Micro.
qxd 19/2/10 1:32 pm Page 1
Glossary
absolute advantage The situation that exists when one country can
produce some commodity at lower absolute cost than another country.
absolute price The amount of money that must be spent to acquire
one unit of a commodity. Also called money price.
adverse selection Self-selection, within a single risk category, of per-
sons of above-average risk.
allocative efficiency A situation in which the market price for each
good is equal to that good’s marginal cost.
asymmetric information A situation in which one party to a transac-
tion has more or better relevant information about the transaction than
the other party.
average fixed cost (AFC) Total fixed costs divided by the number of
units of output.
average product (AP ) Total product divided by the number of units of
the variable factor used in its production.
average revenue (AR ) Total revenue divided by quantity sold; this is
the market price when all units are sold at the same price.
average tax rate The ratio of total taxes paid to total income earned.
average total cost (ATC ) Total cost of producing a given output
divided by the number of units of output; it can also be calculated as
the sum of average fixed costs and average variable costs. Also called
unit cost or average cost.
average variable cost (AVC) Total variable costs divided by the num-
ber of units of output.
barter An economic system in which goods and services are traded
directly for other goods and services.
black market A situation in which goods are sold illegally at prices
that violate a legal price control.
bond A debt instrument carrying a specified amount, a schedule of
interest payments, and (usually) a date for redemption of its face value.
break-even price The price at which a firm is just able to cover all of
its costs, including the opportunity cost of capital.
cartel An organization of producers who agree to act as a single seller
in order to maximize joint profits.
change in demand A change in the quantity demanded at each possi-
ble price of the commodity, represented by a shift in the whole demand
curve.
change in quantity demanded A change in the specific quantity of
the good demanded, represented by a change from one point on a
demand curve to another point, either on the original demand curve or
on a new one.
change in quantity supplied A change in the specific quantity sup-
plied, represented by a change from one point on a supply curve to
another point, either on the original supply curve or on a new one.
change in supply A change in the quantity supplied at each possible
price of the commodity, represented by a shift in the whole supply
curve.
closed economy An economy that has no foreign trade.
collective bargaining The process by which unions and employers
arrive at and enforce agreements.
collusion An agreement among sellers to act jointly in their common
interest. Collusion may be overt or covert, explicit or tacit.
command economy An economy in which most economic decisions
are made by a central planning authority.
common market A customs union with the added provision that labour
and capital can move freely among the members.
common-property resource A product that is rivalrous but not
excludable.
comparative advantage The situation that exists when a country can
produce a good with less forgone output of other goods than can
another country.
comparative statics The derivation of predictions by analyzing the
effect of a change in some exogenous variable on the equilibrium.
compensating differential A difference in the financial payment to a
factor of production (usually labour) across two jobs to compensate the
factor for differences in non-monetary aspects of the two jobs.
competition policy Policy designed to prohibit the acquisition and
exercise of monopoly power by business firms.
complements in consumption Goods that tend to be consumed
together.
concentration ratio The fraction of total market sales (or some other
measure of market activity) controlled by a specified number of the
industry’s largest firms.
constant returns (to scale) A situation in which output increases in
proportion to inputs as the scale of production is increased. A firm in
this situation is a constant-cost firm.
consumer surplus The difference between the total value that
consumers place on all units consumed of a commodity and the payment
that they actually make to purchase that amount of the commodity.
consumption The act of using goods or services to satisfy wants.
cooperative (collusive) outcome A situation in which existing firms
cooperate to maximize their joint profits.
corporation A firm that has a legal existence separate from that of
the owners.
cost minimization An implication of profit maximization that firms
choose the production method that produces any given level of output
at the lowest possible cost.
cost–benefit analysis An approach for evaluating the desirability of a
given policy, based on comparing total (opportunity) costs with total
benefits.
cross elasticity of demand (␩xy) A measure of the responsiveness of
the quantity of one commodity demanded to changes in the price of
another commodity.
cross-sectional data A set of observations made at the same time
across several different units (such as households, firms, or countries).
Crown corporations In Canada, business concerns owned by the
federal or provincial government.
customs union A group of countries who agree to have free trade
among themselves and a common set of barriers against imports from
the rest of the world.
