To My Colleagues, To Our Youth Forum

185 Essential Concepts of Economics for Primary Learners

Edited by Li Keqin

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Preface

• Economics is the study of how the economy works: how the society manages its scarce resources and how people make their decisions. It is an important task for us to study and use its theories and tools.The essential concepts are the languages and tools of Economics. They can help us to develop the economic way of thinking. During my study of Economics, I had paid more attention to those concepts and it made me understand the theories of Economics easily. For the purporse of helping my colleagues study Economics well, I have edited this book. I hope that this book can give you some convenience when you study Economics.

Li Keqin December 30, 2006

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1.Scarcity

• Scarcity means that society has limited resources and therefore cannot produce all the goods and services people wish to have.Just as a household cannot give every member everything he or she wants, a society cannot give every individual the highest standard of living to which he or she might aspire.Because of scarcity,a society must decide how to allocate its scarce resources.

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2.Economics

• Economics is the study of how society manages its scarce resources.It studies how people make decisions:how much they work,what they buy,how much they save,and how they invest their savings.It also studies how people interact with one another.For instance,it examines how the multitude of buyers and sellers of a good together determine the price at which the good is sold and the quantity that is sold,Finally, it analyzes forces and trends that affect the economy as a whole,including the growth in average income,the fraction of the population that cannot find work, and the rate at which prices are rising.In fact, Economics is one science on tradeoffs.

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3.Efficiency

• Efficiency means that society is getting the most it can from its scarce resources. The question of efficiency is whether the economic pie is as big as possible. An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available. From the standpoint of welfare economy, efficiency is the property of a resource allocation of maximizing the total surplus received by all members of society. If an allocation of resources maximizes total surplus,we say that the allocation exhibits efficiency. If an allocation of resources is inefficient, then some of the gains from trade among buyers and sellers are not being realized.

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4.Equity

• Equity means that the benefits of scarce resources are distributed fairly among society’s members. The question of equity is whether the economic pie is divided fairly. Efficiency and equity is one of the most important tradeoffs that society faces. Often,when government policies are being designed,these two goals conflict. Evaluating the equity of a market outcome is more difficult than evaluating the efficiency, because equity involves normative judgments that go beyond economics and enter into the realm of political philosophy.

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5.Opportunity Cost

• Opportunity cost means whatever must be given up to obtain some item.For instance, when you spend a day playing computer games,you cannot spend that time reading a book or writing papers.When making any decision, decisionmakers should be aware of the opportunity costs that accompany each possible action.They should decide whether the benefit is worth the cost.

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6.Marginal Changes

• Marginal changes mean small incremental adjustments to a plan of action. “Margin” means “edge”, so marginal changes are adjustments around the edges of what you are doing. Usually, rational people think at the margin. A rational decisionmaker takes an action if and only if the marginal benefit of the action exceeds the marginal cost.

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7.Market Economy

• Market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.Firms decide whom to hire and what to make.Households decide which firms to work for and what to with their income. These firms and households interact in the marketplace,where prices and self-interest guide their decisions.Usually, markets are a good way to organize economic activity with an invisible hand.

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8.Market Failure

• Market failure is a situation in which a market left on its own fails to allocate resources efficiently. Market power and externalities are examples of market failure.Because of market failure, we sometimes need government to improve market outcomes:to promote efficiency and to promote equity.That is,most policies aim either to enlarge the economic pie or to change how the pie is divided.

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9.Externality

• Externality is the impact of one person’s actions on the well-being of a bystander.If the impact on the bystander is adverse, it is called a negative externality; if it is beneficial, it is called a positive externality. The exhaust from automobiles is a negative externality because it creates smog that other people have to breath. Research into new technologies provides a positive externality because it creates knowledge that other people can use. Externality is one cause of market failure. The classic example of an external cost is pollution that affects people not in the market. Externality causes welfare in a market to depend on more than just the value to the buyers and the cost to the sellers. Because buyers and sellers do not take these side effects into account when deciding how much to consume and produce, the equilibrium in a market can be inefficient from the standpoint of society as a whole.

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10.Market Power

• Market power is the ability of a single economic actor(or small group of actors)to have a substantial influence on market prices.It is one cause of market failure. For example,if everyone in town needs water but there is only one well, the owner of the well is not subject to the rigorous competition with which the invisible hand normally keeps self-interest in check.If a firm can influence the market price of the good it sells, it is said to have market power.

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11.Productivity

• Productivity is the quantity of goods and services produced from each hour of a worker’s time. A country’s standard of living depends on its productivity.In nations where workers can produce a large quantity of goods and services per unit of time, most people enjoy a high standard of living; in nations where workers are less productive, most people must endure a more meager existence. Productivity depends on the amounts of physical capital, human capital, natural resources, and technological knowledge available to workers.

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12.Inflation

• Inflation means an increase in the overall level of prices in the economy.In general, growth in the quantity of money causes inflation. When a government creates large quantities of the nation’s money, the prices rise and the value of the money falls.

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13.Phillips Curve

• Phillips curve is a curve that shows that society faces a short-run tradeoff between inflation an unemployment. It tells us that many economic policies push inflation and unemployment in opposite direction in short-run. The Phillips Curve is crucial for understanding many development such as business cycle in the economy.

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14.Business Cycle

• Business cycle means fluctuations in economic activity, such as employment and production. It tells us that economic fluctuations correspond to changes in business. When real GDP grows rapidly,business is good. During such periods of economic expansion, firms find that customers are plentiful and that profits are growing. When real GDP falls during recessions, businesses have trouble. During such periods of economic contraction, most firms experience declining sales and dwindling profits. The term business cycle is somewhat misleading, because it seems to suggest that economic fluctuations follow a regular, predictable pattern. In fact, economic fluctuations are not at all regular, and they almost impossible to predict with much accuracy.

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15.Circular-flow Diagram

• Circular-flow diagram is a visual model of the economy that shows how dollars flow through markets among households and firms.

