Glossary

Over 200 key terms from the textbook, defined concisely.

Absolute advantage. The ability to produce more of a good with the same resources than another producer. (Ch 3)

Adverse selection. When asymmetric information causes the composition of market participants to skew toward undesirable types (e.g., sicker people buy more insurance). (Ch 14, 16)

Aggregate demand (AD). The total quantity of goods and services demanded at each price level. Slopes downward due to wealth, interest-rate, and exchange-rate effects. (Ch 31)

Aggregate supply (AS). SRAS slopes up (sticky wages); LRAS is vertical at potential output. (Ch 31)

Anchored expectations. The public believes the central bank will maintain low inflation regardless of short-term shocks. Essential for disinflation without recession. (Ch 29)

Automatic stabilizer. Features of the fiscal system (progressive taxes, unemployment insurance) that dampen business cycles without new legislation. (Ch 32)

Behavioral economics. The study of systematic departures from rational-actor models: loss aversion, present bias, anchoring, status quo bias, framing effects. (Ch 10)

Budget deficit. Government spending exceeds tax revenue. (Ch 32)

Carbon tax. A Pigouvian tax on CO₂ emissions equal to the social cost of carbon. ~90% of economists support some form. (Ch 11, 15)

Ceteris paribus. "Other things equal." The condition that isolates one variable's effect by holding everything else constant. (Ch 2)

Coase theorem. If property rights are well-defined and transaction costs are low, private bargaining produces efficient outcomes regardless of initial rights assignment. (Ch 11)

Comparative advantage. Having a lower opportunity cost in producing a good than another producer. The basis for mutually beneficial trade. (Ch 3, 9)

Consumer surplus. Willingness to pay minus actual price paid. (Ch 8)

CPI (Consumer Price Index). Measures the cost of a fixed basket of goods; used to compute inflation. (Ch 4, 23)

Crowding out. Government borrowing raises interest rates and displaces private investment. (Ch 28, 32)

Deadweight loss. The value of trades that don't happen because of a tax, price control, or market power. (Ch 7, 8, 19)

Demand. The relationship between price and quantity demanded. Slopes downward (law of demand). (Ch 5)

Diminishing returns. Holding some inputs fixed, adding more of a variable input eventually yields smaller increments of output. (Ch 17)

Discount rate. The rate at which future costs/benefits are valued relative to the present. Central to climate economics (Stern vs. Nordhaus). (Ch 15)

Economies of scale. Average total cost falls as the firm grows (in the long run). (Ch 17)

Efficient market hypothesis (EMH). Asset prices reflect all available information; you can't consistently beat the market. (Ch 28)

Elasticity. The responsiveness of quantity to a change in price (or income or other variable). (Ch 6)

Equilibrium. The price-quantity pair where supply equals demand. (Ch 5)

Externality. A cost or benefit imposed on a third party without consent. Negative: pollution. Positive: vaccination. (Ch 11)

Federal funds rate. The overnight interbank lending rate; the Fed's primary policy instrument. (Ch 27)

Fiscal policy. Government spending and taxation used to influence the economy. (Ch 32)

Fractional reserve banking. Banks hold a fraction of deposits as reserves and lend the rest, creating money through the multiplier. (Ch 26)

Free rider. Someone who enjoys a public good without paying. (Ch 12)

GDP (Gross Domestic Product). Total market value of all final goods and services produced within a country in a given period. GDP = C + I + G + NX. (Ch 22)

Gini coefficient. A summary measure of income/wealth inequality (0 = perfect equality, 1 = perfect inequality). (Ch 13)

Human capital. Education, skills, experience, and health that make workers more productive. (Ch 21, 25)

Hyperinflation. Extremely rapid inflation (>50%/month). Caused by governments printing money to finance spending. (Ch 23)

Impossible trinity. A country can have only two of: fixed exchange rate, free capital mobility, independent monetary policy. (Ch 33)

Incentive. Something that motivates action (reward or penalty). (Ch 1)

Inflation. A sustained rise in the general price level. (Ch 23, 29)

Information asymmetry. One party to a transaction knows more than the other. (Ch 14, 16)

Institutions (inclusive vs. extractive). Inclusive: property rights, rule of law, broad access → growth. Extractive: concentrated power, weak rights → stagnation. (Ch 25)

Labor force participation rate. Share of working-age population that is working or looking for work. (Ch 24)

Law of demand. Ceteris paribus, higher price → lower quantity demanded. (Ch 5)

Law of supply. Ceteris paribus, higher price → higher quantity supplied. (Ch 5)

