexpected finding by Wassily Leontief that exports from the US were labour-intensive and its imports capital-intensive, a result that contradicts what the economic theories predicted: namely that a country abundant in capital (like the US) would export goods that used a large quantity of capital in their production (TE1, TESA). Introduced in TE1.

leverage

See: leverage ratio (TE1, TESA). See also: leverage ratio.

leverage ratio (for banks or households)

The value of assets divided by the equity stake in those assets. The value of assets divided by the equity stake (capital contributed by owners and shareholders) in those assets (ESPP, DE, TE1, TESA). Introduced in 10.10 The business of banking and bank balance sheets, TE1, TE1, ESPP, DE, DE, DE, DE.

leverage ratio (for non-bank companies)

The value of total liabilities divided by total assets (DE, TE1, TESA).

liability

A debt; an amount that is owed, with a contractual obligation to repay it in future. Anything of value that is owed (Macro, ESPP, TE1, TESA). Introduced in 10.7 Assets, liabilities, and net worth, Macro, Macro, TE1, ESPP. See also: balance sheet, asset.

limit order

An announced price and quantity combination for an asset, either to be sold or bought (TE1, TESA). Introduced in 11.5 Changing supply and demand for financial assets, TE1.

linear regression line

The best-fitting line through a set of data (TE1, TESA). Introduced in Unit 13 Economic fluctuations and unemployment, TE1.

liquid

See: liquidity (TE1, TESA). See also: liquidity.

liquidity

Ease of buying or selling a financial asset at a predictable price (ESPP, TE1, TESA). Introduced in 10.10 The business of banking and bank balance sheets, TE1, ESPP.

liquidity risk

The risk that an asset cannot be exchanged for cash rapidly enough to prevent a financial loss (ESPP, TE1, TESA). Introduced in 10.8 Banks, money, and the central bank, TE1, TE1, ESPP.

lock-in

A consequence of the network external effects that create winner-take-all competition. The competitive process results in an outcome that is difficult to change, even if users of the technology consider an alternative innovation superior (TE1, TESA). Introduced in TE1.

logarithmic scale

A way of measuring a quantity based on the logarithm function, f(x) = log(x). The logarithm function converts a ratio to a difference: log (a/b) = log a – log b. This is very useful for working with growth rates. For instance, if national income doubles from 5 to 1 in a poor country and from 1, to 2, in a rich country, the absolute difference in the first case is 5 and in the second 1,, but log(1) – log(5) = .693, and log(2,) – log(1,) = .693. The ratio in each case is 2 and log(2) = .693 (DE, TE1, TESA). Introduced in Unit 13 Economic fluctuations and unemployment, TE1.

long-run equilibrium

An equilibrium that is achieved when variables that were held constant in the short run (for example, the number of firms in a market) are allowed to adjust, as people have time to respond the situation. An equilibrium that is achieved when variables that were held constant in the short run (for example, the number of firms in a market) are allowed to adjust, as people have time to respond the situation (TE1, TESA). Introduced in 11.3 Short-run and long-run equilibria, TE1.

long run (model)

The term does not refer to a period of time, but instead to what is exogenous. A long-run cost curve, for example, refers to costs when the firm can fully adjust all of the inputs including its capital goods; but technology and the economy’s institutions are exogenous (TE1, TESA). Introduced in 14.10 Aggregate demand and unemployment, TE1, TE1, Micro, Micro. See also: technology, institution, short run (model), medium run (model).

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 5.12 Measuring economic inequality, Macro, TE1, ESPP, ESPP, DE. See also: Gini coefficient.

low capacity utilization

When a firm or economy could increase output by increasing employment utilizing the existing capital goods (TE1, TESA).

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 7.3 Profits, costs, and the isoprofit curve, 8.2 The market and the equilibrium price, 7.6.1 Marginal revenue and marginal cost, Micro, Micro, Macro, TE1, TE1, TE1, ESPP, ESPP.

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 12.1 Market failure: External effects of pollution, Micro, TE1, 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 12.2 External effects and bargaining, Micro, Macro, TE1, 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 12.1 Market failure: External effects of pollution, Micro, TE1, 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 3.2 Labour and production, 3.1.1 Average and marginal productivity, Micro, TE1, TE1, ESPP.

marginal product of labour

The additional amount of output that is produced if if the amount of labour employed was increased by one unit, while holding all other inputs constant (TESA).

marginal productivity of abatement expenditures

The marginal rate of transformation (MRT) of abatement costs into improved environment. It is the slope of the feasible frontier (TE1, TESA). Introduced in TE1. See also: marginal rate of transformation, feasible frontier.

marginal propensity to consume (MPC)

The change in consumption when disposable income changes by one unit (Macro, TE1, TESA). Introduced in 14.1 The transmission of shocks: The multiplier process, Macro, Macro, TE1.

marginal propensity to import

The change in total imports when aggregate income changes by one unit. The change in total imports associated with a change in total income (Macro, TE1, TESA). Introduced in 14.5 The multiplier model: Including the government and net exports, Macro, TE1.

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 Preferences, 5.4 A model of choice and conflict, 7.3 Profits, costs, and the isoprofit curve, 3.2.1 Indifference curves and the marginal rate of substitution, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TE1, TE1, 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 3.5 The feasible set, 5.4 A model of choice and conflict, 7.3 Profits, costs, and the isoprofit curve, 3.4.1 Marginal rate of transformation, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TE1, TE1, 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 7.3 Profits, costs, and the isoprofit curve, 7.6.1 Marginal revenue and marginal cost, Micro, TE1, TE1.

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 12.2 External effects and bargaining, Micro, Micro, Macro, TE1, 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 12.1 Market failure: External effects of pollution, Micro, Macro, TE1, 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 8.2 The market and the equilibrium price, Micro, Micro, Micro, Micro, TE1, 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 Micro, ESPP.

market capitalization rate

The rate of return that is just high enough to induce investors to hold shares in a particular company. This will be high if the company is subject to a high level of systematic risk. The rate of return that is just high enough to induce investors to hold shares in a particular company. This will be high if the company is subject to a high level of systematic risk (TE1, TESA). Introduced in 11.4 The value of an asset: Basics, TE1.

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 The market and the equilibrium price, Micro, TE1, 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 7.9 Price-setting, market power, and public policy, Unit 12 Markets, efficiency, and public policy, Micro, Micro, Macro, TE1, TE1, 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 7.9 Price-setting, market power, and public policy, Micro, Micro, TE1, ESPP.

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 Micro, Macro, TE1.

maturity transformation

The practice of borrowing money short term and lending it long term. For example, a bank accepts deposits, which it promises to repay at short notice or no notice, and makes long-term loans (which can be repaid over many years). Also known as: liquidity transformation. The practice of borrowing money short-term and lending it long-term. For example, a bank accepts deposits, which it promises to repay at short notice or no notice, and makes long-term loans (which can be repaid over many years). Also known as: liquidity transformation (ESPP, TE1, TESA). Introduced in 10.8 Banks, money, and the central bank, TE1, ESPP.

median voter

If voters can be lined up along a single more-versus-less dimension (such as preferring higher or lower taxes, more or less environmental protection), the median voter is the one ‘in the middle’—that is (if there is an odd number of voters in total), with an equal number preferring more and preferring less than what he or she does (TE1, TESA). See also: median voter model.

median voter model

An economic model of the location of businesses applied to the positions taken in electoral platforms when two parties compete that provides conditions under which, in order to maximize the number of votes they will receive, the parties will adopt positions that appeal to the median voter (TE1, TESA). Introduced in TE1. See also: median voter.

medium run (model)

The term does not refer to a period of time, but instead to what is exogenous. In this case capital stock, technology, and institutions are exogenous. Output, employment, prices, and wages are endogenous (TE1, TESA). Introduced in 14.10 Aggregate demand and unemployment, TE1, TE1. See also: capital, technology, institution, short run (model), long run (model).

menu costs

The resources used in setting and changing prices (Macro, TE1, TESA). Introduced in 15.1 What’s wrong with inflation?, Macro, TE1.

merchandise trade

Trade in tangible products that are physically shipped across borders (TE1, TESA). Introduced in TE1.

merit goods

Goods and services that should be available to everyone, independently of their ability to pay (ESPP, TE1, TESA). Introduced in 12.8 The limits of markets, TE1, TE1, ESPP, Micro, 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 4.10 Dividing a pie (or leaving it on the table), 12.2 External effects and bargaining, Micro, Micro, TE1, TE1, ESPP.

