Econ Dictionary

Definitions of common economics terms appropriate for upper grade levels

ADVERSE SELECTION: an inefficient market situation in which sellers have better knowledge about their product than buyers, allowing them to pass off inferior products as if they were of normal quality, and thereby driving away otherwise willing buyers. The used-car market is the classic example of a market in which this might occur.

ALLOCATE: to provide to someone.

BARTER: trading goods and services for other goods and services without using money.

BID: a price proposed by a buyer. The seller must voluntarily accept this price for the transaction to be legal.

BROKEN WINDOW FALLACY: also known as the 'Parable of the Broken Window' was introduced by French economist Frédéric Bastiat in his 1850 essay "That Which We See and That Which We Do Not See". In this essay Bastiat illustrates why destruction, and the money spent to recover from destruction, is not actually a net benefit to society. The broken window fallacy argues that there is no net economic gain from fixing the destruction caused by a harmful event. Even though capital will be spent to repair any damages, that is only a maintenance cost that does not represent an actual increase in economic welfare. This fact becomes apparent with the recognition that the resources required to undertake the repair also have opportunity costs that tend to be overlooked, or 'unseen'.

BUYER: someone who exchanges money for goods.

CAPITAL RESOURCES: goods made by people that are used to produce other goods and services. Examples include machines, computers, office buildings, and tools.

CAPITALISM: a decentralized economic system characterized by mutually voluntary cooperation jointly enforced by the individual property rights of both parties (i.e. an economic system whereby everyone must engage in quid pro quo). For a video-based explanation of this system see here.

CETERIS PARIBUS: means "all else held equal". An assumption typically invoked in order to ascertain theoretically what a single change in market conditions would have on that market in isolation.

CLUB GOOD: is one of the four economic good types, whose consumption is non-rivalrous and whose right to consume it can be excluded from non-payers. Examples include a country club (hence the name), software, cable television, movies, digital music, books (indeed all intellectual property), and uncongested toll roads. Club Goods are often considered to be a natural monopoly, since a single dominant supplier may be able to serve a significant fraction of all consumers, which can lead to an inefficient market due to supplier market power. See also 'Private Good, 'Common Good', and 'Public Good'.

COMMAND ECONOMY: exists when a central authority makes the major economic production and distribution decisions. This economic system means that private individuals do not have property rights over the means of production or the fruits of their labor. Such an economic systems is a communist system.

COMMON GOOD: one of the four economic good types, whose consumption is rivalrous and whose right to consume it cannot be excluded from non-payers. Examples include cows on common grazing land (hence the name), tuna in international waters, waves at surf spots, and congested non-toll roads (what we have in Honolulu). Common Goods are not provided efficiently by a free market alone because of incentives for overuse - if you don't catch that fish now your neighbor will. A solution to this 'Tragedy of the Commons' is to restrict the use of such resources or to extend private property rights to them - and owners will be incentivized to do the same. Otherwise, you can just make yourself look menacing and tell that kook to 'go in'. See also 'Private Good', 'Club Good', and 'Public Good'.

COMMON RESOURCE: an exhaustible resource whose consumption is rivalrous, but whose right to consume it is not restricted by government regulation or private property rights.

COMMUNISM: an economic system whereby the state dictates production decisions, allocates resources, and owns all property - and by corollary individual private property rights do not exist.

COMPETITION: a marketplace situation where no single buyer or seller is important enough to have any appreciable influence over price - where every market participant is therefore a 'price-taker'. The opposite of competition is market power.

CONGESTION CHARGE: charging for the use of roads during peak times to prevent gridlock and increase travel times. Allows for the more efficient use of available road networks, and does not require any additional road infrastructure to implement. Currently practiced in London, Stockholm, Milan, Oslo, and Singapore.

CONSUMER: a person whose wants are satisfied by using goods and services.

CONSUMER SURPLUS: the total net benefits received by all consumers in a market. It represents the total difference between the willingness to pay and the price actually paid across all consumers in a market. The consumer surplus is a psychological object that is not directly observable in the real world.

COST: the resources expended.

DEADWEIGHT LOSS: is a loss to society which occurs due to a market inefficiency, such as occurs due to taxation, externalities, or market power.

DEFLATION: a decrease in the average price level across the entire economy. Deflation is caused by either a decrease in the money supply or an increase in the availability of goods and services, or both.

DEMAND: is the relationship between price and the total number of units that buyers would collectively purchase. See also this video explanation.

