Glossary

In the production of crabs as he can produce a maximum of 20 crabs while you can produce a maximum of 15 crabs, and you have an absolute advantage in producing pineapples as you can grow a maximum of 30 pineapples while Jamie can produce a maximum of 15 only. The graph below (Fig 2.6) shows Jamie’s production possibilities. (2.5)

This is a cash concept. It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. 7.1

The total spending in an economy on domestic goods and services, including consumption expenditure, investment expenditure, government expenditure, and net export expenditure (exports minus imports).

The total spending on domestic goods and services at each price level.

The current value of all the finished goods and services in the economy. AE=C+I+G+NX

The connection from inputs to outputs.

The total quantity of output (real GDP) firms will produce.

The total quantity of output firms will produce and sell at each aggregate price level, holding the price on inputs fixed.

Is an economic concept regarding efficiency at the social or societal level. It refers to producing the optimal quantity of some output, the quantity where the marginal benefit to society of one more unit just equals the marginal cost. 9.4

Something of value that is owned and can be used to produce something.

Tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation.

The level of consumption when income is zero showing the amount of consumption independent of income.

All the components of aggregate expenditure which do not vary with national income.

of labour is the total product divided by the quantity of labour. AP=TP/L. 7.2

An accounting tool that lists assets and liabilities.

When total expenditure and revenues match (G+TR=T)

An amount of money which is promised to be repayed, including some rate of interest, over a predetermined period of time.

These are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. Barriers to entry can range from the simple and easily surmountable, such as the cost of renting retail space, to the extremely restrictive. For example, there are a finite number of radio frequencies available for broadcasting.

An inefficient system of trading one good or service for another.

A year selected to set prices for real GDP calculations. When calculating real GDP, prices are kept constant at their base year levels.

An illegal practice in which bidders (buyers) conspire to set prices in their own interest.

a financial contract that makes one or more fixed money payments at specific
dates in the future.

example: a borrower like a corporation, a city or state, or the federal government agrees to repay the amount that it borrowed and also a rate of interest over a period of time in the future; usually long-term (greater than 10 year) debt instruments.

Total expenses exceed total revenue (G+TR>T). Increases government debt.

Total revenues exceed total expenditures (G+TR<T). Reduces public debt.

Typically, a business cycle has two phases: expansion and recession and two turning points: peak and trough.

A factor of production that has been produced for use in the production of other goods and services. Office buildings, machinery, and tools are examples of capital.

means a group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price. 11.2

Accounts that the depositor has committed to leaving in the bank for a certain period of time. Also called time deposits.

The demand curve shifts from its current position.

A movement along a demand curve that results from a change in price.

A movement along a supply curve that results from a change in price

The supply curve shifts from its current position

Mean that one alternative is selected over another. Selecting among alternatives involves three ideas central to economics: scarcity, choice, and opportunity cost.

It pictures the economy as consisting of two groups—households and firms—that interact in two markets.

defines when firms act together in this way to reduce output and keep prices high. 11.2

The government decides what goods and services will be produced and what prices it will charge for them. The government decides what methods of production to use and sets wages for workers. The government provides many necessities like healthcare and education for free.

Items which have a value from use as something other than money. Examples include: gold, silver, cowrie shells, cocoa beans, etc.

Currencies with values backed up by gold or another commodity held at a bank.

When one is able to produce a good at a lower opportunity cost than another, the person is said to be efficient or have a comparative advantage in producing that good. (2.5)

Both goods A and B are consumed together

occur when the average cost of production does not change as output rises. In a typical long-run average cost curve, there are sections of both economies of scale and diseconomies of scale.

A demand curve, occurs when a price change of one percent results in a quantity change of one percent.

A statistical measure of the average change in prices collected periodically for a market basket of consumer goods.

The amount that individuals would have been willing to pay, minus the amount that they actually paid.

Household consumption depends on a number of factors: disposable current and future income, household wealth, the real interest rate, and price levels.

The relationship between income and consumption.

Fiscal policy that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes.

A policy to lower price level and contract economic growth by raising the overnight interest rate target and decreasing money supply through selling securities which the Bank uses when the economy is experiencing inflation.