Loanable funds market. The S&D framework for borrowing and lending; the real interest rate is the price. (Ch 28)

Lorenz curve. Plots cumulative income share vs. cumulative population share. (Ch 13)

Loss aversion. Losses hurt about twice as much as equivalent gains feel good. (Ch 10)

Marginal cost (MC). The additional cost of producing one more unit. (Ch 1, 17)

Marginal revenue product of labor (MRPL). MPL × Price of output; what a worker adds to the firm's revenue. (Ch 21)

Market failure. A situation where the market equilibrium does not maximize social welfare. (Ch 11–16)

Monetary policy. The Fed's use of interest rates, QE, and forward guidance to manage the economy. (Ch 27)

Money. Anything that serves as medium of exchange, unit of account, and store of value. (Ch 26)

Monopoly. One firm, no close substitutes, barriers to entry. Produces less and charges more than competition. (Ch 19)

Monopsony. One (or few) buyer(s) of labor. The employer can set wages below the competitive level. (Ch 21)

Moral hazard. When one party changes behavior after a contract because the cost falls on the other party. (Ch 14, 16)

Multiplier. The total GDP effect of $1 of government spending. Size depends on conditions. (Ch 32)

NAIRU. The unemployment rate consistent with stable inflation (the "natural rate"). ~4–5% in the U.S. (Ch 24, 29)

Nash equilibrium. A set of strategies where no player can improve by changing unilaterally. (Ch 20)

Network effect. The value of a product increases as more people use it. (Ch 19, 35)

Nominal. In current prices (not adjusted for inflation). (Ch 22, 23)

Nudge. A feature of choice architecture that alters behavior without forbidding options or changing incentives. (Ch 10)

Opportunity cost. The value of the next-best alternative given up when making a choice. (Ch 1)

Ostrom's design principles. Eight conditions for successful community-managed commons. (Ch 12)

Pareto efficient. No one can be made better off without making someone else worse off. (Ch 8)

Phillips curve. Short-run trade-off between inflation and unemployment. Vertical in the long run. (Ch 29)

Pigouvian tax. A tax equal to the marginal external cost of an activity. (Ch 11)

Positive economics. Claims about what is (testable against evidence). (Ch 2)

Normative economics. Claims about what should be (depends on values). (Ch 2)

Present bias. Overweighting the present relative to the future (hyperbolic discounting). (Ch 10)

Price ceiling. A legal maximum price. Binding when below equilibrium → shortage. (Ch 7)

Price discrimination. Charging different prices to different customers for the same product. (Ch 19)

Price floor. A legal minimum price. Binding when above equilibrium → surplus. (Ch 7)

Producer surplus. Price received minus minimum acceptable price. (Ch 8)

Production function. Y = A × f(K, H, N). Output depends on capital, human capital, natural resources, and technology. (Ch 25)

Public good. Non-rival and non-excludable. Markets underprovide because of the free-rider problem. (Ch 12)

Quantitative easing (QE). Large-scale asset purchases by the central bank when rates are at the zero lower bound. (Ch 27)

Quantity theory of money. MV = PY. In the long run, money growth drives inflation. (Ch 29)

Real. Adjusted for inflation (in constant prices). (Ch 22, 23)

Rule of 70. Doubling time ≈ 70 / growth rate (%). (Ch 25)

Scarcity. Wants exceed available resources. Universal. (Ch 1)

Social cost of carbon. The estimated dollar damage from one additional ton of CO₂. (Ch 15)

Solow model. Capital accumulation has diminishing returns; sustained long-run growth requires technology/TFP. (Ch 25)

Stagflation. High inflation + high unemployment simultaneously. Caused by SRAS shifting left. (Ch 29, 31)

Sunk cost. A cost already paid that cannot be recovered. Should be ignored in forward-looking decisions. (Ch 1, 17)

Supply. The relationship between price and quantity supplied. Slopes upward (law of supply). (Ch 5)

Tax incidence. Who actually bears the burden of a tax. Depends on relative elasticities, not on who legally pays. (Ch 6, 7)

Taylor Rule. FFR = 2% + π + 0.5(π − 2%) + 0.5(output gap). A benchmark for Fed rate-setting. (Ch 27)

Total factor productivity (TFP). The efficiency with which inputs are combined; the only source of sustained long-run growth. (Ch 25)

Tragedy of the commons. Overuse of a shared resource because each user captures the benefit but shares the cost. (Ch 12)

Unemployment rate. Unemployed / Labor force × 100. U-3 is the headline; U-6 is broader. (Ch 24)

Terms are listed alphabetically. Chapter references in parentheses indicate where the term is introduced or given its primary treatment.