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16.Production Possibilities Frontier

• Production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology. The economy can produce any combination on or inside the frontier.Points outside the frontier are not feasible given the economy’s resources.

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17.Microeconomics

• Microeconomics is the study of how households and firms make decisions and how they interact in markets including the effects of rent control on housing in a city, the impact of foreign competition on the U.S auto industry, and the effects of compulsory school attendance on workers’ earnings.

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18.Macroeconomics

• Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

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19.Positive Statements

• Positive Statements are one type of statement about world. Positive statements are descriptive. They make a claim about how the world is.In principle, positive statements can be confirmed or refuted by examining evidence.When an economist makes a positive statements, he works just like a scientist to explain how the economy runs.

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20.Normative statements

• Normative statements are another type of statements about world.They are prescriptive. They make a claim about how the world ought to be. Usually, evaluating normative statements involves values as well as facts. When an economist makes normative statements, he works just like a policy adviser to judge what is good or bad policy.

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21.Absolute Advantage

• Absolute advantage is the comparison among producers of a good according to their productivity.The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.

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22.Comparative Advantage

• Comparative advantage is the comparison among producers of a good according to their opportunity cost. The producer who has the smaller opportunity cost of producing the good is said to have a comparative advantage in producing it. The principle of comparative advantage shows the gains from trade are based on comparative advantage, not absolute advantage.Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

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23.Imports

• Goods produced abroad and sold domestically are called imports. When a country allows trade and becomes an importer of a good, domestic consumers of the good are better off, and domestic producers of the good are worse off. Trade raises the economic well-being of a nation in the sense that the gains of the winners(consumers) exceeds the losses of the losers(producers).

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24.Exports

• Goods produced domestically and sold abroad are called exports. When a country allows trade and becomes an exporter of a good, domestic producers of the good are better off, and domestic consumers of the good are worse off. Trade raises the economic well-being of a nation in the sense that the gains of the winners(producers) exceeds the losses of the losers(consumers).

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25.Market

• A market is a group of buyers and sellers of a particular good or service. The buyers as a group determine the demand for the product, and the sellers as a group determine the supply of the product. Market forces

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26.Competitive Market

• A competitive market is a market in which there are many buyers and many sellers so that each has a negligible impact on the market price. For instance, the market for ice cream is a highly competitive market, because no single buyer or seller of ice cream can influence the price of ice cream. Each buyer of ice cream and seller of ice cream takes the market price as given. They are all price takers.

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27.Perfectly Competitive Market

• Perfectly competitive markets are defined by two primary characteristics: (1)the goods being offered for sale all the same,and (2) the buyers and sellers are so numerous that no single buyer or seller can influence the market price. In perfectly competitive markets buyers and sellers are price takers.

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28.Quantity demand

• Quantity demand is the amount of a good that buyers are willing and able to purchase.Usually, many things determine the quantity demanded of any good, but the price of the good plays a central role

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29.Law of Demand

• Law of demand shows the relationship between price and quantity demanded.It claims that the quantity demanded of a good falls when the price of the good rises with other things equal

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30.Demand Schedule

• Demand schedule is a table that shows the relationship between the price of a good and the quantity demanded, holding constant everything else that influences how much consumers of the good want to buy.

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31.Demand Curve

• Demand curve is a graph of the relationship between the price of a good and the quantity demanded. It can come from the demand schedule The price of a good is on the vertical axis, and the quantity demanded is on the horizontal axis.

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32.Normal Good

• Normal good is a good for which, other things equal, an increase in income leads to an increase in demand. Cars, for instance are normal goods.

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33.Inferior Good

• Inferior good means a good for which,other things equal, an increase in income leads to a decrease in demand. Bus ride ,for instance,might be an inferior good.

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34.Substitutes

• Substitutes are two goods for which an increase in the price of one leads to an increase in the demand for the other. Substitutes are often pairs of goods that are used in place of each other, such as hot dogs and hamburgers, movie tickets and video rentals. They show the prices of related goods influence the demand of the goods.

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35.Complements

• Complements are two goods for which an increase in the price of one leads to a decrease in the demand for the other. Complements are often pairs of goods that used together, such as gasoline and automobiles, computers and software. They show that the prices of related goods influence the demand of the goods.

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36.Supply Schedule

• Supply schedule is a table that shows the relationship between the price of a good and the quantity supplied, holding constant everything else that influences how much producers of the good want to sell.

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37.Supply Curve

• Supply curve is a graph of the relationship between the price of a good and the quantity supplied. It can come from the supply schedule The price of a good is on the vertical axis, and the quantity supplied is on the horizontal axis.

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38.Equilibrium

• Equilibrium is a situation in which the price has reached the level where the quantity supplied equals quantity demanded.The equilibrium is found where the supply and demand curves intersect.

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39.Equilibrium Price

• Equilibrium price is the price that balances quantity supplied and quantity demanded.The equilibrium price is sometimes called the market-clearing price because, at this price,everyone in the market has been satisfied: Buyers have bought all they want to buy, and sellers have sold all they want to sell.

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40.Equilibrium Quantity

• Equilibrium quantity is the quantity supplied or the quantity demanded at the equilibrium price.

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41.Surplus

• Surplus is a situation in which quantity supplied is greater than quantity demanded. A surplus is sometimes called a situation of excess supply. Suppliers are unable to sell all they want at the going price.

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42.Shortage

• Shortage is a situation in which quantity demanded is greater than quantity supplied. A shortage is sometimes called a situation of excess demand. Demanders are unable to buy all they want at the going price.

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43. Law of Supply and Demand

• Law of supply and demand is the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance. In most free markets, surplus and shortage are only temporary because prices eventually move toward their equilibrium levels.

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44.Elasticity

• Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.(see price elasticity of demand)

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45.Price Elasticity of Demand

• Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.

• Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

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46.Income Elasticity of demand

• Income elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in consumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income. Normal good have positive income elasticity. Inferior good have negative income elasticity.

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47.Cross-price Elasticity of Demand

• Cross-price elasticity of demand is a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.

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48.Price Elasticity of Supply

• Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price.

• Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price

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49.Price Ceiling

• Price ceiling is a legal maximum on the price at which a good can be sold. If the price ceiling is above the equilibrium price, the price ceiling is not binding, and the market can reach the equilibrium of supply and demand. If the price ceiling is below the equilibrium price, the price ceiling is binding.When the government imposes a binding price on a competitive market, a shortage of the good arise, and sellers must ration the scarce goods among the large numbers of potential buyers.

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50.Price Floor

• Price floor is a legal minimum on the price at which a good can be sold. If the price floor is below the equilibrium price, Market forces naturally move the economy to the equilibrium, and the price floor is not binding. If the price floor is above the equilibrium price, the price floor is binding, and the binding price floor causes a surplus. Buyers must ration their demand among seller.

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51.Tax Incidence

• Tax incidence is the manner in which the burden of a tax is shared among participants in a market. Taxes on buyers and taxes on sellers are equivalent. Buyers and sellers share the tax burden. The only difference between taxes on buyers and taxes on sellers is who sends the money to the government. In fact , a tax on a good places a wedge between the price paid by buyers and the price received by sellers.

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52.Welfare Economics

• Welfare economics is the study of how the allocation of resources affects economic well-being. It examines the benefits that buyers and sellers receive from taking part in a market and how society can make these benefits as large as possible. These researches lead to a profound conclusion: The equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers. The study of welfare economics explains why markets are usually a good way to organize economic activity.

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53.Willingness to Pay

• Willingness to pay means the maximum amount that a buyer will pay for a good. Each buyer’s maximum is called his willingness to pay, and it measures how much that buyer values the good. Each buyer would be eager to buy the good at the price less than his willingness to pay, would refuse to buy the good at a price more than his willingness to pay, and would be indifferent about buying the good at a price exactly equal to his willingness to pay.

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54.Consumer Surplus

• Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. For instance, if John is willing to pay $100 for a book but pays only $80 for it, we say that John receives consumer surplus of $20.Consumer surplus measures the benefit to buyers of participating in a market. In the graph(right), the area below the demand curve and above the price measures the consumer surplus in a market. In most markets, consumer surplus reflects economic well-being because buyers are rational when they make decisions.

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55.Cost

• Cost is the value of everything a seller must give up to produce a good. Here the term cost should interpreted as the seller’s opportunity cost. Cost is a measure of a seller’s willingness to sell his good or services. Each seller would be eager to sell his goods at a price greater than his cost, would refuse to sell his goods at a price less than his cost, and would be indifferent about selling his goods at a price exactly equal to his cost.

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56.Producer Surplus

• Producer surplus is the amount a seller is paid for a good minus the seller’s cost. For instance, if Mary is willing to sell a book for $80 but sells it for $100 , we say that Mary receives producer surplus of $20. Producer surplus measures the benefit to sellers of participating in a market. In the graph(right), the area below the price and above the supply curve measures the producer surplus in a market.

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57.Deadweight Loss

• Deadweight loss is the fall in total surplus that results from a market distortion, such a tax. People respond to incentives. When a tax raises the price to buyers and lowers the price to sellers, it gives buyers an incentive to consume less and sellers an incentive to produce less than they otherwise would. Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade.

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58.World Price

• World price is the price of a good that prevails in the world market for that good. If the world price of a good is higher than the domestic price of the good, the country price lower would become an exporter of that good. Conversely, if the world price of a good is lower than the domestic price of the good, the country price higher would become an importer of that good.

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59.Tariff

• Tariff is a tax on goods produced abroad and sold domestically. The tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade. Tariff raises the domestic price of the good, reduces the welfare of domestic consumers, increases the welfare of domestic producers, and cause deadweight loss.

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60.Import Quota

• Import quota is limit on the quantity of a good that can be produced abroad and sold domestically. Import quota raises the domestic price of the good, reduces the welfare of domestic consumers, increases the welfare of domestic producers, and cause deadweight loss.

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61.Internalizing an Externality

• Internalizing an externality means altering incentives so that people take account of the external effects of their actions. For instance,if the government taxes aluminum for each ton of aluminum sold, the tax would makes the aluminum producers take the costs of pollution into account when deciding how aluminum to supply because people respond to incentives. Negative externalities lead markets to produce a larger quantity than is socially desirable. Positive externalities lead markets to produce a smaller quantity than is socially desirable. To remedy the problem, the government can internalize the externality by taxing goods that have negative externalities and subsidizing goods that have positive externalities.

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62.Coase Theorem

• The Coase theorem is the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on the own. The Coase theorem says that private economic actors can solve the problem of externalities among themselves. Whatever the initial distribution of rights, the interested parties can always reach a bargain in which everyone is better off and the outcome is efficient.

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63.Transaction Cost

• Transaction cost is the costs that parties incur in the process of agreeing and following through on a bargain. It tells us why private solutions do not always work. The Coase theorem applies only when the interested parties have no trouble reaching and enforcing an agreement. In other word, however, bargaining does not always work, even when a mutually beneficial agreement is possible. If the benefit of solving a problem is less than the cost of transaction cost, the parties might choose to leave the problem unsolved. When private bargaining does not work, the government can sometimes play a role.

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64.Pigovian Tax

Taxes enacted to correct the effects of negative externalities are called Pigovian taxes, after economist Arthur Pigou(1877-1959), an early advocate of their use. Pigovian taxes are unlike most other taxes. Most taxes distort incentives and move the allocation of resources away from the social optimum. By contrast, when externalities are present, society also cares about the well-being of the bystanders who are affected. Pigovian taxes correct incentives for the presence of externalities and thereby move the allocation of resources closer to the social optimum. Thus,while Pigovian taxes raise revenue for the government, they also enhance economic efficiency. In essence,the Pigovian tax places a price on the right to lead a negative externality such as pollution. It is a market-based policy that provides incentives so that private decisionmakers will choose to solve the problem on their own.

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65.Excludability

• Excludability is the property of a good whereby a person can be prevented from using it.