According to the Canadian Law, “is a form of protection for original works of authorship including literary, dramatic, musical, architectural, cartographic, choreographic, pantomimic, pictorial, graphic, sculptural, and audiovisual creations.” 9.1

A business that "incorporates" - that is owned by shareholders that have limited liability for the company's debt but share in its profits (and losses).

is defined as the process of marketing among consumers whose culture differs from that of the marketer's own culture; such as language, religion, social norms and values, education and living style.

This shows us how quantity demanded is a response to changes in the price of related goods.

When the government enacts policies that require borrowing, there is potentially less private investment which is a hindrance.

A reduction in investment due to higher interest rate.

Unemployment that changes with the business cycle.

Refers to the amount (price) consumers are willing and able to purchase goods or services at (4.1)

a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time.10.2 & 10.3

Physical aspects of the product, selling location, intangible aspects of the product, and perceptions of the product. Products that are distinctive in one of these four ways are called differentiated products.10.2 & 10.5

When the government decides to change taxes or spending in order to address public policy goals.

occur when the average cost of production rises as output increases. 7.5

is the strategy an individual (or firm) will pursue regardless of the other individual’s (or firm’s) decision. 11.3

One person wants to buy exactly what one person wants to sell.

each oligopolist must worry that while it is holding down output, other firms are taking advantage of the high price by raising output and earning higher profits. 11.4

The market equilibrium where the marginal benefit from a good just equals the marginal cost of producing it. At the efficient level of output which is also called the competitive equilibrium, it is impossible to produce greater consumer surplus without reducing producer surplus, and it is impossible to produce greater producer surplus without reducing consumer surplus. (4.2)

Allows countries, individuals, or firms to reach points outside their PPF. Factors that allow shifts in countries’ PPF resulting in a change in attainable output include: (2.4)

This is a simplified framework that is designed to illustrate complex processes. (2.1)

Is total revenue minus total cost, including both explicit and implicit costs. The difference is important because even though a business pays income taxes based on its accounting profit, whether or not it is economically successful depends on its economic profit. 7.1

The sum of consumer surplus and producer surplus

This is a social science that examines how people choose among the alternatives available to them. It is social because it involves people and their behaviour. It is a science because it uses, as much as possible, a scientific approach in its investigation of choices.

occur when the average cost of production falls as output increases. Economies of scale refer to the situation where, as the quantity of output goes up, the cost per unit goes down. 7.5

Is one in which the elasticity (in absolute value) is greater than one, indicating high responsiveness to changes in price (Fig 6.2 A). (6.1)

Is one in which the elasticity is greater than one, indicating high responsiveness to changes in price.

Measures the responsiveness of one variable to changes in another variable.

A country's exchange rate is the price of its currency in terms of another currency.

Increase in real GDP

Fiscal policy that increases the level of aggregate demand, either through increases in government spending or cuts in taxes.

A policy of lowering the overnight interest rate target and increasing money supply to boost economic growth.

These are out-of-pocket costs, that is, actual payments. The wage and rent that a firm pays for office space are explicit costs. 7.1

The effect of market exchange on a third party who is outside or “external” to the exchange (5.1)

Money with no intrinsic value but is declared by a government to be the legal tender of a country.

Goods whose value is counted towards the GDP. These are finished products, as distinguished from Intermediate Goods, which are used to produce Final Goods.

An institution that amasses funds from one group and makes them available to another.

Marketplace where money is invested and borrowed, or in other words, where securities are traded

These are those that can’t easily be increased or decreased in a short period of time. In the pizza example, the building is a fixed input. Once the entrepreneur signs the lease, he or she is stuck in the building until the lease expires. Fixed inputs define the firm’s maximum output capacity. 7.2

A variable that is measured over a specific period of time. For example, income is a flow variable.

If Canadian prices rise in relative to other countries, then Canadian goods will be relatively more expensive compared to goods in the rest of the world and will reduce net export expenditures.

Unemployment that occurs because it takes time for employers and workers to find each other.