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 12.4 Property rights, contracts, and market failures, Micro, Micro, TE1, ESPP.

momentum trading

Share trading strategy based on the idea that new information is not incorporated into prices instantly, so that prices exhibit positive correlation over short periods (TE1, TESA). Introduced in 11.6 Asset market bubbles, TE1.

monetary policy

Central bank or government actions aimed at influencing economic activity through changes in interest rates or the prices of financial assets. Central bank (or government) actions aimed at influencing economic activity through changing interest rates or the prices of financial assets (Macro, TE1, TESA). Introduced in 9.7 How changes in demand for goods and services affect unemployment, 14.3 Household target wealth, collateral, and consumption spending, Macro, Macro, Macro, Macro, TE1, TE1. See also: quantitative easing.

money

Money is something that acts as a store of value and is widely accepted as a means of exchange. Typically it is also used as the unit of account, for measuring the value of goods and services, and assets and liabilities. Some commodities can be used as money, but in a modern economy money in the hands of the public consists of commercial bank deposits and currency (notes and coins) issued by the central bank. Money is something that facilitates exchange (called a medium of exchange) consisting of bank notes and bank deposits, or anything else that can be used to purchase goods and services, and is generally accepted by others as payment because others can use it for the same purpose. The ‘because’ is important and it distinguishes exchange facilitated by money from barter exchange, in which goods are directly exchanged without money changing hands. Money is something that facilitates exchange (called a medium of exchange) consisting of bank notes and bank deposits, or anything else that can be used to purchase goods and services, and is generally accepted by others as payment because others can use it for the same purpose. The ‘because’ is important and it distinguishes exchange facilitated by money from barter exchange in which goods are directly exchanged without money changing hands. A medium of exchange consisting of bank notes and bank deposits, or anything else that can be used to purchase goods and services, and is accepted as payment because others can use it for the same purpose (Macro, ESPP, TE1, TESA). Introduced in 10.1 Money and wealth, Macro, TE1, ESPP. See also: means of exchange, store of value.

money wage

The amount of money an employer pays to a worker. Also known as: nominal wage (TE1, TESA).

monopolistic competition

A market in which each seller has a unique product but there is competition among firms because firms sell products that are close substitutes for one another (ESPP, TESA). Introduced in 7.9 Price-setting, market power, and public policy, ESPP.

monopolized market

Market in which a single firm produces all the goods that are sold (TE1, TESA).

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 7.9 Price-setting, market power, and public policy, Micro, TE1, TE1, ESPP, ESPP. See also: monopoly power, natural monopoly.

monopoly power

The power that a firm has to control its own price. The fewer close substitutes for the product are available, the greater the firm’s price-setting power (ESPP, TE1, TESA). See also: monopoly.

monopoly rents

A form of profits, which arise due to restricted competition in selling a firm’s product. A form of economic profits, which arise due to restricted competition in selling a firm’s product (ESPP, TE1, TESA). Introduced in 7.9 Price-setting, market power, and public policy, TE1, ESPP. See also: economic profit.

moral hazard

This term originated in the insurance industry to express the problem that insurers face, namely, the person with home insurance may take less care to avoid fires or other damages to his home, thereby increasing the risk above what it would be in absence of insurance. This term now refers to any situation in which one party to an interaction is deciding on an action that affects the profits or wellbeing of the other but which the affected party cannot control by means of a contract, often because the affected party does not have adequate information on the action. It is also referred to as the ‘hidden actions’ problem (ESPP, TE1, TESA). Introduced in 12.5 Public goods, 14.5 The multiplier model: Including the government and net exports, TE1, TE1, ESPP. See also: hidden actions (problem of), incomplete contract, too big to fail.

mortgage-backed security (MBS)

A financial asset that uses mortgages as collateral. Investors receive payments derived from the interest and principal of the underlying mortgages (TE1, TESA). Introduced in TE1. See also: collateral.

mortgage (or mortgage loan)

A loan contracted by households and businesses to purchase a property without paying the total value at one time. Over a period of many years, the borrower repays the loan, plus interest. The debt is secured by the property itself, referred to as collateral (Macro, ESPP, TE1, TESA). Introduced in 10.8 Banks, money, and the central bank, 14.3 Household target wealth, collateral, and consumption spending, Macro, TE1, TE1, ESPP. See also: collateral.

multiplier

See: fiscal multiplier (TE1, TESA). See also: fiscal multiplier.

multiplier model

A model of aggregate demand that includes the multiplier process (Macro, TE1, TESA). Introduced in 14.1 The transmission of shocks: The multiplier process, Macro, Macro, Macro, TE1. See also: fiscal multiplier, multiplier process.

multiplier process

A mechanism through which the direct effect of an increase (or decrease) in aggregate spending is amplified through indirect effects that further increase (or decrease) aggregate output. A mechanism through which the direct and indirect effect of a change in autonomous spending affects aggregate output (Macro, TE1, TESA). Introduced in 14.1 The transmission of shocks: The multiplier process, Macro, Macro, TE1. See also: fiscal multiplier, multiplier model.

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 4.13 Social interactions: Conflicts in the choice among Nash equilibria, 6.6 Work and wages: The labour discipline model, 8.2 The market and the equilibrium price, 9.2 Measuring the economy: Employment and unemployment, 13.7 Why is investment volatile?, Micro, Micro, Micro, Micro, Macro, Macro, Macro, Macro, Macro, TE1, TE1, TE1, TE1, TE1, TE1, ESPP, ESPP, ESPP, ESPP, ESPP. See also: game theory.

national accounts

The system used for measuring overall output and expenditure in a country (Macro, TE1, TESA). Introduced in 13.3 Measuring the aggregate economy, Macro, TE1.

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 1.8 Capitalism, causation and history’s hockey stick, 6.4 Employment rents, 14.7 The multiplier and economic policymaking, Micro, Micro, Macro, Macro, Macro, TE1, TE1, TE1, ESPP, ESPP, ESPP, ESPP, DE, DE, DE, DE, DE.

natural logarithm

See: logarithmic scale (DE, TE1, TESA). See also: logarithmic scale.

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 Prices, costs, and market failure, Micro, TE1, TE1, ESPP.

negative feedback (process)

We say that negative feedback occurs if an initial change sets in motion a process of further changes that dampen the original change. A process whereby some initial change sets in motion a process that dampens the initial change (Macro, ESPP, TE1, TESA). Introduced in 14.5 The multiplier model: Including the government and net exports, TE1, TE1, Macro. See also: positive feedback (process).

net capital flows

The borrowing and lending tracked by the current account (TE1, TESA). Introduced in TE1. See also: current account, current account deficit, current account surplus.

net income

Gross income minus depreciation (ESPP, TE1, TESA). Introduced in 10.1 Money and wealth, TE1. See also: income, gross income, depreciation.

net present value

The net present value of a project that will generate income at some time in the future is the present value of the stream of income, minus the present value of the associated costs (whether the costs are incurred in the present or the future). The present value of a stream of future income minus the associated costs (whether the costs are in the present or the future) (Macro, ESPP, TE1, TESA). Introduced in Macro. See also: present value.