DEMAND CURVE: the graphic representation of demand, customarily depicted as 'inverse demand' – i.e. with the horizontal axis (x-axis) as the quantity demanded, and the vertical axis (y-axis) as the price paid per unit.

DEMAND SCHEDULE: a table that shows the specific quantities of an economic good that buyers would buy at various prices.

DEMAND (LAW OF): states that there is an inverse relationship between the quantity demanded and prices. That is, the demand curve slopes downward - at higher prices a lower quantity of a good or service will be demanded, and conversely at lower prices the quantity demanded is greater.

DIVISIBILITY: a beneficial property of goods used as money, whereby; (1) the good is easy to divide, and (2) when you divide up the good, the sum of its divided parts are interchangeable with the original whole.

DURABILITY: a beneficial property of goods used as money, whereby the good is able to resist damage that might destroy its value.

ECONOMIC GOOD TYPE: refers to whether a good is rivalrous in consumption and whether the right to consume it can be excluded from non-payers. Goods will be either rivalrous and excluded (Private Good), rivalrous and not excluded (Common Good), non-rivalrous and excluded (Club Good), or non-rivalrous and not excluded (Public Good). These two characteristics determine whether or not a free market in a given good will be economically efficient. Note that the categories of rivalrousness and excludability that a given good falls into need not be discrete but may exist on a spectrum.

ECONOMIC SYSTEM: the institutional framework that a society uses to make economic production and allocation decisions.

ECONOMIC WELFARE: the net benefits created by economic activity. In a given market it is comprised of the consumer surplus plus the producer surplus.

ECONOMICS: is the study of the use of scarce resources which have alternative uses.

ECOSYSTEM SERVICES: are services provided by ecosystems to humans including pollination, pest control, nutrient cycling, water purification, food provision, and flood control. Many of these services are not commonly provided by the private market as a result of intrinsic challenges to market efficiency such as strategic free-riding, imperfect information, and high transaction costs.

EFFICIENCY (ECONOMIC): is the market situation where consumer and producer economic welfare are maximized. This occurs when the buyers with the greatest demand are those that consume the product, the sellers with the lowest costs are the ones that produce the product, and all possible mutually beneficial transactions between buyers and sellers are executed. Economic efficiency is the natural outcome of a free, competitive market for a private good in the absence of market imperfections such as externalities, information asymmetries, and market power.

ELASTICITY (PRICE): refers to the sensitivity of the quantities demanded or supplied to price changes.

ENTREPRENEUR: the person who assumes the risk of organizing economic resources to produce goods and services that are more valuable than their original inputs. First used in the mid 18th century and originates from the old French word entreprendre. The literal meaning of the word entrepreneur is 'the one who undertakes'.

EQUILIBRIUM: see 'Market Equilibrium'.

EQUILIBRIUM PRICE: is the price at which the quantity supplied is equal to the quantity demanded. There is therefore neither a surplus nor a shortage. At this price it is also the case that all mutually beneficial trades that are possible will take place. In addition, no non-buyer is willing to pay enough to make any non-seller interested in transacting, and so neither buyers nor sellers have an incentive to bid or accept a different price. As a result, the price in equilibrium is stable. The equilibrium price is typically indicated by the abbreviation 'P*'. If the market price is the equilibrium price, then the market quantity is necessarily also the equilibrium quantity.

EQUILIBRIUM QUANTITY: is the quantity that the market simultaneously demands and supplies (which are equal) at the equilibrium price. The 'equilibrium quantity' is typically indicated by the abbreviation 'Q*'. If the market quantity is the equilibrium quantity, then the market price is necessarily also the equilibrium price.

EXCHANGE: is transferring ownership of your property to another person, so that the other person will transfer ownership of a different good to you.

EXCLUDED GOOD: are goods where the legal right to consume them is restricted to paying customers. See 'Economic Good Type', 'Private Good', and 'Club Good'.

EXPORTS: are goods or services sold to buyers in another nation. Hawaii's primary export is tourism. As a service provided to foreign nationals by domestic businesses, when foreign tourists visit Hawaii they are adding to the exports of the United States.

EXTERNALITY: is a situation in which a third-party that is neither the buyer nor the seller of a good is affected either positively or negatively by that good.

FACTORS OF PRODUCTION: the natural resources, human resources, and capital resources utilized in the production of goods and services.

FIAT MONEY: is a form of money in which the issuer does not promise to redeem in a commodity, and therefore its current value is based solely on the confidence that others will accept it in future. Fiat money is the only form of national currency used in the world today.