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66.Rivalry

• Rivalry is the property of a good whereby one person’s use diminishes other people’s use.

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67.Private Goods

• Private goods are goods such as ice-cream cones cars and clothing, that are both excludable and rival. An ice-cream cone is excludable because it is possible to prevent someone from eating an ice-cream cone-you just don’t give it to him. An ice-cream cone is rival because if one person eats an ice-cream cone, another person cannot eat the same cone. Most goods in the economy are private goods.

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68.Public Goods

• Public goods are goods such as national defense, basic research and fighting poverty,that are neither excludable nor rival. That is , people cannot be prevented from using a public good, and one person’s use of a public good does not reduce another person’s ability to use it.

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69.Free Rider

• Free rider is a person who receives the benefit of a good but avoids paying for it. Because public goods are not excludable, people have an incentive to be free riders. The problem of the free rider prevents the private market from supplying them. The government can potentially remedy the problem. If the government decides that the total benefits exceed the costs, it can provides the public good and pay for it with tax revenue, making everyone better off.

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70.Common Resources

• Common resources are goods such as fish in the ocean, clean air and water, and congested nontoll roads, that are rival but not excludable. There are many examples of common resources. In almost all cases, the same problem arises: Private decisionmakers use the common resource too much. Governments often regulate behavior or impose fees to mitigate the problem of overuse.

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71.Cost-benefit Analysis

• Cost-benefit analysis is a study that compares the costs and benefits to society of providing a public good. The government should provide public goods because the private market on its own will not produce an efficient quantity. the government must then determines what kinds of public goods to provide and in what quantities. When evaluating whether the government should provide a public good, the government might hire a team of economists and engineers to conduct a cost-benefit analysis.

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72.Tragedy of the Commons

• Tragedy of the commons is a parable that illustrates why common resources get used more that is desirable from the standpoint of society as a whole. When one person uses a common resource, he diminishes other people’s enjoyment of it. Because of this negative externality, common resources tend to e used excessively. The tragedy of the commons then arises. The government can solve the problem by reducing use of the common resource through regulation or taxes. Alternatively the government can sometimes turn the common resources into a private good through establishing property rights.

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73.Total Revenue

• Total revenue is the amount a firm receives for the sale of its output. It equals the quantity of output the firm produces times the price at which it sells its output. That is,

• Total revenue = Quantity × Price.

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74.Total Cost

• Total cost is the market value of the inputs a firm uses in production. When economists speak of a firm’s cost of production, they include all the opportunity costs of making its output of goods and services.

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75.Explicit Costs

• Explicit costs are input costs that require an outlay of money by the firm. For instance, when a firm hires workers to produce goods, the wages it pays are part of the firm’s explicit costs. Accountants have the job of keeping track of the money that flows into and out of firms. They are usually interested in studying the flow of the money . As a result, they measure the explicit costs but often ignore the implicit costs.

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76.Implicit Costs

• Implicit costs are input costs that do not require an outlay of money by the firm. An important implicit cost of almost every business is the opportunity cost of the financial capital that has been invested in the business. Because economists are interested in studying how firms make production and pricing decisions that are based on both explicit costs and implicit costs, they include not only explicit costs but also implicit cost. This is an important difference between how economists and accountants analyze a business.

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77.Profit

• Profit is a firm’s total revenue minus its total cost. That is, Profit = Total revenue – Total cost.Economists normally assume that the goal of a firm is to max

imize profit.Because economists and accountants measure costs differentl

y, they also measure profit differently. An economist measures a firm’s economic profit as the firm’s total revenue minus all the opportunity costs(explicit and implicit) of producing the goods and services sold. An accountant measures the firm’s accounting profit as the firm’s total revenue minus only the firm’s explicit costs. As a result, accountant profit is usually larger than economic profit.

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78.Production Function

• Production function is the relationship between quantity of inputs used to make a good and the quantity of output of that good.

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79.Marginal Product

• Marginal product is the increase in output that arises from an additional unit of input.

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80.Diminishing Marginal Product

• Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases.

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81.Fixed Costs

• Fixed costs are costs that do not vary with the quantity of output produced.they are incurred even if the firm produces nothing at all.

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82.Variable Costs

• Variable costs are costs that do vary with the quantity of output produced.

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83.Average Total Cost

• Average total cost is total cost divided by the quantity of output. That is,

Average total cost = Total cost / Quantity ATC = TC / Q Because total cost id just the sum of fixed and variable costs,

average total cost can be expressed as the sum of average fixed cost and average variable cost. Average fixed cost is the fixed cost divided by the quantity of output, and average variable cost is the variable cost divided by the quantity of output. Average cost tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced.

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84.Marginal Cost

• Marginal cost is the increase in total cost that arises from an extra unit of production.

Marginal cost = Change in total cost / Change in quantity

MC = TC / Q△ △Marginal cost tells us the increase in total cost

that arises from producing an additional unit of output.

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85.Efficient Scale

• Efficient scale is the quantity of output that minimizes average total cost.

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86.Economies of Scale

• Economies of scale is the property whereby long-run average total cost falls as the quantity of output increases. Economies of scale often arise because higher production levels allow specialization among workers, which permits each worker to become better at his or her assigned tasks.

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87.Diseconomies of scale

• Diseconomies of scale is the property whereby long-run average total cost rises as the quantity of output increases. Diseconomies of scale can arise because of coordination problems that are inherent in any large organization.

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88.Constant Returns to Scale

• Constant returns to scale is the property whereby long-run average cost stays the same as the quantity of output changes.

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89.Average Revenue

• Average revenue is total revenue divided by the quantity sold. It tells us how much revenue a firm receives for the typical unit sold.

• Average revenue = Total revenue / Quantity.• AR = TR / Q• Because total revenue is the price times the quantit

y (P×Q) and average revenue is total revenue (P×Q) divided by the quantity, average revenue equals the price of the good.

• AR = TR / Q = (P×Q) / Q = P.

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90.Marginal Revenue

• Marginal revenue is the change in total revenue from an additional unit sold.