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 10.7 Assets, liabilities, and net worth, Macro, Macro, TE1, 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 Unit 7 The firm and its customers, Micro, TE1, ESPP.

network external effects

An external effect of one person’s action on another, occuring because the two are connected in a network (TE1, TESA). Introduced in TE1. See also: external effect.

New Deal

US President Franklin Roosevelt’s program, begun in 1933, of emergency public works and relief programs to employ millions of people. It established the basic structures for modern state social welfare programs, labour policies, and regulation (TE1, TESA). Introduced in TE1.

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 15.1 What’s wrong with inflation?, Micro, Macro, Macro, TE1, ESPP, ESPP. See also: real interest rate, interest rate.

nominal wage

The actual amount received in payment for work, per unit of time, expressed in a particular currency. Also known as: money wage. The actual amount received in payment for work, in a particular currency. Also known as: money wage. The actual amount received in payment for work, in a particular currency. Also known as: money wage (Macro, ESPP, DE, TE1, TESA). Introduced in Unit 9 The labour market: Wages, profits, and unemployment, Macro, Macro, TE1, ESPP. See also: real wage.

non-compete contract

A contract of employment containing a provision or agreement by which the worker cannot leave to work for a competitor. This may reduce the reservation option of the worker, lowering the wage that the employer needs to pay (TE1, TESA). Introduced in TE1, TE1.

non-excludable public good

A public good for which it is impossible to exclude anyone from having access (ESPP, TE1, TESA). Introduced in 12.5 Public goods, TE1. See also: artificially scarce good.

non-rival good

A good that, if available to anyone, is available to everyone at no additional cost (ESPP, TE1, TESA). Introduced in ESPP. See also: rival good, non-excludable public good.

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 Micro, Micro, TE1. See also: economic profit, opportunity cost of capital.

NSDP

Net State Domestic Product (NSDP) is a measure of all goods and services produced within the boundaries of the state during a given period of time after deducting the wear and tear or depreciation (TESA). Introduced in 2.10 Escaping from Malthusian stagnation.

offshoring

The relocation of part of a firm’s activities outside of the national boundaries in which it operates. It can take place within a multinational company or may involve outsourcing production to other firms (TE1, TESA). Introduced in TE1, TE1.

Okun's coefficient

The change in the unemployment rate in percentage points predicted to be associated with a 1% change in GDP. For example, an Okun coefficient of -0.4 means that a fall in output of 1% is predicted to be associated with a rise in the unemployment rate of 0.4 percentage points. The change in the unemployment rate in percentage points predicted to be associated with a 1% change in the growth rate of GDP (TE1, TESA). Introduced in Unit 13 Economic fluctuations and unemployment, TE1. See also: Okun’s law.

Okun's law

The empirical regularity that growth of GDP is negatively correlated with the rate of unemployment. The empirical regularity that changes in the rate of growth of GDP are negatively correlated with the rate of unemployment (TE1, TESA). Introduced in Unit 13 Economic fluctuations and unemployment, TE1. See also: Okun’s coefficient.

oligopoly

A market with a small number of sellers of the same good, giving each seller some market power. A market with a small number of sellers, giving each seller some market power (ESPP, TE1, TESA). Introduced in 7.9 Price-setting, market power, and public policy, 8.6 The world oil market, TE1, ESPP.

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 Unit 3 Work, scarcity, and choice, 10.2 Borrowing: Bringing consumption forward in time, Unit 15 Inflation, unemployment, and monetary policy, Micro, Micro, Micro, Micro, Micro, Macro, Macro, TE1, TE1, TE1, TE1, 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 Micro, Micro, Macro, TE1.

order book

A record of limit orders placed by buyers and sellers, but not yet fulfilled (TE1, TESA). Introduced in 11.5 Changing supply and demand for financial assets, TE1.

own account work

Work undertaken for oneself, rather than for an employer (TESA). Introduced in 3.1 Work and its forms, Unit 6 The firm: Owners, managers, and employees.

ownership

The right to use and exclude others from the use of something, and the right to sell the thing that is owned (TE1, TESA). Introduced in 1.7 Capitalism as an economic system, TE1.

paradox of thrift

If a single individual consumes less, their savings will increase; but if everyone consumes less, the result may be lower rather than higher savings overall. This happens if the increase in the saving rate is unmatched by an increase in investment (or other source of aggregate demand such as government spending on goods and services). Then aggregate demand and income fall, so actual levels of saving do not increase. If a single individual consumes less, her savings will increase; but if everyone consumes less, the result may be lower rather than higher savings overall. The attempt to increase saving is thwarted if an increase in the saving rate is unmatched by an increase in investment (or other source of aggregate demand such as government spending on goods and services). The outcome is a reduction in aggregate demand and lower output so that actual levels of saving do not increase (Macro, TE1, TESA). Introduced in 14.5 The multiplier model: Including the government and net exports, Macro, TE1, 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 5.2 Evaluating institutions and outcomes: The Pareto criterion, Micro, Micro, TE1, ESPP, ESPP. See also: Pareto dominant.

Pareto dominant

Allocation A Pareto dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off (ESPP, TE1, TESA). Introduced in 5.2 Evaluating institutions and outcomes: The Pareto criterion, TE1, ESPP. See also: Pareto efficient.

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 5.7 Economically feasible allocations and the surplus, Micro, TE1, ESPP. See also: Pareto efficient.

Pareto efficient

An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off (ESPP, TE1, TESA). Introduced in 5.2 Evaluating institutions and outcomes: The Pareto criterion, 7.6 Gains from trade, 5.8.1 The Pareto efficiency curve, 12.1.1 External effects of pollution, TE1, TE1, TE1, TE1, TE1, 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 5.7 Economically feasible allocations and the surplus, 7.6 Gains from trade, 14.8 The government’s finances, Micro, Micro, Micro, TE1, TE1, TE1, ESPP, ESPP. See also: Pareto dominant.

participation rate

The ratio of the number of people in the labour force to the population of working age (Macro, ESPP, TE1, TESA). Introduced in 9.2 Measuring the economy: Employment and unemployment, Macro, TE1, ESPP. See also: labour force, population of working age.

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 12.5 Public goods, Micro, TE1, TE1, ESPP, ESPP.

payoff

The benefit to each player associated with the joint actions of all the players (ESPP, TE1, TESA). Introduced in 4.1 Social interactions: Game theory, TE1, ESPP.

perfectly competitive equilibrium

Such an equilibrium occurs in a model in which all buyers and sellers are price-takers. In this equilibrium, all transactions take place at a single price. This is known as the law of one price. At that price, the amount supplied equals the amount demanded: the market clears. No buyer or seller can benefit by altering the price they are demanding or offering. They are both price-takers. All potential gains from trade are realized (TE1, TESA). Introduced in TE1. See also: law of one price.

performance-related pay

A pay which varies, at least partially, with a worker’s performance (TE1, TESA). See also: piece-rate work.

Phillips curve

An inverse relationship between the rate of inflation and the rate of unemployment. It is named after Bill Phillips, who observed the relationship empirically, but it can also be derived from a theoretical model of wage and price setting (Macro, TE1, TESA). Introduced in 15.1 What’s wrong with inflation?, Macro, Macro, TE1.

piece-rate work

A type of employment in which the worker is paid a fixed amount for each unit of the product that the worker produces. A type of employment in which the worker is paid a fixed amount for each unit of the product made (ESPP, TE1, TESA). Introduced in 3.1 Work and its forms, 6.3 Other people’s labour, TE1, ESPP.