FREE MARKET: a market in which buyers and sellers are free to exchange with one another on any mutually acceptable terms, as each individual sees fit.

FREE-RIDER PROBLEM: a market imperfection whereby a party can receive the benefits of a resource that is paid for by others without paying themselves. The free-rider problem is intrinsic to Public Goods.

GOODS: are physical objects that can satisfy people's needs or wants. Contrast with 'Services'.

HIDOE ACRONYMS: For a useful guide to the common acronyms used across the Hawaii Department of Education system see here.

HUMAN RESOURCES: represent the quantity and quality of human effort directed toward producing goods and services (also called 'Labor').

IMPORTS: are goods or services bought from sellers in another nation.

INCOME: the money received by a person, business, or government.

INFLATION: is an increase in the average price level across the entire economy, inflation is caused by either an increase in the money supply or a reduction in the availability of goods and services, or both.

INTERDEPENDENCE: is when people rely or depend upon one another to accomplish a task or goal.

INTERMEDIATE GOOD: is a good which is traded not to be consumed directly, but in order to acquire another good for consumption later. Money is an example of an intermediate good.

LABOR: represent the quantity and quality of human effort directed toward producing goods and services (also called "Human Resources").

LAFFER CURVE: is the relationship between tax rates and the amount of tax revenue collected. The disincentive effects of taxation mean that if tax rates exceed a certain threshold, then the tax revenue collected will be less than at lower tax rates. Such a high tax rate is an irrational economic policy. In the words of the famous political commentator John Maynard Keynes, 'taxation may be so high as to defeat its object'.

MACROECONOMICS: is the study of all markets interacting simultaneously. Contrast with 'Microeconomics'.

MARGINAL: the incremental difference.

MARGINAL COST: the amount of additional cost incurred from producing one more unit of output.

MARGINAL PRODUCT: the amount of additional output produced from using one more unit of an input.

MARGINAL UTILITY: the amount of additional satisfaction received from consuming one more unit of a good.

MARKET: a setting where buyers and sellers meet to exchange offers and bids, and through mutual agreement establish market prices.

MARKET ECONOMY: is an economic environment where production and consumption decisions are made privately by individuals, and economic actors are constrained by market competition instead of government regulation: also known as the free enterprise system.

MARKET EQUILIBRIUM: market equilibrium exists when the price is such that the quantity supplied is equal to the quantity demanded. There is therefore neither a surplus nor a shortage. At this price it is also the case that all mutually beneficial trades that are possible will take place. In addition, no non-buyer is willing to pay enough to make any non-seller interested in transacting, and so neither buyers nor sellers have an incentive to bid or accept a different price. As a result, the price in equilibrium is stable. This particular price is called the 'equilibrium price' and is typically indicated by the abbreviation 'P*'. The quantity demanded and supplied at the equilibrium price (they are equal) is called the 'equilibrium quantity' and is typically indicated by the abbreviation 'Q*'.

MARKET FAILURE: see 'Market Imperfection'.

MARKET IMPERFECTION: occurs where consumer and producer economic welfare are not maximized. This can occur in markets for common goods, public goods, and in markets subject to externalities, information asymmetries, and market power.

MARKET POWER: is a marketplace situation where individual buyers or sellers can have an appreciable influence over the market price, and are able to manipulate it for their benefit. A common example of this is an unregulated monopoly in an industry where new entry is forbidden. The opposite of market power is competition.

MICROECONOMICS: is the study of the behavior one market in isolation. Contrast with 'Macroeconomics'.

MONEY: is an intermediate good universally accepted in exchange and used to set prices across all markets.

MONEY SUPPLY: consists of items that are considered money or near-money including the nominal value of all bank account balances and the cash that is outside the vaults of depository institutions.

MORAL HAZARD: is an economic situation where one is incentivized to behave irresponsibly, such as not buying a fire extinguisher because you already have fire insurance on your house.

MUTUAL BENEFIT: an outcome where all participants gain. See also 'Positive Sum Game' and 'Economic Welfare'.

NATURAL RESOURCES: are so-called "gifts of nature", and include land, minerals, landscape views, clean water, lumber, wild animals, and fish.

NEEDS: are necessities such as food, shelter, and clothing that can be satisfied by consuming a good or service. Contrast with 'Wants'.

NEGATIVE EXTERNALITY: is a situation where the production or consumption of a good exerts a negative effect on a third-party who is independent of the transaction.

