GLOSSARY

ability-to-pay principle: the view that those with greater income should pay more in taxes than those with less income (chapter 14)

absolute advantage: a situation in which a person or country is more efficient at producing a good in comparison with another person or country (chapter 17)

accounting profits: total revenue minus total costs where total costs exclude the implicit opportunity costs. This is the definition of profits usually reported by firms. (chapter  8)

ad valorem tariff: a tax on imports evaluated as a percentage of the value of the import (chapter 18)

ad valorem tax: a tax that is proportional to the value of expenditures (chapter 7)

antidumping duty: a tariff imposed on a country as a penalty for dumping goods (chapter 18)

assumptions: judgements about features that can be ignored, to make the world easier to understand (chapter 1)

Australia and New Zealand Standard Industrial Classification (ANZSIC): a taxonomy used to label and group industries for statistical purposes. Each industry is given an ANZSIC code. (chapter 9)

average fixed cost (AFC): fixed cost divided by the quantity produced (chapter 8)

average product of labour: the quantity produced divided by the amount of labour input (chapter 8)

average revenue: total revenue divided by quantity (chapter 10)

average tax rate: the total tax paid divided by the total taxable income (chapter 14)

average total cost (ATC): total costs of production divided by the quantity produced (also called cost per unit) (chapter 8)

average total cost pricing: a regulatory method that stipulates that the firm charge a price that equals average total cost (chapter 12)

average variable cost (AVC): variable costs divided by the quantity produced (chapter 8)

backward-bending labour supply curve: the situation in which the income effect outweighs the substitution effect of an increase in the wage, causing the labour supply curve to bend back and take on a negative slope at higher levels of income (chapter 13)

barriers to entry: anything that prevents firms from entering a market (chapter 10)

bilateral monopoly: the situation in which there is one buyer and one seller in a market (chapter 13)

black market: a market in which goods and services are illegally traded at prices above the price ceiling (chapter 3)

break-even point: the point at which price equals the minimum of average total cost (chapter 8)

budget constraint: an income limitation on a person’s expenditure on goods and services (chapter 5)

budget line: a line showing the maximum combinations of two goods that is possible for a consumer to buy, given a budget constraint and the market prices of the two goods (chapter 5 appendix)

capital: that which enables the production of goods and services now and in the future (see also physical capital, financial capital and human capital) (chapter 2)

capital abundant: a higher level of capital per worker in one country relative to another (chapter 17)

capital gain: the increase in the value of an asset through an increase in its price (chapter 16)

capital intensive: production that uses a relatively high level of capital per worker (chapter 17)

capital loss: the decrease in the value of an asset through a decrease in its price (chapter 16)

cartel: a group of producers in the same industry who coordinate pricing and production decisions (chapter 11)

causation: a relation of cause and effect between variables in which one variable is a determinant of another variable (chapter 1)

ceteris paribus: all other things being equal. The term refers to holding all other variables constant or keeping all other things the same when one variable is changed. (chapter 1)

choice: a selection among alternative goods, services or actions (chapter 2)

Coase theorem: the idea that private negotiations between people will lead to an efficient resolution of externalities regardless of who has the property rights, as long as the property rights are defined (chapter 15)

command and control: the regulations and restrictions that the government uses to correct market imperfections (chapter 15)

command economy: an economy in which the government determines prices and production (also called a centrally planned economy) (chapter 1)

common resources: goods or services that have the characteristics of rivalry in consumption and non-excludability (chapter 15)

company income tax: a tax on the accounting profits of a company (chapter 14)

comparative advantage: a situation in which a person or country can produce one good more efficiently than another good in comparison with another person or country (chapters 2 and 17)

compensating wage differential: a difference in wages for people with similar skills based on some characteristic of the job, such as riskiness, discomfort or convenience of the time schedule (chapter 13)

competition policy: government actions designed to improve economic efficiency by promoting competition (chapter 12)

competitive market: a market where no firm has the power to affect the market price of a good (chapter 6)

complement: a good that is usually consumed or used together with another good (chapter 3)

concentration ratio: the percentage of production in a market supplied by a given number of its largest firms (chapter 12)

conjectural variations approach: a model that assumes that firms make decisions based on what they expect other firms to do in reaction to their decisions (chapter 11)

constant returns to scale: a situation in which long-run average total cost is constant as the output of a firm changes (chapter 8)

consumer surplus: the difference between what a person is willing to pay for an additional unit of a good – the marginal benefit – and the market price of the good. For the market as a whole, it is the sum of all the individual consumer surpluses, or the area below the market demand curve and above the market price. (chapter 5)