MR = TR / Q.△ △For competitive firms, marginal revenue equal

s the price of the good.

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91.Sunk Cost

• Sunk cost is a cost that has already been committed and cannot be recovered. In a sense, a sunk cost is the opposite of an opportunity cost: An opportunity cost is what you have to give up if you choose to do one thing instead of another, whereas a sunk cost cannot be avoided, regardless of the choices you made. Because nothing can be done about sunk costs, you can ignore them when making decisions about various aspects of life, including business strategy.

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92.Monopoly

• Monopoly is a firm that is the sole seller of a product without close substitutes. A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a smaller cost than many firms could(natural monopoly).

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93.Price Discrimination

• Price discrimination is the business practice of selling the same good at different prices to different customers. For instance, many movie theaters charge a lower price for children and senior citizens that for This practice of price discrimination can raise economic welfare by getting the good to some consumers who otherwise would not buy it. In the extreme case of perfect price discrimination, the deadweight losses of monopoly are completely eliminated.more generally, when price discrimination is imperfect, it can either raise or lower welfare compared to the outcome with a single monopoly price. There is no easy answer as to whether price discrimination, in general, is a good thing or a bad thing.

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94.Gross Domestic Product(GDP)

• Gross domestic product(GDP) is the market value of all final goods and services produced within a country in a given period of time. GDP measures an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services. GDP is divided among four components of expenditure: consumption, investment, government purchases, and net exports.

Y= C + I + G + NX GDP is a good measure of economic well-being because pe

ople prefer higher to lower incomes. But it is not a perfect measure of well-being.

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95.Nominal GDP

• Nominal GDP is the production of goods and services valued at current prices. It reflects both the prices of goods and services and the quantities of goods and services the economy is producing.

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96. Real GDP

• Real GDP is the production of goods and services valued at constant prices. It uses constant base-year prices to place a value on the economy’s production of goods and services.Because real GDP is not affected by changes in prices, changes in real GDP reflect only changes in the amounts being produced. Thus, real GDP is a measure of the economy’s production of goods and services.

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97. GDP Deflator

• GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100. It reflects the prices of goods and services but not the quantities produced. The GDP deflator is calculated as follows:

GDP deflator = Nominal GDP ÷ Real GDP ×100

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98.Consumption

• Consumption is spending by households on goods and and services, with the exception of purchases of new housing. “Goods” include household spending on durable goods, such as automobiles and appliances, and non-durable goods, such as food and clothing. “Services” include such intangible items as haircuts and medical care.

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99. Investment

• Investment is the purchase of goods that will be used in the future to produce more goods and services. It is the sum of purchases of capital equipment, inventories, and structures. Investment in structures includes expenditure on new housing.

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100. Government Purchases

• Government purchases are spending on goods and services by local, state, and federal governments. It includes the salaries of government workers and spending on public works. Government transfer payments can alter household income, and do not reflect the economy’s production, they are not counted as part of government purchases.

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101. Net Exports

• Net exports equal the value of goods and services produced domestically and sold abroad (exports) minus the value of goods and services produced abroad and sold domestically (imports)

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102. Consumer Price Index (CPI)

The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. The consumer price index shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. The index is used to measure the overall level of prices in the economy. The percentage change in the consumer price index measures the inflation rate. The consumer price index is an imperfect measure of the cost of living. It usually overstates true inflation.

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103. Inflation Rate

Inflation rate is the percentage change in the price index from the preceding period. That is, the inflation rate between two consecutive years is computed as follows:

Inflation rate in year 2 = (CPI in year 2 － CPI in year 1) ÷ CPI in year 1 × 100

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104. Producer Price Index

• Producer price index is a measure of the cost of a basket of goods and services bought by firms. Because firms eventually pass on their costs to consumers in the form of higher consumer prices, changes in the producer price index are often thought to be useful in predicting changes in the consumer price index.

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105. Indexation

• Indexation is the automatic correction of a dollar amount for the effects of inflation by law or contract. For example, many long-term contracts between firms and unions include partial or complete indexation of the wage to the consumer price index. Such a provision is called a cost-of-living allowance, or COLA. A COLA automatically raises the wage when the consumer price index rises.

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106. Nominal Interest Rate

• Nominal interest rate is the interest rate as usually reported without a correction for the effects of inflation. It is the rate at which the number of dollars in a savings account increases over time. It tells you how fast the number of dollars in your bank account rises over time.

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107. Real Interest rate

• Real interest rate is the interest rate corrected for the effects of inflation. The real interest rate equals the nominal interest rate minus the rate of inflation:

Real interest rate = Nominal interest rate － Inflation.

The real interest rate tells you how fast the purchasing power of your bank account rises over time.

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108. Physical Capital

• Physical capital is the stock of equipment and structures that are used to produce goods and services. An important feature of physical capital is that is a produced factor of production. Physical capital is a factor of production used to produce all kinds of goods and services.

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109. Human Capital

human capital refers to the knowledge and skills that workers acquire through education, training, and experience. It is a produced factor of production.

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110. Natural Resources

• Natural resources are the inputs into the production of goods and services that are provided by nature, such ad land, rivers , and mineral deposits. Natural resources take two forms: renewable and nonrenewable. A forest is an example of a renewable resources. Oil is an example of a nonrenewable resources.

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111. Technological Knowledge

• Technological knowledge refers to the understanding of the best ways to produce goods and services. It is society’s understanding about how the world works.

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112. Diminishing Returns

• Diminishing returns refer to the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases. In other words, the more capital an economy has , the less additional output the economy gets from an extra unit of capital. Because of diminishing returns, higher saving leads to higher growth for a period of time, but growth eventually slows down as the economy approaches a higher level of capital, productivity, and income.

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113. Catch-up Effect

• Catch-up effect refers to the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich. Because of the catch-up effect, poor countries can grow faster with other things equal.

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114. Financial System

• Financial system refers to the group of institutions in the economy that help to match one person’s saving with another person’s investment. Financial institutions can be grouped into two categories-financial markets and financial intermediaries. In essence, financial system moves an economy’s scarce resources from savers to borrowers.

