Adjustment process 2, 4 Path by which a system moves from a position of disequilibrium to one of equilibrium.

Adverse selection 12 A problem in insurance markets caused by asymmetric information. Insurance tends to be purchased most by those who know that they are high risks.

Aggregation A method of simplifying theory by combining many markets into a large, composite market.

Allocation 6 The determination of what goods and services will be produced from available resources. Allocation can be done with markets or with hierarchy.

Antitrust policy 15 Policy that makes companies act in a competitive manner by breaking up companies that are monopolies, prohibiting mergers that would increase market power, and finding and fining companies that collude to establish higher prices.

Arbitrage 12 Simultaneously buying in a cheap market and selling in an expensive one.

Budget Constraint 2 A line that separates outcomes that are affordable from outcomes that are not affordable. Occasionally called a consumption-possibilities frontier.

Change in demand 4 A shift in the demand curve.

Change in quantity demanded 4 A change in the amount people buy because a change in price moves them along a stationary demand curve.

Change in quantity supplied 4 A change in the amount sellers sell because a change in price moves them along a stationary supply curve.

Change in supply 4 A shift in the supply curve.

Circular flow model 9 A simplified picture of a market economy showing the flow of products from businesses to households and the flow of resources from households to businesses.

Consumer Sovereignty 11 In a market economy, it is ultimately the wants of the consumers, not the preferences of the producers, that determine what goods and services are produced.

Consumers' surplus 8, 13 The difference between the maximum a buyer would pay and the actual price.

Consumption-possibilities frontier 2 See budget constraint.

Contingent behavior 2 Behavior that exists when each person's actions depend on what he expects others to do.

Cross-price elasticity (cross-elasticity) 5 A measure of whether goods are substitutes or complements.

Demand curve 4 The relationship between price and the amount of a product people want to buy.

Derived demand 14 The demand for a resource depends on, or is derived from, the demand for the things that the resouce helps produce.

Disequilibrium 2, 4 A condition that exists when a system is not at rest and has a tendency to change.

Dollar voting 11, 13 An explanation of how a market economy determines what goods are produced, made with an analogy to the political process of voting.

Duopoly 15 A market in which there are two sellers.

Economic efficiency 11, 12, 13, 14, 15 A situation in which value is maximized. Given resources, technology, and preferences, no changes will increase value. Also called Pareto optimality.

Economic inefficiency 11, 13, 14, 15, 16 A situation in which there is potential value that no one captures. Given resources, technology, and preferences, there is some change which will improve the well-being on one individual without harming anyone else.

Economic Rent 8 See producer surplus.

Elasticity 5 A measure of responsiveness.

Entrepreneur 12 An individual who creates new a new organization, market, or product, usually in the quest for profit. Entrepreneurs are innovators.

Equilibrium 2, 4, 8 A condition that exists when a system is at rest and has no further tendency to change.

Externality 12 A cost or benefit that a decision maker passes on to a third party. Pollution is an example of a negative externality.

Excise tax 13 A sales tax on a specific item.

Fixed cost 10 Cost that does not change as output changes.

Free rider 13, 15 Person who does not pay for good or service because there is no way to exclude those who do not pay from using the good or service.

Game theory 3 An analysis of interactions in which the outcome a person faces depends not only on his strategy of action, but also on the strategies of others.

Human capital 10, 12 Peopleís assets in the form of investment in themselves.

Income elasticity of demand 5 A measure of the responsiveness of people's purchases to changes in income.

Indifference curve 8 In a graphical representation of a utility function; an indifference curve plots all combinations of goods and services which provide the same utility. Occasionally called an isoutility curve.

Inferior good 4, 5 A good that people buy less frequently if their incomes rise.

Invisible hand 1, 12 A phrase that expresses the belief that the best interests of a society can be served when individual consumers and producers compete to achieve their own private interests.

Isoquant 9 In a graphical representation of a production function, an isoutility curve shows all ways of producing a specificlevel of output.

Law of demand 4 The principle that there is an inverse relationship between the price of a good and the quantity that buyers are willing to purchase.

Law of diminishing returns 9 Adding more of one input while holding other inputs constant eventually results in smaller and smaller increases in added output.

Lorenz Curve 6 A graphical way to illustrate the equality or inequality of the distribution of income.

Marginal cost 7, 10 The change in total cost caused by a one-unit change in an activity, or the slope of the total cost curve. In the case of a business, the change in total cost is caused by a change in output.

Marginal rate of substitution 11 The ratio at which people will trade good B for good A.

Marginal rate of transformation 11 Slope of the production-possibilities frontier, which shows how much of good B must be given up to produce more of good A.

Marginal resource cost 9 The change in total cost caused by a one-unit change in an input.