contestable market: a market in which the threat of competition is enough to encourage firms to act like competitors (chapters 10 and 12)

contingent valuation: an estimation of the willingness to pay for a project on the part of consumers who may benefit from the project (chapter 15)

controlled experiments: empirical tests of theories in a controlled setting in which particular effects can be isolated (chapter 1)

cooperative outcome: an equilibrium in a game where the players agree to cooperate (chapter 11)

corporation: a firm characterised by limited liability on the part of owners and the separation of ownership and management (chapter 6)

correlation: the degree to which economic variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. (chapter 1)

cost-benefit analysis: an appraisal of a project based on the costs and benefits derived from it (chapter 15)

coupon: the fixed amount that a borrower agrees to pay to the bondholder each year (chapter 16)

Cournot model: a model using the conjectural variations approach that assumes that each firm expects other firms to keep their production constant in response to actions the firm takes (chapter 11)

cross-price elasticity of demand: the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good (chapter 4)

customs union: a free-trade area with a common external tariff (chapter 18)

deadweight loss: the loss in producer and consumer surplus due to an inefficient level of production (chapters 7 and 10)

debt contract: a contract in which a lender agrees to provide funds today in exchange for a promise from the borrower, who will repay that amount plus interest at some point in the future (chapter 16)

deferred payment contract: an agreement between a worker and an employer whereby the worker is paid less than the marginal revenue product when young, and subsequently paid more than the marginal revenue product when old (chapter 13)

demand: a relationship between price and quantity demanded (chapter 3)

demand curve: a graph of demand showing the downward-sloping relationship between price and quantity demanded (chapter 3)

demand schedule: a tabular presentation of demand showing the price and quantity demanded for a particular good, all else being equal (chapter 3)

depreciation: the decrease in an asset’s value over time. For capital, it is the amount by which physical capital wears out over a given period of time. (chapter 16)

derived demand: demand for an input derived from the demand for the product produced with that input (chapter 13)

diminishing marginal utility: the decline in additional utility from consumption of an additional unit of a good as more and more of the good is consumed (chapter 5)

diminishing returns to labour: a situation in which the incremental increase in output due to a unit increase in labour declines with increasing labour input; a decreasing marginal product of labour (chapter 6)

discount rate: an interest rate used to discount future payment when computing present discounted value (chapter 16 appendix)

discounting: the process of translating a future payment into a value in the present (chapter 16 appendix)

diseconomies of scale: a situation in which long-run average total cost increases as the output of a firm increases (also called decreasing returns to scale) (chapter 8)

dividend yield: the dividend stated as a percentage of the price of the share (chapter 16)

division of labour: the division of production into various parts in which different groups of workers specialise (chapter 2)

domestic content restriction: a requirement that a fraction of the product must be produced within the area to qualify for zero tariffs between the countries in the free-trade area (chapter 18)

dumping: the selling of goods by foreign firms at a price below average cost or below the price in the domestic country (chapter 18)

dynamic comparative advantage: changes in comparative advantage over time from investment in physical and human capital and in technology (chapter 17)

earnings: accounting profits of a firm (chapter 16)

econometrics: the use of economic theory, mathematical methods and statistical techniques to analyse economic phenomena (chapter 1)

economic growth: an upward trend in real GDP, reflecting expansion in the economy over time; it can be represented as an outward shift in the production possibilities curve (chapter 2)

economic history: the study of economic events and the collection of economic observations from the past (chapter 1)

economic interaction: exchanges of goods and services between people (chapter 2)

economic model: an explanation of how the economy or part of the economy works (chapter 1)

economic profits: total revenue minus total costs, where total costs include opportunity costs whether implicit or explicit (chapter 8)

economic regulation: government regulation that sets prices or conditions on the entry of firms into an industry (chapter 12)

economic variable: any economic measure that can vary over a range of values (chapter 1)

economies of scale: a situation in which long-run average total cost declines as the output of a firm increases (also called increasing returns to scale) (chapters 8 and 12)

economies of scope: a situation where average total costs decline when different types of good are produced (chapter 8)

efficiency wage: a wage higher than one that would equate quantity supplied and quantity demanded set by employers to increase worker efficiency, for example, by decreasing shirking by workers (chapter 13)

efficient market hypothesis: the idea that markets adjust rapidly enough to eliminate profit opportunities immediately (chapter 16)