Micro.qxd 19/2/10 1:32 pm Page 2
2 G L O S S A RY
decreasing returns (to scale) A situation in which output increases
less than in proportion to inputs as the scale of a firm’s production
increases. A firm in this situation is an increasing-cost firm.
demand The entire relationship between the quantity of a commodity
that buyers want to purchase and the price of that commodity, other
things being equal.
demand curve The graphical representation of the relationship
between quantity demanded and the price of a commodity, other things
being equal.
demand schedule A table showing the relationship between quantity
demanded and the price of a commodity, other things being equal.
demogrants Social benefits paid to anyone meeting only minimal
requirements such as age or residence; in particular, not income-tested.
derived demand The demand for a factor of production that results
from the demand for the products that it is used to make.
differentiated product A group of commodities that are similar
enough to be called the same product but dissimilar enough that all of
them do not have to be sold at the same price.
direct burden For an individual tax, the amount of money that is
collected from taxpayers.
disequilibrium A situation in a market in which there is excess
demand or excess supply.
disequilibrium price A price at which quantity demanded does not
equal quantity supplied.
dividends Profits paid out to shareholders of a corporation.
division of labour The breaking up of a production process into a
series of specialized tasks, each done by a different worker.
dumping The practice of selling a commodity at a lower price in the
export market than in the domestic market for reasons unrelated to
differences in costs of servicing the two markets.
economic model A term used in several related ways: sometimes for
an abstraction designed to illustrate some point but not designed to
generate testable hypotheses, and sometimes as a synonym for theory.
economic profits The difference between the revenues received from
the sale of output and the opportunity cost of the inputs used to make
the output. Negative economic profits are called economic losses.
economic rent The excess of total earnings over the minimum
necessary to prevent a factor from moving to another use.
economies of scale Reduction of long-run average costs resulting from
an expansion in the scale of a firm’s operations so that more of all
inputs is being used.
economy A system in which scarce resources are allocated among
competing uses.
elastic demand Following a given percentage change in price, there is
a greater percentage change in quantity demanded; elasticity greater
than 1.
endogenous variable A variable that is explained within a theory.
Sometimes called an induced variable or a dependent variable.
entry barrier Any barrier to the entry of new firms into an industry. An
entry barrier may be natural or created.
equalization payments Transfers of tax revenues from the federal
government to the low-income provinces.
equilibrium price The price at which quantity demanded equals
quantity supplied. Also called the market-clearing price.
excess burden The allocative inefficiency or deadweight loss
generated by a tax.
excess demand A situation in which, at the given price, quantity
demanded exceeds quantity supplied.
excess supply A situation in which, at the given price, quantity
supplied exceeds quantity demanded.
excess-capacity theorem The property of long-run equilibrium in
monopolistic competition that firms produce on the falling portion of
their long-run average cost curves. This results in excess capacity,
measured by the gap between present output and the output that
coincides with minimum average cost.
excise tax A tax on the sale of a particular commodity.
excludable A good or service is excludable if its owner can prevent
others from consuming it.
exogenous variable A variable that is determined outside the theory.
Sometimes called an autonomous variable or an independent variable.
externality An effect on parties not directly involved in the production
or use of a commodity. Also called third-party effects.
factor mobility The ease with which a factor of production can move
between firms, industries, occupations, or regions.
factors of production Resources used to produce goods and services;
frequently divided into the basic categories of land, labour, and capital.
fixed factor An input whose quantity cannot be changed in the
short run.
free trade area (FTA) An agreement among two or more countries to
abolish tariffs on trade among themselves while each remains free to
set its own tariffs against other countries.
free-market economy An economy in which most economic decisions
are made by private households and firms.
functional distribution of income The distribution of national income
among the major factors of production: labour, capital, and land.
gains from trade The increased output attributable to the specializa-
tion according to comparative advantage that is made possible by
trade.
game theory The theory that studies decision making in situations in
which one player anticipates the reactions of other players to its own
actions.
general-equilibrium analysis The analysis of all the economy’s
markets simultaneously, recognizing the interactions among the
various markets.
Giffen good An inferior good for which the income effect
outweighs the substitution effect so that the demand curve is
positively sloped.
goods Tangible commodities, such as cars or shoes.
homogeneous product In the eyes of purchasers, every unit of the
product is identical to every other unit.
human capital The acquired skills that individuals have, usually from
formal education or on-the-job training.
import quota A limit set on the quantity of a foreign commodity that
may be imported in a given time period.