Marginal revenue 4, 5, 9 The change in total revenue resulting from a change in sales; the slope of the total cost curve.

Marginal revenue product 10 The change in total revenue resulting from a one-unit change in an input.

Market failure 11 A situation in which a market yields a result that is economically inefficient, that is, there is value that is not captured.

Maximization principle 7 The rule that net benefits are maximized when marginal benefit equals marginal cost.

Monopoly 15 An industry with only one seller.

Monopolistic competition 16 An industry that has easy entry and exit, but in which sellers are price searchers.

Monopsony 9 A market with only one buyer.

Moral hazard 12 An insurance problem; when the cost of a disaster is reduced with insurance, people have less incentive to avoid the disaster.

Negative-sum game 13 In terms of game theory, an interaction in which losses exceed winnings.

Normative analysis 1, 14, 15 An analysis based on a judgement about what is desirable and what is undesirable.

Oligopoly 15 An industry in which there are few sellers.

Paradox of Value 8 The puzzle of why essential items such as water are cheap while frivolous items such as diamonds are expensive. The paradox is easily resolved when one understands the difference between total value and marginal value.

Pareto optimality 11 See Economic efficiency.

Positive analysis 1, 4 An analysis limited to statements about the actual consequences of an event or policy, with no judgement about whether the consequences are desirable or not.

Positive-sum game 3, 9, 13 In terms of game theory, an interaction in winnings exceed losses.

Present value 8 Money in the future is less valuable than an equivalent amount of money now because money in the future gives fewer options. The comparison of money in different time periods is made with a present value computation.

Price ceiling 6 Legally established maximum price a seller can charge.

Price-discrimination 15, 16 Charging different prices for the same good or service.

Price floor 6 Legally established minimum price a seller can be paid.

Price elasticity of demand 5 Measures how much consumers respond to a change in price in their buying decisions

Price elasticity of supply 5 The same formula as price elasticity of demand, except that the quantity in the formula refers to the quantity that sellers will sell.

Price searcher 4 A seller (buyer) who can influence price by the amount he sells (buys).

Price taker 4 A seller (buyer) who has no control over price, but sells (buys) at the given price.

Principal-agent problem 10 The potential conflict of interest when a person (the principal) has someone (the agent) acting on his behalf.

Prisonersí dilemma 3, 11, 15 A game theory illustration that self-interest can lead to group disaster.

Problem of the commons 2, 3, 8, 14 Refers to the absence of any automatic mechanism or incentive to prevent the overuse and depletion of commonly-held resources.

Producers' surplus 8, 13 The difference between the lowest price a producer will accept and the actual price. Also called economic rent.

Production function 9 The mathematical way of stating that output depends on inputs.

Production-possibilities frontier 2 , 9, 11, 13, 15, 16 Frontier that separates outcomes that are possible for an individual (or a group) to produce from those that cannot be produced.

Profit seeking 13 Efforts to obtain value through exchange by providing a good or service that others consider valuable. (See rent seeking for the alternative.)

Progressive tax 13 A tax that charges a higher percentage of income as income rises.

Proportional tax 13 A tax that charges the same percentage of income, regardless of the size of income.

Public good 13 A good or service that, once produced, has two properties: Benefits are available to all and there is no way to bar people who do not pay (free riders) from consuming the good or service.

Quota 3, 13, 16 Limit on the quantity of a good that may be imported in any time period.

Regressive tax 13 A tax that charges a lower percentage of income as income rises.

Rent seeking 13 Efforts to obtain value through transfer without providing anything in return.

Scarcity 1, 2, 3 The condition in which human wants exceed the available supply of goods, time, and resources. In a world without scarcity, there would be no economics.

Shortage 4, 6 The market condition existing when quantity demanded exceeds quantity supplied. Generally an increase in price will eliminate a shortage.

Speculation 12 Attempting to buy when the price is low and sell when it is high.

Sunk cost 15 Cost that cannot be recovered.

Supply curve 4 The relationship between the quantity sellers want to sell during some time period (quantity supplied) and price.

Surplus 4 The market condition existing where the quantity supplied is greater than the quantity demanded. Generally a decrease in price will eliminate a surplus.

Tariff 13, 16 Excise tax on imported goods.

Tax incidence 13 Taxes can be shifted from those who write the check to the government to others. The study of tax incidence is the study of who ultimately bears the burden of the tax.

Tournament theory 14 An analysis of conditions under which small differences in ability result in large differences in reward.

Utility 1, 7 An abstract variable, indicating goal-attainment or want-satisfaction.

Utility function 7 A mathematical way of saying that utility depends on consumption of goods and services.

Zero-sum game 1, 2, 3, 8, 16 An interaction in which the sum of winnings and losses equals zero.