elastic demand: demand for which price elasticity is greater than 1 (chapter 4)

elasticity: the measure of how sensitive one variable is to another (chapter 4)

emission tax: a charge made to firms that pollute the environment based on the quantity of pollution they emit (chapter 15)

equilibrium price: the price at which quantity supplied equals quantity demanded (chapters 3 and 7)

equilibrium quantity: the quantity traded at the equilibrium price (chapter 3)

equilibrium risk-return relationship: the positive relationship between the risk and the expected rate of return on an asset derived from the fact that, on average, risk-averse investors who take on more risk must be compensated with a higher return (chapter 16)

equity contract: shares of ownership in a firm in which payments to the owners of the shares depend on the firm’s profits (chapter 16)

excess capacity: a situation in which a firm produces below the level that gives minimum average total cost (chapter 11)

excess costs: costs of production that are higher than the minimum average total cost (chapter 11)

exchange rate: the price of one currency in terms of another (chapter 2)

excise tax: a tax on sales of a narrow group of goods (chapter 14)

excludability: a characteristic of a product whereby people can be excluded from using the product (chapter 15)

expected return: the return on an uncertain investment calculated by weighting the gains or losses by the probability that they will occur (chapter 16)

experimental economics: a branch of economics that uses laboratory experiments to analyse economic behaviour (chapter 1)

explicit collusion: open cooperation of firms to make mutually beneficial pricing or production decisions (chapter 11)

export: the sale of goods and services abroad (chapter 17)

external diseconomies of scale: a situation in which growth in an industry causes average total cost for the individual firm to rise as a result of some factor external to the firm. It corresponds to an upward-sloping long-run industry supply curve. (chapter 9)

external economies of scale: a situation in which growth in an industry causes average total cost for the individual firm to fall as a result of some factor external to the firm. It corresponds to a downward-sloping long-run industry supply curve. (chapter 9)

externality: the situation in which the costs of producing or the benefits of consuming a good spill over onto those who are neither producing nor consuming the good (chapter 15)

face value: the principal that will be paid back when a bond matures (chapter 16)

financial capital: funds used to purchase, rent or build physical capital (chapter 16)

firm: an organisation that produces goods or services (chapter 6)

fixed costs: costs of production that do not depend on the quantity of production (chapters 6 and 8)

free entry and exit: movement of firms in and out of an industry that is not blocked by regulation, other firms or any other barriers (chapter 9)

free trade: a complete lack of restrictions on international trade (chapter 17)

free-rider problem: a problem arising in the case of public goods because those who do not contribute to the costs of providing the public good cannot be excluded from the benefits of the good (chapter 15)

free-trade area (FTA): an area that has no trade barriers between the countries in the area (chapter 18)

freely determined prices: prices that are determined by the individuals and firms interacting in markets (chapter 2)

gains from trade: improvements in income, production or satisfaction owing to the exchange of goods or services (chapters 2 and 17)

game theory: a branch of applied mathematics with many uses in economics, including the analysis of the interaction of firms that take each other’s actions into account (chapter 11)

General Agreement on Tariffs and Trade (GATT): an international treaty and organisation designed to promote mutual reductions in tariffs and other trade barriers among countries (chapter 18)

Gini coefficient: an index of income inequality ranging between 0 (for perfect equality) and 1 (for absolute inequality). It is defined as the ratio of the area between the Lorenz curve and the perfect equality line to the area between the lines of perfect equality and perfect inequality. (chapter 14)

goods and services tax (GST): a consumption (as opposed to income) tax levied on the purchases of goods and services by consumers (chapter 14)

government failure: a situation in which the government makes things worse than the market, even though there may be market failure (chapter 2)

gross domestic product (GDP): a measure of the value of all the goods and services newly produced in an economy during a specified period of time (chapter 2)

human capital: a person’s accumulated knowledge and skills (chapter 13)

imperfect competition: a market that does not have all the features of a perfectly competitive market (chapter 7)

implicit rental price: the interest payments on the funds borrowed to buy the capital plus the depreciation of the capital over a given period of time (chapter 16)

import: the purchase of goods and services from abroad (chapter 17)

incentive regulation: a regulatory method that sets prices for several years ahead and then allows the firm to keep any additional profits or suffer any losses over that period of time (chapter 12)

incentives: devices that motivate people to take action, usually so as to increase economic efficiency (chapters 1 and 2)

income effect: the amount by which the quantity demanded falls as a result of the decline in real income from a price increase (chapter 5)