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 12.3 External effects: Policies and income distribution, Micro, TE1, ESPP. See also: external effect, Pigouvian subsidy.

policy (interest) rate, policy rate

The nominal interest rate set by the central bank, which applies to banks that borrow base money from each other, and from the central bank. Also known as: base rate, official rate. The interest rate set by the central bank, which applies to banks that borrow base money from each other, and from the central bank. Also known as: base rate, official rate (Macro, ESPP, TE1, TESA). Introduced in 10.9 The central bank, the money market, and interest rates, 15.8 Monetary policy, Macro, Macro, Macro, TE1, TE1, ESPP. See also: real interest rate, nominal interest rate.

political accountability

Accountability achieved by political processes such as elections, oversight by an elected government, or consultation with affected citizens (ESPP, TE1, TESA). Introduced in TE1, ESPP. See also: accountability, economic accountability.

political institutions

An institution is a set of laws and informal rules that regulate social interactions, sometimes also termed ‘the rules of the game’. Political institutions are the institutions that determine who has power and how it is exercised in a society. The rules of the game that determine who has power and how it is exercised in a society (Macro, TE1, TESA). Introduced in Macro, TE1, ESPP.

political rent

Political rent is the difference between the net benefit (monetary or otherwise) that an individual receives as a result of their political position, and the net benefit from their next best alternative (what they would receive in the absence of a privileged political position). A payment or other benefit in excess of the individual’s next best alternative (reservation position) that exists as a result of the individual’s political position. The reservation position in this case refers to the individual’s situation were they to lack a privileged political position. A payment or other benefit in excess of the individual’s next best alternative (reservation position) that exists as a result of the individual’s political position. The reservation position in this case refers to the individual’s situation were he or she to lack a privileged political position (Macro, ESPP, TE1, TESA). Introduced in Macro, TE1, ESPP. See also: economic rent.

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 1.9 Varieties of capitalism: Institutions, government, and the economy, Micro, TE1, ESPP.

polluter pays principle

A guide to environmental policy according to which those who impose negative environmental effects on others should be made to pay for the damages they impose, through taxation or other means (ESPP, TE1, TESA). Introduced in TE1, ESPP. See also: external cost.

population of working age

A statistical convention, which in many countries is all people aged between 15 and 64 years (Macro, ESPP, TE1, TESA). Introduced in 9.2 Measuring the economy: Employment and unemployment, Macro, TE1, ESPP.

positive feedback (process)

We say that positive feedback occurs if an initial change sets in motion a process of further changes that magnify the original change. A process whereby some initial change sets in motion a process that magnifies the initial change (Macro, ESPP, TE1, TESA). Introduced in 11.7 Modelling bubbles and crashes, 14.5 The multiplier model: Including the government and net exports, TE1, TE1, TE1, TE1, Macro. See also: negative feedback (process).

postwar accord

An informal agreement (taking different forms in different countries) among employers, governments, and trade unions that created the conditions for rapid economic growth in advanced economies from the late 194s to the early 197s. Trade unions accepted the basic institutions of the capitalist economy and did not resist technological change in return for low unemployment, tolerance of unions and other rights, and a rise in real incomes that matched rises in productivity (TE1, TESA). Introduced in TE1.

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 5.6 Allocations imposed by force, Micro, TE1, ESPP.

precautionary saving

An increase in saving to restore wealth to its target level (Macro, TE1, TESA). Introduced in 14.3 Household target wealth, collateral, and consumption spending, Macro, TE1. See also: target wealth.

predistribution policy

Government actions that affect the endowments people have and their value, including the distribution of market income and the distribution of privately held wealth. Examples include education, minimum wage, and anti-discrimination policies (TE1, TESA). Introduced in TE1. See also: redistribution policy.

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 Preferences, Micro, Micro, Micro, Micro, Macro, TE1, ESPP, ESPP, ESPP, ESPP.

present value

The effective value today of a stream of income or other benefits that will be received in the future. The present value is less that the future value when future income is discounted using an interest rate or the person’s own discount rate. The value today of a stream of future income or other benefits, when these are discounted using an interest rate or the person’s own discount rate (Macro, ESPP, TE1, TESA). Introduced in 10.9 The central bank, the money market, and interest rates, Macro, TE1, ESPP. See also: net present value.

price-based environmental policy

A policy that uses a tax or subsidy to affect prices, with the goal of internalizing the external effects on the environment of an individual’s choices (TE1, TESA). Introduced in TE1.

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 7.2 The demand curve and willingness to pay, 11.2 How market organization can influence prices, Micro, TE1, 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 7.7 The elasticity of demand, Micro, Macro, Macro, TE1, ESPP, ESPP, ESPP.

price elasticity of supply

The percentage change in supply that would occur in response to a 1% increase in price. Supply is elastic if this is greater than 1, and inelastic if less than 1 (ESPP, TESA). Introduced in 8.5 Changes in supply and demand, ESPP.

price gap

A difference in the price of a good in the exporting country and the importing country. It includes transportation costs and trade taxes. When global markets are in competitive equilibrium, these differences will be entirely due to trade costs (ESPP, TE1, TESA). Introduced in TE1. See also: arbitrage.

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 7.7 The elasticity of demand, Micro, Macro, TE1, ESPP, ESPP.

price-setting curve

The curve that gives the real wage paid when firms choose their profit-maximizing price (TE1, TESA). Introduced in Unit 9 The labour market: Wages, profits, and unemployment, TE1, TE1.

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 8.2 The market and the equilibrium price, Micro, TE1, ESPP.

primary deficit

The government deficit (its revenue minus its expenditure) excluding interest payments on its debt (TE1, TESA). Introduced in 14.8 The government’s finances, TE1. See also: government debt.

primary labour market

When the labour market is segmented into separate parts, a primary labour market is a segment where conditions for workers are relatively good, typically with trade union representation, high wages, and job security. A market in which workers are typically represented by trade unions, and enjoy high wages and job security (Macro, TE1, TESA). Introduced in Macro, TE1. See also: secondary labour market, segmented labour market.

principal-agent relationship

This is an asymmetrical relationship in which one party (the principal) benefits from some action or attribute of the other party (the agent) about which the principal’s information is not sufficient to enforce in a complete contract. This relationship 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. This relationship 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. Also known as: principal–agent problem (ESPP, DE, TE1, TESA). Introduced in 6.10 Principals and agents: Interactions under incomplete contracts, 9.13 Conclusion, 10.12 Credit market constraints: A principal–agent problem, 12.5 Public goods, TE1, TE1, TE1, TE1, TE1, TE1, 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 4.3 The prisoners’ dilemma, Micro, TE1, 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 12.5 Public goods, Micro, TE1.

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 5.6 Allocations imposed by force, Unit 12 Markets, efficiency, and public policy, Micro, Micro, TE1, TE1, ESPP, ESPP.

procedural judgements 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) (ESPP, TE1, TESA). Introduced in 5.3 Evaluating institutions and outcomes: Fairness, TE1, ESPP. See also: substantive judgements of fairness.

process innovation

An innovation that allows a good or service to be produced at lower cost than its competitors (TE1, TESA). Introduced in TE1.

procyclical

Tending to move in the same direction as aggregate output and employment over the business cycle (TE1, TESA). Introduced in TE1. See also: countercyclical.

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 7.6 Gains from trade, Micro, Micro, TE1, ESPP.

product innovation

An innovation that produces a new good or service at a cost that will attract buyers (TE1, TESA). Introduced in TE1.

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 2.3 Basic concepts: Prices, costs, and innovation rents, 3.2 Labour and production, 14.10 Aggregate demand and unemployment, Micro, Micro, Micro, Macro, Macro, TE1, 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 7.7 The elasticity of demand, Micro, Micro, Macro, TE1, ESPP, ESPP.

progressive (policy)

An expenditure or transfer that increases the incomes of poorer households by more than richer households, in percentage terms (TE1, TESA). Introduced in TE1. See also: regressive (policy).