NEGATIVE SUM GAME: an interaction where all participants lose, i.e. a 'lose-lose scenario'. In such interactions value is destroyed. For example, in the 1983 movie WarGames the supercomputer opines that, "The only winning move [in thermonuclear war] is not to play." See also 'Positive Sum Game', and 'Zero Sum Game'.

NON-EXCLUDED GOOD: are goods where the legal right to consume them is not restricted to paying customers. See 'Economic Good Type', 'Common Good', and 'Public Good'.

NON-RIVAL GOOD: are goods that can simultaneously be consumed by others if they are already being consumed by someone else. Contrast with 'Rival Good'. See 'Economics Good Type', 'Club Good', and 'Public Good'.

OFFER: a price proposed by a seller. The buyer must voluntarily accept this price for the transaction to be legal.

OPPORTUNITY COST: is the value of the best forgone alternative. Opportunity costs imply that nothing is free. Everything comes with a cost, even if that cost is simply not doing something else.

PORTABILITY: is a beneficial property of goods used as money, whereby units of the good have great purchasing power in relation to their weight and volume.

POSITIVE EXTERNALITY: is a situation where the production or consumption of a good exerts a positive effect on a third-party who is independent of the transaction.

POSITIVE SUM GAME: an interaction where all participants gain, i.e. a 'win-win scenario'. In such interactions, value is created. For example, exchanges between a willing buyer and a willing seller are Positive Sum Games. See also 'Economic Welfare', 'Negative Sum Game', and 'Zero Sum Game'.

PRICE (MARKET): is the amount of money voluntarily agreed upon by both the buyer and the seller in an exchange. Price can also be thought of as the rate of exchange.

PRICE CONTROL: is a government policy where a market price minimum (price floor) or maximum (price ceiling) is set, instead of allowing prices to be determined by buyers and sellers. See 'Price Ceiling' and 'Price Floor' below.

PRICE CEILING: is a government policy where a market price maximum is set that is lower than the level that buyers and sellers would otherwise agree on. Examples include rent control and the US gasoline price controls of the 1970s.

PRICE FLOOR: is a government policy where a market price minimum is set that is higher than the level that buyers and sellers would otherwise agree on. Examples include minimum wages, regulated US airfares prior to 1978, and minimum per-drink laws for alcohol.

PRIVATE: relating to the individual as opposed to the entire society, as in for instance 'private property rights'. See also 'Social'.

PRIVATE BENEFIT: the benefit received by individual buyers or sellers, and not including any costs borne by third-parties. Contrast with 'Social Benefit'.

PRIVATE COST: the cost incurred by individual buyers or sellers, and not including any costs borne by third-parties. Contrast with 'Social Cost'.

PRIVATE GOOD: is one of the four economic good types, whose consumption is rivalrous and whose right to consume it can be excluded from non-payers. Examples include cars, cookies, clothes, houses, washing machines, and congested toll roads. Private goods are provided efficiently by a free market. See also 'Common Good', 'Club Good', and 'Public Good'.

PRODUCER: is the person who makes goods and provides services.

PRODUCER SURPLUS: is the total net benefits earned by all producers in a market, which is identical to the total profits earned across an entire industry.

PRODUCTIVE RESOURCES: are all natural resources (including land), human resources (labor), and human-made resources (capital - e.g. poi pounders) used in the production of goods and services.

PROFIT: is the difference between revenues and costs incurred in producing a good or service. Profits incentivize operational efficiency and, when positive, provide a return for risk-taking.

PROPERTY RIGHTS: comprise; (i) the authority to determine how a resource is used, (ii) the right to receive the services of that resource, and (iii) on what terms its ownership may be transferred to another. Property rights are protected through government administered force. Well-defined and well-protected property rights prevent the Tragedy of the Commons and replace socially destructive competition for control of economic resources with socially beneficial market competition.

PUBLIC GOOD: is one of the four economic good types, whose consumption is non-rivalrous, and whose right to consume it cannot be excluded from non-payers. Examples include national defense, the rule of law, firework displays, uncongested non-toll roads, and clean beaches. In the absence of other societal deterrents (such as stink eye), public goods are not efficiently provided in the market due to strategic free-riding. See also 'Free-Rider Problem', 'Private Good', 'Common Good', and 'Club Good'.

RIVAL GOOD: are goods that cannot be consumed by others if they are already being consumed by someone else. Contrast with 'Non-Rival Good'. See 'Economic Good Type', 'Private Good', and 'Common Good'.