income elasticity of demand: the percentage change in quantity demanded of one good divided by the percentage change in income (chapter 4)

income inequality: disparity in levels of income among individuals in the economy (chapter 7)

increasing opportunity costs: a situation in which producing more of one good requires giving up producing an increasing amount of another good (chapter 2)

indifference curve: a curve showing the combinations of two goods that leave the consumer with the same level of utility (chapter 5 appendix)

individual demand curve: a curve showing the relationship between quantity demanded of a good by an individual and the price of the good (chapter 5)

individual income tax: a tax on all forms of income an individual receives (chapter 14)

industry: a group of firms producing a similar product (chapter 9)

inelastic demand: demand for which the price elasticity is less than 1 (chapter 4)

infant industry argument: the view that a new industry may be helped to develop by protectionist policies (chapter 18)

inferior good: a good for which demand decreases when income rises and increases when income falls (chapter 3)

inflation: the overall increase in price of goods and services over time (chapter 13)

inputs or factors of production: labour, capital and other resources used in the production of goods and services (chapter 2)

inter-industry trade: trade between countries in goods from different industries (chapter 11)

internalise: to provide incentives so externalities are taken into account internally by firms or consumers (chapter 15)

international trade: the exchange of goods and services (trade) between people or firms in different nations (chapters 2 and 17)

intra-industry trade: trade between countries in goods from the same or similar industries (chapter 11)

invisible hand: the idea that the free interaction of people in a market economy leads to a desirable social outcome. The term was coined by Adam Smith. (chapter 7)

labour: the number of hours people work in producing goods and services (chapter 2)

labour abundant: a lower level of capital per worker in one country relative to another (chapter 17)

labour demand: the relationship between the quantity of labour demanded by firms and the wage (chapter 13)

labour intensive: production that uses a relatively low level of capital per worker (chapter 17)

labour market: the market in which individuals supply their labour time to firms in exchange for wages and salaries (chapter 13)

labour market equilibrium: the situation in which the quantity of labour supplied equals the quantity of labour demanded (chapter 13)

labour productivity: output per hour of work (chapter 13)

labour supply: the relationship between the quantity of labour supplied by individuals and the wage (chapter 13)

law of demand: the tendency for the quantity demanded of a good in a market to decline as its price rises (chapter 3)

law of supply: the tendency for the quantity supplied of a good in a market to increase as its price rises (chapter 3)

linear: a situation in which a curve is straight, with a constant slope (chapter 1 appendix)

long run: the minimum period of time during which all inputs to production can be changed (chapter 8)

long-run average total cost curve: the curve that traces out the short-run average total cost curves, showing the lowest average total cost for each quantity produced as the firm expands in the long run (chapter 8)

long-run equilibrium: a situation in which entry and exit from an industry is complete and economic profits are zero with price (P) equal to average cost (ATC) (chapter 9)

long-run industry supply curve: a curve traced out by the intersections of demand curves shifting to the right and the corresponding short-run supply curves (chapter 9)

long-run perfect competition model: a model of firms in an industry in which free entry and exit produce an equilibrium such that price equals the minimum of average total cost (chapter 9)

long-term employment contract: an agreement, either explicit or implicit, between employers and workers that sets conditions concerning the work relationship for a long period of time (chapter 13)

Lorenz curve: a curve showing the relation between the cumulative percentage of the population and the proportion of total income earned by each cumulative percentage. It measures income inequality. (chapter 14)

macroeconomics: the branch of economics that examines the workings and problems of the economy as a whole, such as economic growth, inflation, unemployment and economic fluctuations (chapter 1)

marginal benefit: the increase in the willingness to pay to consume one more unit of a good (chapter 5)

marginal cost: the change in total cost due to a one-unit change in quantity produced (chapters 6 and 8)

marginal cost pricing: a regulatory method that stipulates that the firm charge a price that equals marginal cost (chapter 12)

marginal private benefit: the marginal benefit from consumption of a good as viewed by a private individual (chapter 15)

marginal private cost: the marginal cost of production as viewed by the private firm or individual (chapter 15)

marginal product of labour: the change in production due to a one-unit increase in labour input (chapters 6 and 13)

marginal revenue: the change in total revenue due to a one-unit increase in quantity sold (chapter 6)

marginal revenue product of capital: the change in total revenue due to a one-unit increase in capital (chapter 16)

marginal revenue product of labour: the change in total revenue due to a one-unit increase in labour input (chapter 13)

marginal social benefit: the marginal benefit from consumption of a good as viewed by society as a whole (chapter 15)