Micro.qxd 19/2/10 1:32 pm Page 3
income effect The change in the quantity of a good demanded result-
ing from a change in real income (holding relative prices constant).
income elasticity of demand (␩Y) A measure of the responsiveness of
quantity demanded to a change in income.
income-tested benefits Social benefits paid to recipients who qualify
because their income is less than some critical level.
increasing returns (to scale) A situation in which output increases
more than in proportion to inputs as the scale of a firm’s production
increases. A firm in this situation is a decreasing-cost firm.
index number An average that measures change over time of such
variables as the price level and industrial production; conventionally
expressed as a percentage relative to a base period, which is assigned
the value 100.
inelastic demand Following a given percentage change in price, there
is a smaller percentage change in quantity demanded; elasticity less
than 1.
infant industry argument The argument that new domestic industries
with potential for economies of scale or learning by doing need to be
protected from competition from established, low-cost foreign
producers so that they can grow large enough to achieve costs as low
as those of foreign producers.
inferior good A good for which quantity demanded falls as income
rises—its income elasticity is negative.
intermediate products All outputs that are used as inputs by other
producers in a further stage of production.
internalizing the externality A process that results in a producer or
consumer taking account of a previously external effect.
labour union An association authorized to represent workers in
bargaining with employers.
law of diminishing returns The hypothesis that if increasing
quantities of a variable factor are applied to a given quantity of fixed
factors, the marginal product of the variable factor will eventually
decrease.
learning by doing The reduction in unit costs that often results as
workers learn through repeatedly performing the same tasks. It causes
a downward shift in the average cost curve.
limited partnership A firm that has two classes of owners: general
partners, who take part in managing the firm and are personally liable
for the firm’s actions and debts, and limited partners, who take no part
in the management of the firm and risk only the money that they have
invested.
long run A period of time in which all inputs may be varied, but the
existing technology of production cannot be changed.
long-run average cost (LRAC) curve The curve showing the lowest
possible cost of producing each level of output when all inputs can be
varied.
Lorenz curve A graph showing the extent of inequality of income
distribution.
luxuries Products for which the income elasticity of demand is positive
and greater than 1.
macroeconomics The study of the determination of economic
aggregates such as total output, the price level, employment, and growth.
G L O S S A RY 3
marginal cost (MC) The increase in total cost resulting from
increasing output by one unit.
marginal product (MP) The change in total output that results from
using one more unit of a variable factor.
marginal revenue (MR) The change in a firm’s total revenue resulting
from a change in its sales by one unit.
marginal revenue product (MRP) The extra revenue that results from
using one unit more of a variable factor.
marginal tax rate The fraction of an additional dollar of income that is
paid in taxes.
marginal utility The additional satisfaction obtained from consuming
one additional unit of a commodity.
marginal-cost pricing Setting price equal to marginal cost so that
buyers for the last unit are just willing to pay the amount that it cost
to make that unit.
market Any situation in which buyers and sellers can negotiate the
exchange of goods or services.
market failure Failure of the unregulated market system to achieve
allocative efficiency.
market power The ability of a firm to influence the price of a product
or the terms under which it is sold.
market structure All features of a market that affect the behaviour and
performance of firms in that market, such as the number and size of
sellers, the extent of knowledge about one another’s actions, the
degree of freedom of entry, and the degree of product differentiation.
microeconomics The study of the causes and consequences of the
allocation of resources as it is affected by the workings of the price
system.
minimum efficient scale (MES) The smallest output at which LRAC
reaches its minimum. All available economies of scale have been
realized at this point.
minimum wages Legally specified minimum rate of pay for labour.
mixed economy An economy in which some economic decisions are
made by firms and households and some by the government.
monopolist A firm that is the only seller in a market.
monopolistic competition Market structure of an industry in which
there are many firms and freedom of entry and exit but in which each
firm has a product somewhat differentiated from the others, giving it
some control over its price.
monopoly A market containing a single firm.
monopsony A market structure in which there is a single buyer.
moral hazard A situation in which an individual or a firm takes
advantage of special knowledge while engaging in socially inefficient
behaviour.
multinational enterprises (MNEs) Firms that have operations in more
than one country.
Nash equilibrium An equilibrium that results when each firm in an
industry is currently doing the best that it can, given the current
behaviour of the other firms in the industry.
natural monopoly An industry characterized by economies of scale
sufficiently large that one firm can most efficiently supply the entire
market demand.