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115.Financial Markets

• Financial markets are the institutions through which a person who wants to save can directly supply funds to a person who wants to borrow. The two most important financial markets in our economy are the bond market and the stock market.

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116.Bond

• Bond refers to a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. It identifies the time at which the loan will be repaid, called the date of maturity, and the rate of interest that will be repaid periodically untill the loan matures. Usually, bonds have three important characteristics: term, credit risk and tax treatment. The term is the length of time untill the bond matures. The credit risk is the probability that the borrower will fail to pay some of the interest or principal. The tax treatment is the way in which the tax laws treat the interest earned on the bond.

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117.Stock

• Stock represents ownership in a firm and is a claim to the profits that the firm makes. For example, if Intel sells a total of 1,000,000 shares of stock, then each share represents ownership of 1/1,000,000 of the business. The sale of stock to raise money is called equity finance, whereas the sale of bonds is called debt finance.stocks and bonds are very different. The owner of shares of a firm’s stock is a part owner of that firm; the owner of a firm’s bond is a creditor of that firm. Compared to bonds, stocks offer the holder both higher risk and potentially higher return.

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118.Financial Intermediaries

• Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers. The term intermediary reflects the role of these institutions in standing between savers and borrowers. Banks and mutual funds are two of the most important financial intermediaries.

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119.Mutual Fund

• Mutual fund is an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds. The shareholder of the mutual fund accepts all the risk and return associated with the portfolio. The primary advantage of mutual fund is that they allow people with small amounts of money to diversify. A second advantage claimed by mutual fund companies is that mutual funds give ordinary people access to the skills of professional money managers.

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120.National Saving

• National saving is the total income in the economy that remains after paying for consumption and government purchases. We write

S = ( Y – T – C ) + ( T – G ) National saving can be separated into two pieces: private saving and public saving.

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121.Private Saving

• Private saving is the amount of income that households have left after paying their taxes and paying for their consumption. Private saving is Y – T – C .

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122.Public Saving

• Public saving is the amount of tax revenue that the government has left after paying for its spending. Because the government receives T in tax revenue and spends G on goods and services, public saving is T – G .

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123.Budget Surplus

• Budget surplus is an excess of tax revenue over government spending. It means that the government receives more money than it spends. This surplus of T – G represents public saving. A budget surplus increases the supply of loanable funds, reduces the interest rate, and stimulates investment.

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124.Budget Deficit

• Budget deficit is a shortfall of tax revenue from government spending. It means that the government spends more than it receives in tax revenue. In this case, public saving T – G is a negative number. When the government reduces national saving by running a budget deficit, the interest rate rises, and investment falls.

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125.Market for loanable funds

• Market for loanable funds is the market in which those who want to save supply funds and those who want to borrow to invest demand funds. It is governed by supply and demand in the market. Saving is the source of the supply of loanable funds. Investment is the source of the demand for loanable funds.

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126.Crowding Out

• Crowding out is a decrease in investment that results from government borrowing. When the government borrows to finance its budget deficit, it crowds out private borrowers who are trying to finance investment. Because investment is important for long-run economic growth, crowding out reduces the economy’s growth rate.

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127.Finance

• Finance refers to the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk. The tools of finance can help us understand the decisions that people make as they participate in financial markets and in turn, understand how the economy works.

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128.Present Value

• Present value refers to the mount of money today that would be needed to produce, using prevailing interest rates, a given future amount of money. Suppose you are going to be paid $200 in 10 years. If the interest rate is 5 percent, the future $200 has a present value of $123. The concept of present value is useful in many applications. For example, when a company evaluates investment projects and makes its decision, it will depends on the interest rate.

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129.Future Value

• Future value refers to the amount of money in the future that an amount of money today will yield, given prevailing interest rates. Suppose you put $123 in a bank account today . If the interest rate is 5 percent, the present $123 has a future value of $200 in 10 years.

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130.Compounding

• Compounding refers to the accumulation of a sum of money in , say , a bank account, where the interest earned remains in the account to earn additional interest in future.

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131.Risk Averse

• Risk averse refers to exhibiting a dislike of uncertainty. It means that people dislike bad things more than they like comparable good things. Economists have developed models of risk aversion using the concept of utility, which is a person’s subjective measure of well-being or satisfaction. There are at least three ways to deal with risk: insurance, diversification, and the risk-return tradeoff.

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132.Diversification

• Diversification refers to the reduction of risk achieved by replacing a single risk with a large number of smaller unrelated risks. Simply, it means that don’t put all your eggs in one basket.

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133.Idiosyncratic Risk

• Idiosyncratic risk refers to risk that affects only a single economic actor. It is the uncertainty associated with the specific companies. Diversification can eliminate idiosyncratic risk.

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134.Aggregate Risk

• Aggregate risk refers to risk that affects all economic actors at once. It is the uncertainty associated with the entire economy, which affects all companies. Diversification reduces the risk of holding stocks, but it does not eliminate it.

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135.Fundamental Analysis

• Fundamental analysis refers to the study of a company’s accounting statements and future prospects to determine its value. It may include the demand for its product, how much competition it faces, how much capital it has in place, whether its workers are unionized, how loyal its customers are, what kinds of government regulations and taxes it faces, and so on.

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136.Informationally Efficient

• Informationally efficient reflects all available information about the value of the asset in a rational way, according to efficient markets hypothesis theory. It claims that the market price is the best guess of the company’s value based on available information at any moment in time.

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137.Random Walk

• Random walk refers to the path of a variable whose changes are impossible to predict. This means that the changes in stock prices are impossible to predict from available information. It is one implication of the efficient markets hypothesis.

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138.Labor Force

• Labor force refers to the total number of workers, including both the employed and the unemployed, if we places each adult into one of three categories(employed, unemployed and not in the labor force)

Labor force = Number of employed + Number of unemployed.

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139.Unemployment Rate

• Unemployment rate is the percentage of the labor force that is unemployed.