marginal social cost: the marginal cost of production as viewed by society as a whole (chapter 15)

marginal tax rate: the change in total tax divided by the change in income (chapter 14)

marginal utility: the additional utility from an additional unit of consumption of a good (chapter 5)

market: an arrangement whereby economic exchanges between people take place (chapters 1 and 2)

market definition: demarcation of a geographic region and a category of goods and services in which firms compete (chapter 12)

market demand curve: the horizontal summation of all the individual demand curves for a good (also called the demand curve) (chapter 5)

market economy: an economy characterised by freely determined prices and the free exchange of goods and services in markets (chapter 1)

market equilibrium: the situation in which the price is equal to the equilibrium price and the quantity traded equals the equilibrium quantity (chapter 3)

market failure: any situation in which the market does not lead to an efficient economic outcome and in which there is a potential role for government (chapters 1, 2 and 15)

market power: a firm’s power to set its price without losing its entire share of the market (chapter 10)

maturity date: the date when the principal on a loan is paid back (chapter 16)

medium of exchange: an item that is generally accepted as a means of payment for goods and services (chapter 2)

mercantilism: the notion, popular in the 1700s, that the wealth of a nation was based on how much it could export in excess of its imports, and thereby accumulate precious metals (chapter 17)

microeconomic reform: changes to government policy that are designed to increase the efficiency of the economy as a whole (chapter 12)

microeconomics: the branch of economics that examines individual decision-making by firms and households and the way they interact in specific industries and markets (chapter 1)

minimum efficient scale: the smallest scale of production for which long-run average total cost is at a minimum (chapter 8)

minimum wage: a wage per hour below which it is illegal to pay workers (chapter 3)

minimum wage legislation: a law that sets a floor on the wage, or price of labour (chapter 13)

mixed economy: a market economy in which the government plays a very large role (chapter 1)

monopolistic competition: an industry characterised by many firms selling differentiated products in an industry in which there is free entry and exit (chapter 11)

monopoly: one firm in an industry selling a product for which there are no close substitutes (chapter 10)

monopsony: a situation in which there is a single buyer of a particular good or service in a given market (chapter 13)

most-favoured nation (MFN): the principle by which all countries involved in GATT negotiations receive the same tariff rates as those of the country with the lowest negotiated tariff rates (chapter 18)

movement along the curve: a situation in which a change in the variable on one axis causes a change in the variable on the other axis, but maintains the position of the curve (chapter 1 appendix)

multilateral negotiation: simultaneous tariff reductions on the part of many countries (chapter 18)

multilateral trade: trade among more than two persons or nations (chapter 2)

natural monopoly: a single firm in an industry in which average total cost is declining over the entire range of production and the minimum efficient scale is larger than the size of the market (chapters 10 and 12)

negative externality: the situation in which costs spill over onto someone not involved in producing or consuming the good (chapter 15)

negative slope: a slope of a curve that is less than zero, representing a negative or inverse relationship between two variables (chapter 1 appendix)

negatively related: a situation in which an increase in one variable is associated with a decrease in another variable (also called inversely related) (chapter 1)

net exports: the value of goods and services sold abroad minus the value of goods and services bought from the rest of the world – that is, exports minus imports (chapter 17)

non-cooperative outcome: an equilibrium in a game where the players cannot agree to cooperate and instead follow their individual incentives (chapter 11)

non-tariff barrier: any government action other than a tariff that reduces imports, such as a quota or a standard (chapter 18)

normal good: a good for which demand increases when income rises and decreases when income falls (chapter 3)

normal profits: the amount of accounting profits when economic profits are equal to zero (chapter 8)

normative economics: economic analysis that makes recommendations about economic policy (chapter 1)

oligopoly: an industry characterised by few firms selling the same product with limited entry of other firms (chapter 11)

opportunity cost: the value of the next-best forgone alternative that was not chosen because something else was chosen (chapters 1, 2 and 17)

organisation: a human structure, such as a family, firm, government or university, through which people may exchange goods and services (chapter 2)