Micro.qxd 19/2/10 1:32 pm Page 4
4 G L O S S A RY
necessities Products for which the income elasticity of demand is
positive but less than 1.
non-cooperative outcome An industry outcome reached when
firms maximize their own profit without cooperating with other
firms.
non-profit organizations Firms that provide goods and services with
the objective of just covering their costs. These are often called NGOs,
for non-governmental organizations.
non-tariff barriers (NTBs) Restrictions other than tariffs designed to
reduce imports.
normal good A good for which quantity demanded rises as income
rises—its income elasticity is positive.
normative statement A statement about what ought to be as opposed
to what actually is.
oligopoly An industry that contains two or more firms, at least
one of which produces a significant portion of the industry’s total
output.
open economy An economy that engages in international trade.
opportunity cost The cost of using resources for a certain purpose,
measured by the benefit given up by not using them in their best
alternative use.
ordinary partnership A firm that has two or more joint owners, each of
whom is personally responsible for the firm’s actions and debts.
partial-equilibrium analysis The analysis of a single market in
isolation, ignoring any feedbacks that may come from induced changes
in other markets.
paternalism Intervention in the free choices of individuals by others
(including governments) to protect them against what is presumed to
be their own ignorance or folly.
perfect competition A market structure in which all firms in an
industry are price takers and in which there is freedom of entry into
and exit from the industry.
positive statement A statement about what actually is (or was or will
be), as opposed to what ought to be.
poverty line An estimate of the annual family income that is required
to maintain a minimum adequate standard of living.
poverty trap Occurs whenever individuals have little incentive to
increase their pre-tax income because the resulting loss of benefits
makes them worse off.
present value The value today of a future stream of payments
discounted using the market interest rate.
price discrimination The sale by one firm of different units of a
commodity at two or more different prices for reasons not associated
with differences in cost.
price elasticity of demand (␩) A measure of the responsiveness of
quantity demanded to a change in the commodity’s own price.
price elasticity of supply (␩S) A measure of the responsiveness of
quantity supplied to a change in the product’s own price.
price setter A firm that faces a downward-sloping demand curve for its
product. It chooses which price to set.
price taker A firm that can alter its rate of production and sales with-
out affecting the market price of its product.
principle of substitution The principle that methods of production will
change if relative prices of inputs change, with relatively more of the
cheaper input and relatively less of the more expensive input being
used.
private cost The value of the best alternative use of resources used in
production as valued by the producer.
private goods Goods or services that are both rivalrous and excludable.
producer surplus The price of a good minus the marginal cost of pro-
ducing it, summed over the quantity produced.
production The act of making goods or services.
production function A functional relation showing the maximum out-
put that can be produced by any given combination of inputs.
production possibilities boundary A curve showing which alternative
combinations of commodities can just be attained if all available
resources are used efficiently; it is the boundary between attainable
and unattainable output combinations.
productive efficiency for the firm When the firm chooses among all
available production methods to produce a given level of output at the
lowest possible cost.
productive efficiency for the industry When the industry is produc-
ing a given level of output at the lowest possible cost. This requires
that marginal cost be equated across all firms in the industry.
productivity Output produced per unit of some input; frequently used
to refer to labour productivity, measured by total output divided by the
amount of labour used.
progressive tax A tax that takes a larger percentage of income at
higher levels of income.
proportional tax A tax that takes a constant percentage of income at
all levels of income.
protectionism Any government policy that interferes with free trade in
order to protect domestic firms and workers from foreign competition.
public goods Goods or services that can simultaneously provide bene-
fits to a large group of people. Also called collective consumption goods.
quantity demanded The amount of a good or service that consumers
want to purchase during some time period.
quantity supplied The amount of a commodity that producers want to
sell during some time period.
rational ignorance When agents have no incentive to become informed
about some government policy because the costs of becoming informed
exceed the benefits of any well-informed action the agent might take.
real income Income expressed in terms of the purchasing power of
money income—that is, the quantity of goods and services that can be
purchased with the money income.
regressive tax A tax that takes a lower percentage of income at higher
levels of income.
relative price The ratio of the money price of one commodity to the
money price of another commodity; that is, a ratio of two absolute prices.
rent seeking Behaviour whereby private firms and individuals try to
use the powers of the government to enhance their own economic well-
being in ways that are not in the social interest.
resource allocation The allocation of an economy’s scarce resources of
land, labour, and capital among alternative uses.