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 Unit 12 Markets, efficiency, and public policy, Micro, Micro, TE1, ESPP.

protectionist policy

Measures taken by a government to limit trade; in particular, to reduce the amount of imports in the economy. These are designed to protect local industries from external competition. They can take different forms, such as taxes on imported goods or import quotas (Macro, TE1, TESA). Introduced in 15.1 What’s wrong with inflation?, Macro, TE1, TE1.

prudential policy

A policy that is prudent in that it places a very high value on reducing the likelihood of a disastrous outcome, even if this is costly in terms of other objectives foregone. Such an approach is often advocated where there is fundamental uncertainty about the conditions under which a disastrous outcome would occur. A policy that places a very high value on reducing the likelihood of a disastrous outcome, even if this is costly in terms of other objectives foregone. Such an approach is often advocated where there is great uncertainty about the conditions under which a disastrous outcome would occur (Macro, TE1, TESA). Introduced in Macro, TE1.

public bad

The negative equivalent of a public good. It is non-rival in the sense that a given individual’s consumption of the public bad does not diminish others’ consumption of it (ESPP, TE1, TESA). Introduced in 12.5 Public goods, TE1, 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 4.6 Public goods, free riding, and repeated interaction, 8.8 Price-setting and price-taking firms, 12.5 Public goods, Micro, Macro, TE1, TE1, TE1, TE1, ESPP. See also: non-excludable public good, artificially scarce good.

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 1.2 Measuring income and living standards, Micro, Macro, TE1, ESPP. See also: constant prices.

pure impatience

In a situation in which a person’s endowment is the same amount of consumption this period and later, she would have this characteristic if she values an additional unit of consumption now over an additional unit later. It arises when a person is impatient to consume more now because she places less value on consumption in the future for reasons of myopia, weakness of will, or for other reasons. This is a characteristic of a person who values an additional unit of consumption now over an additional unit later, when the amount of consumption is the same now and later. It arises when a person is impatient to consume more now because she places less value on consumption in the future for reasons of myopia, weakness of will, or for other reasons (ESPP, TE1, TESA). Introduced in 10.2 Borrowing: Bringing consumption forward in time, TE1, TE1, ESPP. See also: weakness of will.

quantitative easing (QE)

Central bank purchases of financial assets aimed at reducing interest rates on those assets when conventional monetary policy is ineffective because the policy interest rate is at the zero lower bound (Macro, TE1, TESA). Introduced in 15.8 Monetary policy, Macro, TE1. See also: zero lower bound.

quantity-based environmental policy

Policies that implement environmental objectives by using bans, caps, and regulations (TE1, TESA). Introduced in TE1.

quota

A limit imposed by the government on the volume of imports allowed to enter the economy during a specific period of time (TE1, TESA). Introduced in TE1.

race to the bottom

Self-destructive competition between national or regional governments, resulting in lower wages and less regulation to attract foreign investment in a globalized economy (TE1, TESA). Introduced in TE1.

radical innovation

Innovations based on a broad range of knowledge from different sectors, recombining this to create new and very different products (TE1, TESA).

rationed goods

Goods that are allocated to buyers by a process other than price (such as queueing, or a lottery) (TE1, TESA). Introduced in 11.8 Non-clearing markets: Rationing, queuing, and secondary markets, TE1.

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 15.1 What’s wrong with inflation?, Micro, Macro, Macro, TE1, ESPP. See also: nominal interest rate, interest rate.

real wage

The wage expressed in terms of the amount of goods and services the worker can buy with it. It is calculated by dividing the nominal wage by the current price level in the same currency. The nominal wage, adjusted to take account of changes in prices between different time periods. It measures the amount of goods and services the worker can buy (Macro, ESPP, DE, TE1, TESA). Introduced in Unit 9 The labour market: Wages, profits, and unemployment, 15.3 Inflation, the business cycle, and the Phillips curve, Macro, Macro, TE1, TE1, ESPP. See also: nominal wage.

recession

The US National Bureau of Economic Research defines a recession as a period when output is declining. It is over once the economy begins to grow again. An alternative definition is a period when the level of output is below its normal level, even if the economy is growing. It is not over until output has grown enough to get back to normal. The latter definition has the problem that the ‘normal’ level is subjective. The US National Bureau of Economic Research defines it as a period when output is declining. It is over once the economy begins to grow again. An alternative definition is a period when the level of output is below its normal level, even if the economy is growing. It is not over until output has grown enough to get back to normal. The latter definition has the problem that the ‘normal’ level is subjective (Macro, TE1, TESA). Introduced in Unit 13 Economic fluctuations and unemployment, Macro, TE1.

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 4.2 Equilibrium in the invisible hand game, Micro, TE1, ESPP. See also: social preferences.

redistribution policy

Taxes, monetary, and in-kind transfers of the government that result in a distribution of final income that differs from the distribution of market income (TE1, TESA). Introduced in TE1. See also: predistribution policy.

regressive (policy)

An expenditure or transfer that increases the incomes of richer households by more than poorer households, in percentage terms (TE1, TESA). Introduced in TE1. See also: progressive (policy).

regular wage

A fixed and regular compensation for services provided, independent of time taken to provide those services (TESA). Introduced in 3.1 Work and its forms, Unit 6 The firm: Owners, managers, and employees.

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 2.3 Basic concepts: Prices, costs, and innovation rents, 15.1 What’s wrong with inflation?, Micro, TE1, TE1.

remittances

Money sent home by international migrant workers to their families or others in the migrants’ home country. In countries which either supply or receive large numbers of migrant workers, this is an important international capital flow (TE1, TESA). Introduced in TE1.

rent ceiling

The maximum legal price a landlord can charge for a rent (Micro, Macro, TE1, TESA). Introduced in 11.9 Markets with controlled prices, Micro, TE1.

repeated game

A game in which the same interaction (same payoffs, players, feasible actions) may occur more than once. A game in which the same interaction (same payoffs, players, feasible actions) may be occur more than once (ESPP, TE1, TESA). Introduced in ESPP.

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 Unit 7 The firm and its customers, Micro, TE1, 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 5.7 Economically feasible allocations and the surplus, 10.2 Borrowing: Bringing consumption forward in time, Micro, Micro, TE1, TE1, 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 2.3 Basic concepts: Prices, costs, and innovation rents, 5.7 Economically feasible allocations and the surplus, 12.2 External effects and bargaining, Micro, Micro, Micro, Micro, TE1, TE1, TE1, 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 8.1 Buying and selling: Demand and supply in a competitive market, Micro, TE1, 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 Determinants of the employment rent, 9.2 Measuring the economy: Employment and unemployment, Micro, Micro, Micro, Macro, Macro, TE1, TE1, ESPP.

reserves (natural resource)

The amount of a natural resource that is economically feasible to extract given existing technologies (TE1, TESA). Introduced in TE1. See also: resources (natural).

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 6.2 Other people’s money: The separation of ownership and control, Micro, TE1, ESPP.

resources (natural)

The estimated total amount of a substance in the earth’s crust (TE1, TESA). Introduced in TE1. See also: reserves (natural resource).

revealed preference

A way of studying preferences by reverse engineering the motives of an individual (her preferences) from observations about her or his actions (TE1, TESA). Introduced in 4.8 Behavioural experiments in the lab and in the field, TE1.

reverse causality

If we are looking for evidence that one variable (x) causes another (y) and find that the variables are correlated, the explanation may be the reverse: that y causes x. For example, if we find that people who attend university earn more, does that mean that university increased their earning ability? Could it be that people with high earning potential are more likely to attend university? A two-way causal relationship in which A affects B and B also affects A (Macro, TE1, TESA). Introduced in Unit 13 Economic fluctuations and unemployment, 14.7 The multiplier and economic policymaking, Macro, Macro, TE1, TE1. See also: correlation.

rival good

A good which, if consumed by one person, is not available to another (ESPP, TE1, TESA). See also: non-rival good.

saving

When consumption expenditure is less than net income, saving takes place and wealth rises (Micro, Macro, ESPP, TE1, TESA). Introduced in 10.1 Money and wealth, Micro, TE1, 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 Unit 3 Work, scarcity, and choice, 8.6 The world oil market, Micro, ESPP.

