Economics Online Tutor
Glossary and Dictionary of
Economics Terms

Page 8
PRICE MAKER: A firm with significant market power to set its own price.

PRICE TAKER: A firm with no market power; it has to accept the price that is established by the market.

PRIVATE BENEFIT: A benefit received by a party to a transaction.

PRIVATE COST: A cost paid by a party to a transaction.

PRIVATE SECTOR: The portion of the economy that does not included the government.

PRISONER'S DILEMMA: Game theory model used to explain the behavior of firms in oligopoly.

PRODUCER: A private organization that produces goods and / or services.  The term as used here is interchangeable with firm,
business firm, company, enterprise, and business.

PRODUCER PRICE INDEX: A measurement of changes in the prices received by producers.  A leading economic indicator for
inflation.  Formerly known as the Wholesale Price Index.
PRODUCER SURPLUS: The difference between the price the sellers are willing to sell the product for and the price that the sellers
actually receive.

PRODUCER'S TAX: A tax levied on sellers.

PRODUCTION BOTTLENECKS: The inability of firms to increase output in the short run due to a lack of excess capacity.

PRODUCTION POSSIBILITIES CURVE: An economic model that shows graphically the various combinations of two goods that can be
produced using a given level of resources.

PRODUCTIVE EFFICIENCY: Using the least cost combination of resources to produce a specific level of output.

PRODUCTIVITY: The amount of output per unit of input.

PROFIT: The excess of total revenue over total cost.

PROHIBITIVE BARRIERS TO ENTRY: Barriers to entry in an industry that are high enough to effectively prevent any entry.

PUBLIC SECTOR: The portion of the economy represented by the government.

QUANTITY DEMANDED: The amount of a specific good or service that people are willing and able to purchase at one specific price.

QUANTITY SUPPLIED: The amount of a specific good or service that producers are willing and able to offer for sale at one specific

RATE OF INFLATION: The percentage change in the average level of prices from one year to the next.

RATIONAL SELF INTEREST: The assumption in economics that the choices people make are done rationally, based on the
information known at the time, in an attempt to maximize their satisfaction.  Also known as bounded rationality.

REAL GDP: Total output of an economy measured in constant prices.

REAL GDP PER CAPITA: Total output of an economy measured in constant prices, divided by total population.

REAL INTEREST RATE: The nominal (stated) interest rate minus the anticipated rate of inflation.

REAL VALUE: A value that has been adjusted for changes in the average level of prices.

RECESSION: A period of significant decline in total output, income, employment, and trade, usually lasting from six months to a
year, and marked by widespread contractions in many sectors of the economy.

RECESSIONARY GAP: A situation in which a GDP gap exists, or when equilibrium real GDP is below potential real GDP.

REDISTRIBUTION OF WEALTH: Anything that changes the wealth distribution between different groups of people.

RENT: The earnings of land, with land being a factor of production.

REQUIRED RESERVE RATIO: The percentage of deposits that banks have to keep on hand, and not make available for loans.

REQUIRED RESERVES: The amount of deposits that a bank has that cannot be loaned out, in order to meet the required reserve

RESERVE RATIO: The percentage of deposits at a bank that have not been loaned out.

RESERVE REQUIREMENT: The required reserve ratio.

RESERVES: In banking, the deposits at a bank that have not been loaned out.  Same as bank reserves.

RESOURCE PRICES: The prices that producers pay for the use of resources.

RESOURCES: The use of factors of production.  Used interchangeably with the term inputs.

RESPONSIVENESS: The amount that one variable will change in response to a change in another variable.

REVENUE: Proceeds from sales.  Same as total revenue.  Equal to price times quantity.

RICARDIAN EQUIVALENCE: The theory that consumers reduce current consumption because of the future tax increases that they
believe will occur to pay for the government debt.

SCARCITY: When something is not available in sufficient quantities to satisfy every human want, regardless of price.

SEASONAL UNEMPLOYMENT: Unemployment that is caused by the slow season in an industry.

SECTOR: Classification of different portions of the economy: the household sector, the business sector, the government sector, the
international sector.

SERVICES: The output of a firm that is not comprised of physical merchandise.

SERVICES ACCOUNT: The portion of the current account of the balance of payments that includes transactions between countries
involving services, such as tourism and transportation.

SHADOW ECONOMY: Economic activity that is not reported for tax purposes and is not included in official government statistics.  
Also known as the black market, underground economy, hidden economy, informal economy, and parallel economy.

SHORT RUN: A time frame sufficiently short enough so that at least one input is fixed.

SHORT RUN AGGREGATE SUPPLY CURVE: The aggregate supply curve in the short run.  It would be upward sloping.

SHORT RUN AVERAGE TOTAL COST: The sum of average variable cost and average fixed cost in the short run.

SHORTAGE: The amount by which demand exceeds supply.

SHUT DOWN PRICE: The price below which a profit-maximizing firm will shut down in the short run.

SHUT DOWN RULE: A competitive firm should shut down in the short run if it cannot find an output level that will allow it to cover
total variable costs.  Otherwise, it should continue to produce.

SILVER STANDARD: An economy in which the value of the currency is tied to the value of silver.  The currency can be exchanged for
an equal value of silver upon demand.

SOCIAL BENEFIT: Total benefit of a transaction - private benefit plus external benefit.

SOCIAL COST: Total cost of a transaction - private cost plus external cost.

SOCIALISM: An economic system in which the government owns the means of production.

SPECIALIZATION & TRADE: The concept that individuals or nations should specialize in the production of things for which they have
comparative advantage, and trade for the things that they do not have comparative advantage.

SPECULATIVE DEMAND FOR MONEY: The amount of money that the public prefers to hold as a hedge against price changes in other
financial assets.

SPENDING MULTIPLIER: The amount by which an increase in spending will increase real GDP.  Equal to the reciprocal of leakages:
(1 / (MPS + MPI)).

SPILLOVER:  The effect that actions of producers or consumers have on people who are not parties to private transactions.

SRATC: Short run average total cost.  The sum of average variable cost and average fixed cost in the short run.

STAGFLATION: A situation in which inflation and unemployment are both rising at the same time.

STANDARDIZED PRODUCTS: Products of different firms that have no differences in the minds of consumers.  Consumers do not
prefer the products of one firm over another firm.  The products are considered to be perfect substitutes.  Also known as identical
products and homogeneous products.

STOCK CONCEPT: A stock is something that is measured at a specific point in time rather than over a period of time, which would
be a flow concept.  For example, standard accounting statements include an income statement, which is a flow concept, and a
balance sheet, which is a stock concept.
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