SCARCITY: is the lack of sufficient resources to satisfy all wants. Scarcity necessitates economic decision-making and means that there are opportunity costs implicit in everything we do - because if we use a resource for one purpose, it means that there will necessarily be less for something else.

SELLER: someone who exchanges goods for money.

SERVICES: are actions that can satisfy people's needs or wants. Contrast with 'Goods'.

SHORTAGE: a market situation in which the quantity supplied is less than the quantity demanded at the current market price. This occurs when the the market price is below the equilibrium price. Contrast with 'Surplus'.

SOCIAL: means relating to the society as a whole, as opposed to an individual - as in 'Social Welfare' - which in an economic context means the collective economic welfare of everyone. See also 'Private'.

SOCIAL BENEFIT: is the total benefit to society, comprising both private benefits and any positive externalities received by third-parties.

SOCIAL COST: is the total cost to society, comprising both private costs and any negative externalities borne by third-parties.

SOCIAL WELFARE: is the total net benefits produced from economic activity across an entire society. This can be thought of as the total economic welfare (i.e. consumer and producers surpluses) generated across all markets.

SOCIALISM: within economics the word 'socialism' can refer to either government ownership of, and control over, the means of production - essentially a synonym for 'Communism' (this was the older meaning of 'Socialism'), or it can refer to an otherwise free market situation where the government imposes especially high taxes to compulsorily redistribute a significant fraction of the incomes earned by citizens (this is how the word is most commonly used today). What does 'Socialism' mean in a given use case today? You will need to infer the meaning from the context in which it is used or ask the author to clarify in order to know for sure.

SPECIALIZATION: is concentrating one's production efforts on a very limited variety of goods and/or services; a division of labor. This is done in order to increase production.

SUNK COST: is a cost that has already been incurred and cannot be undone, and is therefore irrelevant for decision-making about a future choice. Another way of thinking about this is that a losing plan of action should always be abandoned immediately no matter how much time and expense has previously been invest in it.

SUPPLY: is the relationship between price and the total number of units that producers would collectively bring to market. See also this video explanation.

SUPPLY CURVE: is the graphic representation of supply, customarily depicted with the vertical axis as the price paid per unit and the horizontal axis as the quantity supplied.

SUPPLY SCHEDULE: a table that shows the specific quantities of an economic good that sellers would bring to market at various prices.

SUPPLY (LAW OF): states that there is a positive relationship between quantity of a good supplied and prices. That is, the supply curve slopes upward - at higher prices a higher quantity of a good will be supplied, and conversely at lower the prices the quantity supplied will be less.

SURPLUS: a market situation in which the quantity supplied is greater than the quantity demanded at the current market price. This occurs when the the market price is above the equilibrium price. Contrast with 'Shortage'.

TAXES: are a compulsory transfer of private resources to the government. Taxes are one potential source of income for the government.

TRADE: is the exchange of goods and services.

TRADE-OFFS: is getting a more of one option in exchange for a less of another.

TRAGEDY OF THE COMMONS: is where the overuse of a common resource that is rivalrous in consumption leads to the exhaustion of an otherwise renewable resource. Examples include common grazing land and common fishing grounds. Solutions to the Tragedy of the Commons include; (i) government regulation restricting overexploitation (such as catch quotas and prohibiting the collection of females), (ii) extending private property rights over these resources so that the owners will be able and incentivized to conserve them, or (ii) social censure of overuse. The effectiveness and feasibility of these potential solutions will depend on the specifics of each case.

UNIFORMITY: is a beneficial property of goods used as money, whereby each unit of the good is fungible with any other unit.

UTILITY: is the amount of satisfaction that a consumer derives from consuming a good.

VALUE: is the amount of benefit provided by a good. Note that Value is different from Price.

WANTS: are unnecessary desires that can be satisfied by consuming a good or service. Contrast with 'Needs'.

WELFARE (ECONOMIC): is the level of economic benefits being generated. In markets, economic welfare is composed of the Consumer Surplus and the Producer Surplus.

ZERO SUM GAME: an interaction where one participant's gain is necessarily another participant's loss, i.e. a 'win-lose scenario'. In such interactions value is transferred from one party to another. For example, for the players; sports, gambling, and poker are Zero Sum Games. See also 'Positive Sum Game', and 'Negative Sum Game'.

ECONOMICS LIBRARY

Econ Dictionary