Unemployment rate = Number of unemployed ÷ Labor force ×100.

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140.Labor-force Participation Rate

• Labor- force participation rate is the percentage of the adult population that is in the labor force.

Labor-force participation rate = Labor force ÷ Adult population × 100.

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141.Natural Rate of Unemployment

• Natural rate of unemployment is the normal rate of unemployment around which the unemployment rate fluctuates.

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142.Cyclical Unemployment

• Cyclical unemployment is the deviation of unemployment from its natural rate.

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143.Discouraged Workers

• Discouraged workers are individuals who would like to work but have given up looking for a job. These individuals may have tried to find a job but have given up after an unsuccessful search.

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144.Frictional unemployment

• Frictional unemployment refers to unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills. It is often thought to explain relatively short spells of unemployment..it also shows that there are always some workers without jobs and the unemployment rate never falls to zero.

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145.Structural Unemployment

• Structural unemployment refers to unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one. It is often thought to explain longer spells of unemployment.

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146.Job Search

• Job search is the process by which workers find appropriate jobs given their tastes and skills. Because Workers differ in their tastes and skills, and jobs differ in their attributes, and information about job candidates and job vacancies is disseminated slowly among the many firms and households, the process of matching workers and jobs is necessary. Some unemployment in economy is inevitable.

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147.Unemployment Insurance

• Unemployment insurance is a government program that partially protects workers’ incomes when they become unemployed. This program is designed to offer workers partial protection against job loss. While unemployment insurance reduces the hardship of unemployment, it also increases the amount of unemployment because it can reduces workers’ search effort for new jobs.

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148.Union

• Union refers to a worker association that bargains with employers over wages and working conditions. Economists who study the effects of unions typically find that union workers earn much than similar workers who do not belong to unions. The role of unions in the economy depends in part on the laws that govern union organization and collective bargaining.

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149.Collective Bargaining

• Collective bargaining is the process by unions and firms agree on the terms of employment. When a union bargains with a firm, it asks for higher wages, better benefits, and better working conditions than the firm would offer in the absence of a union.

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150.Strike

• Strike refers to the organized withdrawal of labor from a firm by a union. Sometimes the union and the firm can not reach a agreement. In this case, the union can organize a withdrawal of labor from the fim. Because a strike reduces production, sales, and profit, a firm facing a strike threat is likely to agree to pay higher wages than it otherwise would.

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151.Efficiency wages

• Efficiency wages refer to above-equilibrium wages paid by firms in order to increase worker productivity. The theory of efficient wages uses it to explain why economies always experience some unemployment. According to this theory, firms operate more efficiently if wages are above the equilibrium level because high wages can improve worker health, lower worker turnover, increase worker effort, and raise worker quality.

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152.Money

• Money is the set of assets in an economy that people regularly use to buy goods and services from other people. Money has three functions in the economy: It is a medium of exchange, a unit of account, and a store of value.

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153.Medium of Exchange

• Medium of exchange is an item that buyers give to seller when they want to purchase goods and services. When you walk into a store, you are confident that the store will accept your money for the items it is selling because money is the commonly accepted medium of exchange.

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154.Unit of Account

• A unit of account is the yardstick people use to post prices and record debts. When we want to measure and record economic value, we use money as the unit of account.

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155.Store of Value

• A store of value is an item that people can use to transfer purchasing power from the present to the future. When a seller accepts money today in exchange for a good or service, that seller can hold the money and become a buyer of another good or service at another time.

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156.Liquidity

• Liquidity is used to describe the ease with which an asset can be converted into the economy’s medium of exchange. Money is the most liquid asset available. Most stocks and bonds are relatively liquid assets. Assets like houses are less liquid.

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157.Commodity Money

• Commodity money is money that takes the form of a commodity with intrinsic value. The term intrinsic value means that item would have value even if it were not used ad money. One example of commodity money is gold. Another example of commodity money is cigarettes. In prisoner-of-war camps during World war II, prisoners traded goods and services with one another using cigarettes as the store of value, unit of account, and medium of exchange.

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158.Fiat Money

• Fiat money is money without intrinsic value that is used as money because of government decree. A fiat is simply an order or decree, and fiat money is established as money by government decree. For example, the paper RMB in your wallet is fiat money printed by the China government. To a large extent, the acceptance of fiat money depends as much on expectations and social convention as on government decree.

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159.Currency

• Currency refers to the paper bills and coins In the hands of the public. Currency is clearly the most widely accepted medium of exchange in our economy. It is part of the money stock.

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160.Demand Deposits

• Demand deposits refer to balances in bank accounts that depositors can access on demand by writing a check.

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161.Central Bank

• Central bank refers to an institution designed to oversee the banking system and regulate the quantity of money in the economy. The major central banks around the world include the Federal Reserve, the Bank of England, the Bank of Japan, the European Central Bank, and the Central Bank of Chinese People. The central bank usually has two related jobs. One is to regulate banks and ensure the health of the banking system. Another is to control the quantity of money supply.

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162.Money Supply

• Money supply refers to the quantity of money available in the economy. It is the more important job for the central bank to control the quantity of money that is made available in the economy. To some extent, money supply is the core of monetary policy.

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163.Monetary Policy

• Monetary policy refers to the setting of the money supply by policymakers in the central bank. In China, the Central Bank of Chinese people decides monetary policy. It discusses the condition of the economy and considers change in monetary policy.

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164.Fractional-reserve Banking

• Fractional-reserve banking is a banking system in which banks hold only a fraction of deposits as reserves. Reserves are deposits that banks have received but have not loaned out.The fraction of total deposits that a bank holds as reserves is called reserve ratio. This reserve ratio is determined by a combination of government regulation and bank policy.

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165.Money Multiplier

• Money multiplier refers to the amount of money the banking system generates with each dollar of reserves. The money multiplier is the reciprocal of the reserve ratio. Thus ,the higher the reserve ratio, the less of each of deposit banks loan out, and the smaller the money multiplier.