When the actual unemployment rate is equal to the natural unemployment rate.

Potential GDP where machines and factories are running at capacity, and the unemployment rate is at its natural rate of unemployment.

is a branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs based on what other players decide to do. 11.3

The GDP deflator is obtained by dividing the nominal GDP by the real GDP and multiplying the result by 100. The goal of the deflator is to keep track of price levels from one year to the next.

The sum of purchases of goods and services from firms by government agencies plus the total value of output produced by government agencies themselves during a time period

The total income generated in an economy by the production of final goods and services during a particular period

the value of all final goods and services produced within a country in a given year

The total value of final goods and services produced during a particular period with factors of production owned by the residents of a particular country

The value of all goods produced during a period for use in the production of other goods and services

The accumulated knowledge (from education and experience), skills, and expertise that the average worker in an economy possesses.

A comprehensive measure of human well being constructed by the United Nations that includes factors that GDP fails to consider, such as literacy levels and life expectancy

is an assertion of a relationship between two or more variables that could be proven to be false.

Identical goods mean there is nothing to distinguish one firm’s goods from another. For example corn – once all the corn is dumped into the grain elevator there is absolutely no way to tell from which farm a particular kernel of corn came. 8.1

The time it takes to assess the impact on the economy.

Results from the process of discussions and arguments by Members of Parliament to decide on appropriate course of action and the political consequences of policy changes.

These are more subtle but just as important. They represent the opportunity cost of using resources that the firm already owns. Often for small businesses, they are resources that the owners contribute.7.1

Shows how the quantity demanded of a good response to a change in income

Consumption minus imports.

Is one in which the elasticity (in absolute value) is less than one, indicating low responsiveness to changes in price (Fig 6.2 A). (6.1)

Is one in which the elasticity is less than one, indicating low responsiveness to changes in price

Will have a negative income elasticity, since if income rises (or falls), the quantity demanded decreases (or increases). (6.4)

Consumption of the goods decreases (increases) when income increases (decreases)

A general and ongoing rise in the level of prices in an entire economy.

A 2% target set by the Bank of Canada and the federal government.

The gap between the level of real GDP and potential output, when real GDP is greater than potential.

We call this combination of patents, trademarks, and copyrights intellectual property because it implies ownership over an idea, concept, or image, not a physical piece of property like a house or a car.

the current market rate paid to lenders or charged to borrowers.

As prices for outputs rise, the same purchases will take more money or credit to accomplish. The additional demand will push interest rates higher which will reduce borrowing, thus reducing consumption and investment spending.

Goods used in the production of Final Goods (for example, the logs and lumber used to build a house). The value of intermediate goods is not counted towards GDP, since their value is included in the value of the final goods they are used to produce.

An economy's income minus consumption and government spending.

The relationship between real GDP and investment levels.

The target for the overnight rate that the Bank expects to be used in financial markets for one-day ("overnight") loans between financial institutions.

curve in which competing oligopoly firms commit to match price cuts, but not price increases. 11.5

This is the human effort that can be applied to the production of goods and services. People who are employed—or are available to be—are considered part of the labour available to the economy.

The value that each employed person creates per unit of his or her input.

which holds that as the production of a good or service increases, the marginal opportunity cost of producing it increases as well.

Where laws prohibit (or severely limit) competition.9.1

A debt or something you owe.

How quickly an asset can be used to buy a good or service.

The aggregate markets for loans, bonds, and stocks.

This is the period of time during which all factors are variable. Once the lease expires for the pizza restaurant, the shop owner can move to a larger or smaller place. 7.2

The vertical line showing the relationship between price and real GDP if all prices, including wages, are fully flexible at potential GDP.

Sustained long-term economic growth comes from increases in worker productivity.

Where firms continue to produce as long as the price equals the average total cost, ending in zero economic profits

When real GDP equals potential GDP.

curve is actually based on a group of short-run average cost (SRAC) curves, each of which represents one specific level of fixed costs. More precisely, the long-run average cost curve will be the least expensive average cost curve for any level of output. 7.5

A supply of money which includes assets that are the most liquid such as cash, checkable deposits, and traveller's cheques.