Schumpeterian rents

Another, equivalent way to refer to innovation rents. Also known as: innovation rents. Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form or marketing strategy. Also known as: innovation rents (TE1, TESA).

secondary and primary markets

The primary market is where goods or financial assets are sold for the first time. For example, the initial sale of shares by a company to an investor (known as an initial public offering or IPO) is on the primary market. The subsequent trading of those shares on the stock exchange is on the secondary market. The terms are also used to describe the initial sale of tickets (primary market) and the secondary market in which they are traded (ESPP, TE1, TESA). Introduced in 11.5 Changing supply and demand for financial assets, TE1, ESPP.

secondary labour market

When the labour market is segmented into separate parts, a secondary labour market is a segment where conditions for workers are relatively poor, typically with low wages and short-term contracts or limited job security. This might be due to their age, or because they are discriminated against according to race or ethnic group. Workers typically on short-term contracts with limited wages and job security. This might be due to their age, or because they are discriminated against by race or ethnic group (Macro, TE1, TESA). Introduced in Macro, TE1. See also: primary labour market, segmented labour market.

segmented labour market

A labour market with two or more distinct segments that function as separate labour markets, with limited mobility of workers from one segment to the other (including for reasons of racial, language, or other forms of discrimination). A labour market whose distinct segments function as separate labour markets with limited mobility of workers from one segment to the other (including for reasons of racial, language, or other forms of discrimination) (Macro, TE1, TESA). Introduced in Macro, TE1. See also: primary labour market, secondary labour market.

self-insurance

To maintain their consumption, households can use savings and borrowing to self-insure against a temporary fall in income or need for greater expenditure. Saving by a household in order to be able to maintain its consumption when there is a temporary fall in income or need for greater expenditure (Macro, TE1, TESA). Introduced in 13.5 How households cope with fluctuations, Macro, TE1.

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 6.2 Other people’s money: The separation of ownership and control, Micro, TE1, 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 4.10 Dividing a pie (or leaving it on the table), Micro, TE1, ESPP. See also: simultaneous game.

share

A part of the assets of a firm that may be traded. It gives the holder a right to receive a proportion of a firm’s profit and to benefit when the firm’s assets become more valuable. Also known as: common stock (ESPP, TE1, TESA). Introduced in 6.2 Other people’s money: The separation of ownership and control, 11.4 The value of an asset: Basics, TE1, TE1, ESPP, ESPP.

share of employment in industry

Percentage of the workforce employed in non-agricultural i.e. industrial sector (TESA).

shock

An exogenous change in some of the fundamental data or variables used in a model. An exogenous change in some of the fundamental data used in a model (ESPP, TE1, TESA). Introduced in 8.5 Changes in supply and demand, 13.5 How households cope with fluctuations, TE1, TE1, ESPP.

short-run equilibrium

An equilibrium that will prevail while certain variables (for example, the number of firms in a market) remain constant, but where we expect these variables to change when people have time to respond to the situation (TE1, TESA). Introduced in 11.3 Short-run and long-run equilibria, TE1.

short run (model)

The term does not refer to a period of time, but instead to what is exogenous: prices, wages, the capital stock, technology, institutions (TE1, TESA). Introduced in 14.10 Aggregate demand and unemployment, TE1, TE1, Micro, Micro. See also: wages, capital, technology, institutions, medium run (model), long run (model).

short selling

The sale of an asset borrowed by the seller, with the intention of buying it back at a lower price. This strategy is adopted by investors expecting the value of an asset to decrease. Also known as: shorting (TE1, TESA). Introduced in 11.7 Modelling bubbles and crashes, TE1.

short side (of a market)

The side (either supply or demand) on which the number of desired transactions is least (for example, employers are on the short side of the labour market, because typically there are more workers seeking work than there are jobs being offered). The opposite of short side is the long side (TE1, TESA). Introduced in 11.9 Markets with controlled prices, TE1. See also: supply side, demand side.

short-termism

This subjective term refers to the case when the person making a judgement places too much weight on costs, benefits, and other things occurring in the near future than would be appropriate (TE1, TESA). Introduced in TE1.

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 4.10 Dividing a pie (or leaving it on the table), Micro, Micro, TE1, 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 Unit 4 Social interactions, Unit 12 Markets, efficiency, and public policy, Micro, TE1, TE1, ESPP, ESPP.

social insurance

Expenditure by the government, financed by taxation, which provides protection against various economic risks (for example, loss of income due to sickness, or unemployment) and enables people to smooth incomes throughout their lifetime (ESPP, TE1, TESA). Introduced in TE1, TE1, ESPP. See also: co-insurance.

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 Unit 4 Social interactions, Micro, Micro, TE1, 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 goods, free riding, and repeated interaction, Unit 12 Markets, efficiency, and public policy, Micro, TE1, TE1, 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 4.4 Social preferences: Altruism, Micro, TE1, TE1, ESPP.

solvent

A firm or individual for which net worth is positive or zero. For example, a bank whose assets are more than its liabilities (what it owes). A firm or individual for which net worth is positive or zero. For example, a bank for this assets are more than its liabilities (what it owes) (ESPP, TE1, TESA). See also: insolvent.

sovereign debt crisis

If a government is unable to repay its debt as required, and cannot negotiate a change in terms with the lender, it may default on some or all of the debt. A situation in which the government either defaults, or is expected to default, is described as a sovereign debt crisis. A situation in which government bonds come to be considered so risky that the government may not be able to continue to borrow. If so, the government cannot spend more than the tax revenue they receive (Macro, TE1, TESA). Introduced in 14.8 The government’s finances, Macro, TE1.

specialization

This takes place when a country or some other entity produces a narrower range of goods and services than it consumes, acquiring the goods and services that it does not produce by trade. This takes place when a country or some other entity produces a more narrow range of goods and services than it consumes, acquiring the goods and services that it does not produce by trade (ESPP, TE1, TESA). Introduced in TE1, ESPP.

speculation

Buying and selling assets in order to profit from an anticipated change in their price (TE1, TESA). Introduced in 11.4 The value of an asset: Basics, TE1.

speculative finance

A strategy used by firms to meet payment commitments on liabilities using cash flow, although the firm cannot repay the principal in this way. Firms in this position need to ‘roll over’ their liabilities, usually by issuing new debt to meet commitments on maturing debt. Term coined by Hyman Minsky in his Financial Instability Hypothesis (ESPP, TE1, TESA). Introduced in TE1. See also: hedge finance.

stable equilibrium

An equilibrium is stable if a small movement away from the equilibrium is self-correcting (leading to movement back toward the equilibrium). An equilibrium in which there is a tendency for the equilibrium to be restored after it is disturbed by a small shock (Macro, TE1, TESA). Introduced in 11.7 Modelling bubbles and crashes, Macro, TE1. See also: equilibrium.

stagflation

Persistent high inflation combined with high unemployment in a country’s economy (TE1, TESA). Introduced in TE1.

stationary state

In the absence of technological progress, the marginal contribution of additional capital goods to increased production would eventually become so small that the process of growth could cease. John Stuart Mill welcomed this prospect as ‘a very considerable improvement on our present condition’ (TE1, TESA).

statutory minimum wage

A minimum level of pay laid down by law, 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. Also known as: minimum wage (TE1, TESA). Introduced in TE1.