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166.Open-Market Operations

• Open-market operations are the purchase and sale of the government bonds by the central bank. It is one of tools of monetary control. To increase the money supply, the central bank buy government bonds from the public in the bond markets. To reduce the money supply, the central bank does just the opposite: it sells government bonds to the public in the bond markets.

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167.Reserve Requirements

• Reserve requirements refer to regulations on the minimum amount of reserves that banks must hold against deposits. It is one of tools of monetary control. An increase in reserve requirements means that banks must hold more reserves and, therefore, can loan out less of each dollar that is deposited; as a result, it raises the reserve ratio, lowers the money multiplier, and decreases the money supply. Conversely, a decrease in reserve requirements lowers the reserve ratio, raise the money multiplier, and increases the money supply.

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168.Discount Rate

• Discount rate is the interest rate on the loans that the central bank makes to banks. A higher discount rate discourages banks from borrowing reserves from the central bank. Thus, an increase in the discount rate reduces the quantity of reserves in the banking system, which in turn reduces the money supply.conversely, a lower discount rate encourages banks to borrow from the central bank, increases the quantity of reserves, and increases the money supply.

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169.Quantity Theory of Money

• Quantity theory of money is a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate. It explains the effects of a monetary injection. An increase in the money supply decreases the the value of money, and increases the price level. Thus, the price level is determined by money supply.

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170.The Classical Dichotomy

• The classical dichotomy is the theoretical separation of nominal and real variables. Nominal variables are variables measured in monetary units. Real variables are variables measured in physical units. According to the theory, changes in the supply of money affect nominal variables but not real variables. This irrelevance of monetary changes for real variables is called monetary neutrality.

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171.Velocity of Money

• Velocity of money refers to the rate at which money changes hands. If P is the price level (the GDP deflator), Y the quantity of output(real GDP), and M the quantity of money, then velocity of money is

V = (P*Y)/M.

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172.Quantity Equation

• Quantity equation is the equation M*V = P*Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services. It shows that an increase in the quantity of money in an economy must be reflected in one of the other three variables:the price level must rise, the quantity of output must rise, or the velocity of money must fall.

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173.Inflation Tax

• Inflation tax refers to the revenue the government raises creating money. The inflation tax is not exactly like other taxes because on one receives a bill from the government for this tax. The inflation tax is more subtle. When the government prints money, the price level rises, and the dollars in your wallet are less valuable. Thus, the inflation tax is like a tax on everyone who holds money.

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174.Fisher Effect

• Fisher effect refers to the one-for-one adjustment of the nominal interest rate to the inflation rate. It shows that the result is both a higher inflation rate and a higher nominal interest rate when the central bank increases the rate of money growth. Fisher effect is based on the principle of monetary neutrality. It is crucial for understanding changes over time in the nominal interest rate.

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175.Shoeleather Costs

• Shoeleather costs belong to the costs of inflation. The cost of reducing your money holdings is called the shoeleather cost of inflation because making more frequent trips to the bank causes your shoes to wear out more quickly.The actual cost of reducing your money holdings is not the wear and tear on your shoes but the time and convenience you must sacrifice to keep less money on hand than you would if there were no inflation.

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176.Menu Costs

• Menu costs belong to the costs of inflation. Menu costs are the costs of changing prices. When inflation increases rapidly, firms must change their prices. Menu costs include the cost of deciding on new prices, the cost of printing new price lists and catalogs, the cost of sending these new price lists and catalogs to dealers and customers, the cost of advertising the new prices, and even the cost of dealing with customer annoyance over price changes.

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177.Recession and Depression

• Recession refers to a period of declining real incomes and rising unemployment. A severe recession is called a depression. During the periods of recessions, especially of depressions, firms find themselves unable to sell all of the goods and services they have to offer, so they cut back on production, and workers are laid off, unemployment rises, real GDP and other measures of incomes fall.

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178.Model of Aggregate Demand and Aggregate Supply

• Model of aggregate demand and aggregate supply refers to the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend. Most economists believe that classical theory describes the world in the long run but not in the short run. In the short run, we need the model of aggregate demand and aggregate supply to study the changes in economy. According to this model, the price level and the quantity of output adjust to bring aggregate demand and aggregate supply into balance.

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179.Aggregate-Demand Curve

• The aggregate-demand curve is a curve that shows the quantity of goods and services that households, firms, and the government want to buy at each price level. Because of the wealth effect, the interest-rate effect and the exchange-rate effect, The aggregate-demand curve slopes downward with other things equal. Changes in consumption, investment, government purchase, or net exports at a given price level shift the aggregate-demand curve to the left or the right.

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180.Aggregate-Supply Curve

• Aggregate-supply curve is a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level. In the long run, the aggregate-supply curve is vertical, whereas, in the short run, the aggregate-supply curve is upward sloping. Changes in labor, capital, natural resources, or technology shift the short-run supply curve and may shift the long-run supply curve.

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181.Stagflation

• Stagflation refers to a period of falling output (stagnation) and rising prices(inflation). When a economy faces a stagflation, Policymakers can influence aggregate demand, but can not offset both of these adverse effects simultaneously.

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182.Theory of Liquidity Preference

• The theory of liquidity preference is Keynes’s theory that the interest rate adjusts to bring money supply and money demand into balance. Keynes proposed the theory of liquidity preference to explain what factors determine the economy’s interest rate. The theory of liquidity preference illustrates an important principle: monetary policy can be described either in terms of the money supply or in terms of the interest rate.

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183.multiplier Effect

• The multiplier effect refers to the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending. It shows how the economy can amplify the impact of changes in spending: A small initial change in consumption, investment, government purchases, or net exports can end up having a large effect on aggregate demand and, therefore, the economy’s production of goods and services.

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184.Crowding-out Effect

• Crowding-out effect refers to the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending. The crowding out of investment partially offsets the impact of the multiplier effect.

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185.Automatic Stabilizers

• Automatic stabilizers refer to changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action. The most important automatic stabilizer is the tax system. Government spending also acts as an automatic stabilizer.