A supply of money which included M1 plus some less liquid assets including savings and time deposits, certificates of deposit, and money market funds.

Looks at the economy as a whole. Microeconomics and macroeconomics are not separate subjects, but rather complementary perspectives on the overall subject of the economy.

When the aggregate expenditure equals the GDP. This occurs when what is being produced is equal to what is being sold.

Many firms, mean that from the perspective of one individual firm there is no way to raise or lower the market price for a good. This is because the individual firm’s output is such a small part of the overall market that it does not make a difference in terms of price. 8.1

This is the process of breaking down a decision into a series of ‘yes or no’ decisions. More formally, it is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. If benefits > costs, this is the right choice for a rational thinker.

Marginal product is the additional output of one more worker. Mathematically, Marginal Product is the change in total product divided by the change in labour: MP=ΔTP/ΔL.

The share (or percentage) of the additional income a person decides to consume (or spend).

The percentage change in spending on imports when national income changes.

The share of the additional income the person decides to save.

This shows the additional revenue gained from selling one more unit. As mentioned before, a firm in perfect competition faces a perfectly elastic demand curve for its product—that is, the firm’s demand curve is a horizontal line drawn at the market price level.8.2

When we add external benefits to private benefits. In the presence of a positive externality (with a constant marginal external benefit), this curve lies above the demand curve at all quantities. (5.1)

When we add external costs to private costs. In the presence of a negative externality (with a constant marginal external cost), this curve lies above the supply curve at all quantities. (5.1)

A market is an institution that brings together buyers and sellers of goods or services, who may be either individuals or businesses. The New York Stock Exchange is a prime example of a market that brings buyers and sellers together.

is the current price at which a good or service can be purchased or sold. 10.2

In which firms and consumers interact. There are three main metrics by which we measure a market’s structure: (8.0)

The number of firms. More firms mean more competition and more places to which consumers can turn to purchase a good.
The similarity of goods: The more similar the goods sold in the market the more easily consumers can switch firms and the more competitive the market is.
The barriers to entry: The more difficult is it to enter a market for a new firm, the less competitive it is.

Focuses on the actions of individual agents within the economy, like households, workers, and businesses.

To calculate elasticity, instead of using simple percentage changes in quantity and price, economists use the average percent change. (6.1)

% Change in Quantity Demanded:  [New Q – Old Q /(New Q +Old Q)/2]×100% /(New Q +Old Q)/2 shows the average of the two quantities
% Change in Price: [New Price – Old Price / (New P +Old P)/2]×100% (New P +Old P)/2 is the average of the two prices

Where the average cost is at its minimum. This is the point where economies of scale are used up and no longer benefit the firm. Figure 9.11 illustrates these points. 7.5

Most economies in the real world are mixed. They combine elements of command and market systems. The Canadian economy is positioned toward the market-oriented end of the spectrum.

Tools used by the Bank of Canada to control the money supply and promote economic growth.

The money demand and money supply functions and the equilibrium in the money market occurs where the money demand curve intersects the money supply curve.

The deposits of many individual investors are pooled together and invested in a safe way, such as short-term government bonds.

The ratio of the change in money supply to the initial change in bank reserves.

The total quantity of money in the economy at any one time.

lies in between monopoly and perfect competition. It involves many firms competing against each other, but selling products that are distinctive in some way. 10.1

when a government grants a patent for an invention to one firm. 11.1

Such a movement is called a change in quantity supplied.

Changes in any category of expenditure have a more than proportional impact on GDP.

A series of increases in induced consumption expenditure from an initial increase in autonomous spending.

is an outcome where, given the strategy choices of the other players, no individual player can obtain a higher payoff by altering their strategy choice. 11.3

Where the barriers to entry are something other than legal prohibition 9.1

Unemployment found when the aggregate economy faces only frictional and structural unemployment and no cyclical unemployment.

Externalities can be negative or positive. If you hate country music, then having it waft into your house every night. (5.1)

The balance between the flows of exports and imports

The value of the goods and services produced in the stated year

The stated interest rate on a loan that must be repaid.