Micro.qxd 19/2/10 1:32 pm Page 5
rivalrous A good or service is rivalrous if, when one person consumes
one unit of it, there is one less unit available for others to consume.
scatter diagram A graph of statistical observations of paired values of
two variables, one measured on the horizontal and the other on the
vertical axis. Each point on the coordinate grid represents the values of
the variables for a particular unit of observation.
sellers’ preferences Allocation of commodities in excess demand by
decisions of the sellers.
services Intangible commodities, such as haircuts or medical care.
short run A period of time in which the quantity of some inputs cannot
be increased beyond the fixed amount that is available.
short-run equilibrium For a competitive industry, the price and output
at which industry demand equals short-run industry supply, and all
firms are maximizing their profits. Either profits or losses for individual
firms are possible.
shut-down price The price that is equal to the minimum of a firm’s
average variable costs. At prices below this, a profit-maximizing firm
will shut down and produce no output.
single proprietorship A firm that has one owner who is personally
responsible for the firm’s actions and debts.
size distribution of income The distribution of income among individ-
uals, without regard to source of income.
social cost The value of the best alternative use of resources used in
production as valued by society.
specialization of labour The specialization of individual workers in the
production of particular goods or services.
state-owned enterprise A firm that is owned by the government. In
Canada, these are called Crown corporations.
strategic behaviour Behaviour designed to take account of the
reactions of one’s rivals to one’s own behaviour.
substitutes in consumption Goods that can be used in place of
another good to satisfy similar needs or desires.
substitution effect The change in the quantity of a good demanded
resulting from a change in its relative price (holding real income
constant).
supply The entire relationship between the quantity of some commod-
ity that producers wish to sell and the price of that commodity, other
things being equal.
supply curve The graphical representation of the relationship between
quantity supplied and the price of a commodity, other things being equal.
supply schedule A table showing the relationship between quantity
supplied and the price of a commodity, other things being equal.
tariff A tax applied on imports of goods or services.
tax bracket A range of taxable income for which there is a constant
marginal tax rate.
tax incidence The location of the burden of a tax—that is, the identity
of the ultimate bearer of the tax.
technical efficiency When a given number of inputs are combined in
such a way as to maximize the level of output.
technological change Any change in the available techniques of
production.
G L O S S A RY 5
terms of trade The ratio of the average price of a country’s exports to
the average price of its imports.
time-series data A set of observations made at successive periods of
time.
total cost (TC) The total cost of producing any given level of output; it
can be divided into total fixed cost and total variable cost.
total fixed cost (TFC) All costs of production that do not vary with the
level of output.
total product (TP) Total amount produced by a firm during some time
period.
total revenue (TR) Total receipts from the sale of a product; price
times quantity.
total utility The total satisfaction resulting from the consumption of a
given commodity by a consumer.
total variable cost (TVC) Total costs of production that vary directly
with the level of output.
tradable pollution permits Rights to emit specific amounts of
specified pollutants that private firms may buy and sell among
themselves. The total quantity of permits is set by government
policy.
trade creation A consequence of reduced trade barriers among a set of
countries whereby trade within the group is increased and trade with
the rest of the world remains roughly constant.
trade diversion A consequence of reduced trade barriers among a set
of countries whereby trade within the group replaces trade that used to
take place with countries outside the group.
trade policy A government’s policy involving restrictions placed on
international trade.
traditional economy An economy in which behaviour is based mostly
on tradition.
transfer earnings The minimum payment required by a factor in order
to prevent it from leaving to other uses.
transfer payment A payment to an individual, a firm, or an
organization that is not made in exchange for a good or service.
transnational corporations (TNCs) Firms that have operations in
more than one country. Also called multinational enterprises
(MNEs).
two-part tariff A method of charging for a good or a service in which
the consumer pays a flat access fee and a specified amount per unit
purchased.
utility The satisfaction or well-being that a consumer receives from
consuming some good or service.
variable Any well-defined item, such as the price or quantity of a
commodity, that can take on various specific values.
variable factor An input whose quantity can be changed over the time
period under consideration.
very long run A period of time that is long enough for the technologi-
cal possibilities available to a firm to change.
voluntary export restriction (VER) An agreement by an exporting
country to limit the amount of a good exported to another
country.