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 10.1 Money and wealth, Micro, Micro, TE1, TE1. See also: flow.

stock exchange

A financial marketplace where shares (also known as stocks) and other financial assets are traded. It has a list of companies whose shares are traded there. A financial marketplace where shares (or stocks) and other financial assets are traded. It has a list of companies whose shares are traded there (ESPP, TE1, TESA). Introduced in 11.5 Changing supply and demand for financial assets, TE1, ESPP. See also: share.

strategic complements

For two activities A and B: the more that A is performed, the greater the benefits of performing B, and the more that B is performed the greater the benefits of performing A (TE1, TESA). Introduced in TE1.

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 4.1 Social interactions: Game theory, Micro, TE1, ESPP.

strategic substitutes

For two activities A and B: the more that A is performed, the less the benefits of performing B, and the more that B is performed the less the benefits of perfoming A (TE1, TESA).

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 4.1 Social interactions: Game theory, Micro, TE1, ESPP.

subprime borrower

An individual with a low credit rating and a high risk of default (ESPP, TE1, TESA). Introduced in TE1, ESPP. See also: subprime mortgage.

subprime mortgage

A residential mortgage issued to a high-risk borrower, for example, a borrower with a history of bankruptcy and delayed repayments (ESPP, TE1, TESA). Introduced in TE1, ESPP. See also: subprime borrower.

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 2.2 Economic models: How to see more by looking at less, Micro, TE1.

substantive judgements of fairness

Judgements based on the characteristics of the allocation itself, not how it was determined (ESPP, TE1, TESA). Introduced in 5.3 Evaluating institutions and outcomes: Fairness, TE1, ESPP. See also: procedural judgements 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 7.9 Price-setting, market power, and public policy, Micro, TE1, TE1, 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 3.8 Income and substitution effects on hours of work and free time, Micro, Micro, Micro, Macro, TE1, TE1, TE1, 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 8.1 Buying and selling: Demand and supply in a competitive market, Micro, Micro, TE1, ESPP.

supply shock

An unexpected change on the supply side of the economy, such as a rise or fall in oil prices or an improvement in technology (TE1, TESA). Introduced in 15.7 Supply shocks and inflation, TE1. See also: wage-setting curve, price-setting curve, Phillips curve.

supply side

The side of a market on which those participating are offering something in return for money (for example, those selling bread) (TE1, TESA). Introduced in 1.6 Capitalism defined: Private property, markets, and firms, TE1. See also: demand side.

supply side (aggregate economy)

How labour and capital are used to produce goods and services. It uses the labour market model (also referred to as the wage-setting curve and price-setting curve model) (TE1, TESA). Introduced in 14.10 Aggregate demand and unemployment, 1.6 Capitalism defined: Private property, markets, and firms, TE1, TE1, TE1. See also: demand side (aggregate economy).

supply-side policies

Economic policies that are designed to improve the functioning of the economy by increasing productivity and international competitiveness, and reducing costs for producers. They include cutting taxes on profits, tightening conditions for the receipt of unemployment benefits, changing legislation to make it easier to fire workers, and the reform of competition policy to reduce monopoly power. A set of economic policies designed to improve the functioning of the economy by increasing productivity and international competitiveness, and by reducing profits after taxes and costs of production. Policies include cutting taxes on profits, tightening conditions for the receipt of unemployment benefits, changing legislation to make it easier to fire workers, and the reform of competition policy to reduce monopoly power. Also known as: supply-side reforms (Macro, TE1, TESA). Introduced in Macro, TE1.

supply-side problem

See: supply side (TE1, TESA). See also: supply side.

surplus, joint

See: joint surplus. The sum of the economic rents of all involved in an interaction. Also known as: total gains from exchange or trade (TE1, TESA). Introduced in 5.6 Allocations imposed by force.

surplus labour

Labour that does not add to output (TESA). Introduced in 2.7 Malthusian Economics: Modelling output growth.

systematic risk

A risk that affects all assets in the market, so that it is not possible for investors to reduce their exposure to the risk by holding a combination of different assets. Also known as: undiversifiable risk. A risk that affects all assets in the market, so that it is not possible for investors to reduce their exposure to the risk by holding a combination of different assets. Also known as: undiversifiable risk (TE1, TESA). Introduced in 11.4 The value of an asset: Basics, TE1.

systemic risk

A risk that threatens the financial system itself (TE1, TESA). Introduced in 11.4 The value of an asset: Basics, TE1.

tacit knowledge

Knowledge made up of the judgements, know-how, and other skills of those participating in the innovation process. The type of knowledge that cannot be accurately written down. Knowledge made up of the judgments, know-how, and other skills of those participating in the innovation process. The type of knowledge that cannot be accurately written down (TE1, TESA). Introduced in TE1. See also: codified knowledge.

tangency

When a line touches a curve, but does not cross it. When two curves share one point in common but do not cross. The tangent to a curve at a given point is a straight line that touches the curve at that point but does not cross it (ESPP, TE1, TESA). Introduced in 3.2 Labour and production, TE1, ESPP, ESPP.

target wealth

The level of wealth that a household aims to hold, based on its economic goals (or preferences) and expectations. We assume that households try to maintain this level of wealth in the face of changes in their economic situation, as long as it is possible to do so (Macro, TE1, TESA). Introduced in 14.3 Household target wealth, collateral, and consumption spending, Macro, TE1.

tariff

A tax on a good imported into a country (TE1, TESA). Introduced in TE1.

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 8.7 The effects of taxes, Micro, TE1.

Taylorism

Innovation in management that seeks to reduce labour costs, for example by dividing skilled jobs into separate less-skilled tasks so as to lower wages (TE1, TESA). Introduced in TE1.

technically feasible

An allocation within the limits set by technology and biology (ESPP, TE1, TESA). Introduced in 5.5 Technically feasible allocations, TE1, ESPP.

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 1.4 The permanent technological revolution, Micro, TE1, 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 1.4 The permanent technological revolution, Micro, Micro, Micro, TE1, ESPP.

tipping point

A tipping point is an unstable equilibrium at the boundary between two regions. A small movement into either of the regions causes a movement further into the same region, away from the equilibrium. An unstable equilibrium at the boundary between two regions characterized by distinct movements in some variable. If the variable takes a value on one side, the variable moves in one direction; on the other, it moves in the other direction (Macro, TE1, TESA). Introduced in Macro, TE1, TE1. See also: asset price bubble.

tipping point (environmental)

A state of the environment beyond which some process (typically a degradation) becomes self-reinforcing, because of positive feedback processes. On one side, processes of environmental degradation are self-limiting. On the other side, positive feedbacks lead to self-reinforcing, runaway environmental degradation (TE1, TESA). Introduced in Macro, TE1, TE1. See also: positive feedback (process).

too big to fail

Said to be a characteristic of large banks, whose central importance in the economy ensures they will be saved by the government if they are in financial difficulty. The bank thus does not bear all the costs of its activities and is therefore likely to take bigger risks (ESPP, TE1, TESA). Introduced in 12.7 Incomplete contracts and external effects in credit markets, TE1, TE1, ESPP. See also: moral hazard.

total surplus

The total gains from trade received by all parties involved in the exchange. It is measured as the sum of the consumer and producer surpluses. See: joint surplus (ESPP, TE1, TESA). Introduced in 7.6 Gains from trade, TE1, ESPP.

trade balance

The value of exports minus the value of imports. Also known as: net exports. Value of exports minus the value of imports. Also known as: net exports (Macro, TE1, TESA). Introduced in 13.4 Measuring the aggregate economy: The components of GDP, Macro, TE1. See also: trade deficit, trade surplus.