Will have a positive income elasticity, since if income rises (or falls), the quantity demanded also increases (or decreases). (6.4)

Consumption of the goods increases (decreases) when income increases (decreases)

This is one that makes a value judgment. Such a judgment is the opinion of the speaker; no one can “prove” that the statement is or is not correct.

arises when a small number of large firms have all or most of the sales in an industry. 11.1

Real GDP per person used as a gauge of an economy's material standard of living.

The interest rate that large financial institutions receive or pay on loans from one day until the next.

Gives the inventor the exclusive legal right to make, use, or sell the invention for a limited time.9.1

are the outcomes associated with every possible strategic combination, for each player. 11.3

The point at which expansion ends and recession begins

means the response to price is complete and infinite: a change in price results in the quantity falling to zero. 10.2

is one in which elasticity is infinity, the demand curve is horizontal

is one in which elasticity is infinity, the supply curve is horizontal

is one in which elasticity is zero, the demand curve is vertical

is one in which elasticity is infinity, the supply curve is vertical

A flow variable that measures the value of goods and services purchased by households during a time period

A tax that addresses a negative externality by taxing the good instead of the actual external cost.

are the agents actively participating in the game and who will experience outcomes based on the play of all players. 11.3

An aim to maintain a stable price environment over the medium term.

shows two goods are substitutes and negative cross-price elasticity shows two goods are complements.

Occurs when the market interaction of others presents a benefit to non-market participants. If you love country music, then what amounts to a series of free concerts

A statement of fact or a hypothesis. (1.5)

A practice that is aimed at driving out competition by artificially reducing the price of one product sold by a supplier.

It is a type of price control where the government sets the maximum price to be charged to sell a good or service

shows how the quantity demanded of a good response to changes in its price.

shows how the quantity supplied of a good response to changes in its price.

It is a type of price control where the government sets the minimum price to be charged or paid to sell a good or service

A number whose movement reflects movement in the average level of prices.

Meaning that their decision is simply how much to sell at the market price. If they try and sell for a higher price, no one will buy from them, and they could sell for a lower price, but if they did so, they would only be hurting themselves because it would not affect the quantity sold. 8.1

The interest rate that banks and lenders use to determine the interest rates for many types of loans and lines of credit.

is a scenario in which the gains from cooperation are larger than the rewards from pursuing self-interest. 11.3

Private markets only consider consumers, producers, and the government – the impacts on external parties are irrelevant. (5.1)

The amount that a seller is paid for a good minus the seller’s actual cost.

is based on variety and innovation. 10.5

The process (or processes) a firm uses to transform inputs (e.g. labour, capital, raw materials) into outputs, i.e. the goods or services the firm wishes to sell. 7.2

A mathematical expression or equation that explains the engineering relationship between inputs and outputs. 7.2

is a graph that shows all the different combinations of output of two goods that can be produced using available resources and technology. The PPF captures the concepts of scarcity, choice, and tradeoffs.

Public goods have two defining characteristics: they are nonexcludable and non-rival. (5.4)

In the long run the price level moves in proportion with changes in the money supply, at least for high-inflation countries.

The value of the goods and services produced in the stated year, with prices set to their values in a given base year

Measures the percentage increase in purchasing power the lender receives when the borrower repays the loan with interest.

Decrease in real GDP

The gap between the level of real GDP and potential output, when real GDP is less than potential.

Identifying the correct economic circumstance to identify the appropriate policy tool to be used, through data collection which might take anywhere between three and six months.

are simultaneous move games played repeatedly by the same players. 11.3

A variable's approximated doubling time equals 70 divided by the growth rate, stated as a whole number.

Bank accounts on which you cannot write a cheque directly.

This means that human wants for goods, services and resources exceed what is available. Because of scarcity, we need to make choices.

A type of structural unemployment which is linked to certain kinds of jobs.

Synonym for financial assets, or a certificate or other financial instrument that has monetary value and can be traded. These can be debt securities like bonds or equity securities like stocks.

A tool to raise the overnight interest rate target where the Bank of Canada gets money from financial institutions so they are left with less in reserves and the decrease in money supply drives up the interest rate.

This is the period of time during which at least one or more factors remain fixed. Within a short period of time, the shop owner may not be able to obtain more physical capital or move to a larger space.

The period of time that wages are sticky so an upwards sloping curve shows the quantity of total output at each price level.

The intersection of the aggregate supply and aggregate demand curves showing the level of real GDP and the equilibrium price level.

This is the amount by which the quantity demanded exceeds the quantity supplied at the current price. A shortage occurs only if the current price is lower than the equilibrium price

The point at which level the firm is indifferent between producing the loss minimizing output or shutting down.

This is distinct from other monopolies in that the firm must charge the same price to all consumers. In this case, the aggregate demand is the firm’s demand! 9.2

are played once and then the game is over. 11.3

In production results in gains from trade, as each person or country, can focus on what it can produce at the lowest cost and trade it with its partner.(2.5)

Externalities that occur in market transactions that affect other parties beyond those involved.

A situation when the economy faces decrease in real GDP combined with rising inflation.

A specific firm’s claim on partial ownership.

A variable that is independent of time. For example, the balance in a checking account is a stock variable.

are all of the possible strategic choices available to each player, they can be the same for all players or different for each player. 11.3

Unemployment that occurs if individuals have no jobs because they lack skills valued by the labour market.

One can consume either good A or good B

The amount of some good or service a producer is willing to supply at each price. The supply curve shows the quantity that firms are willing to supply at each price. (4.2)

Is the amount by which the quantity supplied exceeds the quantity demanded at the current price. A surplus occurs only if the current price exceeds the equilibrium price. (3.5)

This method recognizes that who pays the tax is ultimately irrelevant. Instead, the wedge method illustrates that a tax drives a wedge between the price consumers pay and the revenue producers receive, equal to the size of the tax levied. (4.4)

Tax cuts also generate a multiplier effect as the government expects that people will have more disposable income to spend and this could increase consumption spending.

A combination of invention - advances in knowledge - and innovation (putting that advance to use in a new product or service.

Goods and services are produced using the factors of production available to the economy.

States that if property rights are well-defined, and negotiations among the actors are costless, the result will be a socially efficient level of the economic activity in question. It is one of the most important and influential theorems in economics. (5.2)

The percentage of the working age population (WAP) that is employed or has some form of paid work.

The total number of people working or unemployed.

The percentage of the working age population that is in the labour force.

Which holds that as the production of a good or service increases, the marginal opportunity cost of producing it increases as well.

The percentage of the labour force that is unemployed.

is a simplified representation of how two or more variables interact with each other.

Of production in the short run, a useful starting point is to divide total costs into two categories: Fixed Costs and Variable Costs. Fixed cost of production is the cost that does not change as output changes and variable cost is the cost that changes as output changes. 7.3

Are his expenditures that do not change regardless of the number of haircuts offered. 7.3

TP is the amount of output produced with a given amount of labour and a fixed amount of capital. In this example, one barber can give 8 haircuts in a day. Two barbers can produce 22 haircuts in a day and so on. 7.2

The income the firm generates from selling its products. We calculate it by multiplying the price of the product times the quantity of output sold 7.1

are incurred in the act of producing—the more he produces, the greater the variable cost.

An identifying symbol or name for a particular good or service, like Chiquita bananas, Chevrolet cars, Rogers Cable.9.1

The point at which recession ends and expansion begins

The ruler by which other economic values are measured.

The amount by which the value of a firm’s output exceeds the value of the goods and services the firm purchases from other firms

These are those that can easily be increased or decreased in a short period of time. The pizzaiolo can order more ingredients with a phone call, so ingredients would be variable inputs. The owner could hire a new person to work the counter pretty quickly as well. So labour is a variable input. 7.2

Assets minus liabilities.

As the price level increases, the buying power of savings that people have stored up in bank accounts and other assets will diminish.

Serves as a starting point for the demand curve. A consumer’s maximum Willingness to Pay is equal to that consumer’s Marginal Benefit (MB). This is useful information if we want to use Marginal Analysis. (4.1)