trade costs

The transport costs, tariffs or other factors incurred in trading between markets in two countries that mean that, for affected goods, the law of one price will not hold across each market (TE1, TESA). See also: law of one price.

trade deficit

If a country’s imports exceed its exports, the trade balance (X – M) is negative, and we say that it has a trade deficit. The size of the deficit is M – X (the negative of the trade balance). A country’s negative trade balance (it imports more than it exports) (Macro, TE1, TESA). Introduced in 13.4 Measuring the aggregate economy: The components of GDP, Macro, TE1. See also: trade surplus, trade balance.

trade surplus

If a country’s exports exceed its imports, the trade balance (X – M) is positive. We say that it has a trade surplus of X – M. A country’s positive trade balance (it exports more than it imports) (Macro, TE1, TESA). Introduced in 13.4 Measuring the aggregate economy: The components of GDP, Macro, TE1. See also: trade deficit, trade balance.

trade union

An organization consisting predominantly of employees, the principal activities of which include the negotiation of rates of pay and conditions of employment for its members (ESPP, TE1, TESA). Introduced in 9.10 Labour unions: Bargained wages and the union voice effect, TE1, ESPP.

trademark

A logo, a name, or a registered design typically associated with the right to exclude others from using it to identify their products (ESPP, TE1, TESA). Introduced in TE1, ESPP.

tragedy of the commons

A social dilemma in which self-interested individuals acting independently deplete a common resource, lowering the payoffs of all (ESPP, TE1, TESA). Introduced in TE1, ESPP. See also: social dilemma.

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 12.2 External effects and bargaining, Micro, TE1, ESPP.

trilemma of the world economy

The likely impossibility that any country, in a globalized world, can simultaneously maintain deep market integration (across borders), national sovereignty, and democratic governance. First suggested by Dani Rodrik, an economist (TE1, TESA). Introduced in TE1.

unemployment

A situation in which a person who is able and willing to work is not employed (ESPP, TE1, TESA). Introduced in 9.2 Measuring the economy: Employment and unemployment, TE1, 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 6.5 Determinants of the employment rent, Micro, Macro, Macro, TE1, ESPP.

unemployment, involuntary

The state of being out of work, but pre­ferring to have a job at the wages and working conditions that other­wise identical employed workers have (TE1, TESA). Introduced in 6.7 Wages, effort, and profits in the labour discipline model, Unit 9 The labour market: Wages, profits, and unemployment, 9.2 Measuring the economy: Employment and unemployment, TE1, TE1, TE1, ESPP. See also: unemployment.

unemployment rate

The unemployment rate is the fraction of the total labour force that is seeking work, but is not currently employed. The ratio of the number of the unemployed to the total labour force. (Note that the employment rate and unemployment rate do not sum to 100%, as they have different denominators.) The ratio of the number of the unemployed to the total labour force. (Note that the employment rate and unemployment rate do not sum to 100%, as they have different denominators) (Macro, ESPP, TE1, TESA). Introduced in 9.2 Measuring the economy: Employment and unemployment, Macro, TE1, ESPP. See also: labour force, employment rate.

unit cost

Total cost divided by number of units produced. Total cost divided by the number of units produced (ESPP, TESA). Introduced in 7.3 Profits, costs, and the isoprofit curve, ESPP.

unstable equilibrium

An equilibrium is unstable if, when a shock disturbs the equilibrium, there is a subsequent tendency to move even further away from the equilibrium. An equilibrium such that, if a shock disturbs the equilibrium, there is a subsequent tendency to move even further away from the equilibrium.  An equilibrium such that, if a shock disturbs the equilibrium, there is a subsequent tendency to move even further away from the equilibrium (Macro, TE1, TESA). Introduced in 11.7 Modelling bubbles and crashes, Macro, TE1, TE1. See also: equilibrium.

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 Preferences, 6.5 Determinants of the employment rent, 3.2.1 Indifference curves and the marginal rate of substitution, Micro, Micro, Micro, Micro, Micro, Macro, TE1, TE1, TE1, ESPP, ESPP, ESPP.

value added

The value of output minus the value of all inputs (called intermediate goods). For a production process this is the value of output minus the value of all inputs (called intermediate goods). The capital goods and labour used in production are not intermediate goods. The value added is equal to profits before taxes plus wages (Macro, TE1, TESA). Introduced in 13.3 Measuring the aggregate economy, Macro, TE1.

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 12.4 Property rights, contracts, and market failures, Micro, TE1, ESPP.

wage inflation

An increase in the level of the nominal wage, usually measured as the percentage increase over one year. An increase in the nominal wage. Usually measured over a year (Macro, TE1, TESA). Introduced in 15.1 What’s wrong with inflation?, Macro, TE1. See also: nominal wage.

wage labour

A system in which producers are paid for the time they work for their employers (ESPP, TE1, TESA). Introduced in 6.1 Firms, markets, and the division of labour, TE1, ESPP.

wage labour contract

See: wage labour, contract (TE1, TESA). See also: wage labour, contract.

wage-price spiral

This occurs if an initial increase in wages in the economy is followed by an increase in the price level, which is followed by an increase in wages and so on. It can also begin with an initial increase in the price level (Macro, TE1, TESA). Introduced in 15.3 Inflation, the business cycle, and the Phillips curve, TE1, Macro.

wage-setting curve

The curve that gives the real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well (TE1, TESA). Introduced in Unit 9 The labour market: Wages, profits, and unemployment, TE1, TE1.

weakness of will

The inability to commit to a course of action (dieting or foregoing some other present pleasure, for example) that one will regret later. It differs from impatience, which may also lead a person to favour pleasures in the present, but not necessarily act in a way that one regrets (ESPP, TE1, TESA). Introduced in 13.6 Why is consumption smooth?, TE1.

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 10.1 Money and wealth, Micro, Macro, Macro, TE1, ESPP.

welfare state

A set of government policies designed to provide improvements in the welfare of citizens by assisting with income smoothing (for example, unemployment benefits and pensions) (TE1, TESA). Introduced in TE1, TE1.

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 8.1 Buying and selling: Demand and supply in a competitive market, Micro, TE1, 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 7.2 The demand curve and willingness to pay, 8.1 Buying and selling: Demand and supply in a competitive market, Micro, Micro, TE1, TE1, ESPP. See also: willingness to accept.

winner-take-all competition

Firms entering a market first can often dominate the entire market, at least temporarily (TE1, TESA). Introduced in TE1.

worker's best response function (to wage)

The amount of work that a worker chooses to perform as her best response to each wage that the employer may offer. Also known as: best response curve. The optimal amount of work that a worker chooses to perform for each wage that the employer may offer (ESPP, TE1, TESA). Introduced in 6.6 Work and wages: The labour discipline model, TE1, ESPP, ESPP.

yield

The implied rate of return that the buyer gets on their money when they buy a bond at its market price (ESPP, TE1, TESA). Introduced in 10.9 The central bank, the money market, and interest rates, TE1, ESPP.

zero economic profit

A rate of profit equal to the opportunity cost of capital (TE1, TESA). See also: normal profits, opportunity cost of capital.

zero lower bound

This refers to the fact that the nominal interest rate cannot be negative, thereby setting a floor on the nominal interest rate that can be set by the central bank at zero. This refers to the fact that the nominal interest rate cannot be negative, thus setting a floor on the nominal interest rate that can be set by the central bank at zero (Macro, TE1, TESA). Introduced in 15.8 Monetary policy, Macro, Macro, TE1, TE1. See also: quantitative easing.

zero sum game

A game in which the payoff gains and losses of the individuals sum to zero, for all combinations of strategies they might pursue (TE1, TESA). Introduced in 4.4 Social preferences: Altruism, TE1.