Pareto efficiency: a situation in which it is not possible to make someone better off without making someone else worse off (chapter 7)

partnership: a firm owned by more than one person in which the partners decide the division of the firm’s income among them and are jointly liable for losses the firm incurs (chapter 6)

payroll tax: a tax on wages and salaries paid by employers (chapter 14)

perfect competition: a market in which there are many buyers and sellers of products that are homogeneous. Buyers and sellers have full information about prices, and are price-takers. (chapter 7)

perfectly elastic demand: demand for which the price elasticity is infinite, indicating an infinite response to a change in the price and therefore a horizontal demand curve (chapter 4)

perfectly elastic supply: supply for which the price elasticity is infinite, indicating an infinite response of quantity supplied to a change in price and thereby a horizontal supply curve (chapter 4)

perfectly inelastic demand: demand for which the price elasticity is zero, indicating no response to a change in price and therefore a vertical demand curve (chapter 4)

perfectly inelastic supply: supply for which the price elasticity is zero, indicating no response of quantity supplied to a change in price and thereby a vertical supply curve (chapter 4)

phase-out: the gradual reduction of a government regulation or trade barrier (chapter 17)

physical capital: the factories, improvements to cultivated land, machinery and other tools, equipment and structures used to produce goods and services (chapter 16)

piece-rate system: a system by which workers are paid a specific amount per unit they produce (chapter 13)

portfolio diversification: spreading the collection of assets owned to limit exposure to risk (chapter 16)

positive economics: economic analysis that explains what happens in the economy and why, without making recommendations about economic policy (chapter 1)

positive externality: the situation in which benefits spill over onto someone not involved in producing or consuming the good (chapter 15)

positive slope: a slope of a curve that is greater than zero, representing a positive or direct relationship between two variables (chapter 1 appendix)

positively related: a situation in which an increase in one variable is associated with an increase in another variable (also called directly related) (chapter 1)

poverty line: the minimal amount of weekly income needed by an income unit to avoid severe economic hardship (chapter 14)

poverty trap: a situation where people on low incomes are discouraged from working because the extra income from work is reduced (chapter 14)

present discounted value: the value in the present of future payments (chapter 16 appendix)

price: the amount of money or other goods that one must pay to obtain a particular good (chapter 3)

price ceiling: a government price control that sets the maximum allowable price for a good (chapters 3 and 7)

price control: a government law or regulation that sets or limits the price to be charged for a particular good (chapters 3 and 7)

price discrimination: a situation in which different groups of consumers are charged different prices for the same good (chapter 10)

price earnings ratio: the price of a share divided by its annual earnings per share (chapter 16)

price elasticity of demand: the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good (chapter 4)

price elasticity of supply: the percentage change in quantity supplied divided by the percentage change in price (chapter 4)

price floor: a government price control that sets the minimum allowable price for a good (chapters 3 and 7)

price leader: the price-setting firm in a collusive industry where other firms follow the leader (chapter 11)

price-directed approach: a management technique whereby the instructions to a division of a firm are to maximise profits given transfer prices set by executives (chapter 8)

price-maker: a firm that has the power to set its price, rather than taking the price set by the market (chapter 10)

price-taker: any firm that takes the market price as given. This firm cannot affect the market price because the market is competitive. (chapter 6)

prisoner’s dilemma: a game in which individual incentives lead to a non-optimal (non-cooperative) outcome. If the players can credibly commit to cooperate, then they achieve the best (cooperative) outcome. (chapter 11)

private good: a good or service that has the characteristics of rivalry in consumption and excludability (chapter 15)

private remedy: a procedure that eliminates or internalises externalities without government action other than the defining of property rights (chapter 15)

privatisation: the process of changing a government enterprise into a privately owned enterprise (chapter 15)

producer surplus: the difference between the price received by a firm for an additional item sold and the marginal cost of the item’s production. For the market as a whole, it is the sum of all the individual firms’ producer surpluses, or the area above the market supply curve and below the market price. (chapter 6)

product differentiation: the effort by firms to produce goods that are slightly different from other types of good (chapter 11)

production function: a relationship that shows the quantity of output for any given amount of input (chapters 6 and 8)

production possibilities: alternative combinations of production of various goods that are possible, given the economy’s resources (chapter 2)

production possibilities curve: a curve showing the maximum combinations of production of two goods that are possible, given the economy’s resources and level of technology (chapter 2)

profit maximisation: an assumption that firms try to achieve the highest possible level of profits – total revenue minus total costs – given their production function (chapter 6)

profits: total revenue received from selling the product minus the total costs of producing the product (chapter 6)

progressive tax: a tax for which the amount of an individual’s taxes rises as a proportion of income as the person’s income increases (chapter 14)

property rights: rights over the use, sale and proceeds from a good or resource (chapters 2 and 15)

proportional tax: a tax for which the amount of an individual’s taxes as a percentage of income is constant as the person’s income rises (chapter 14)

protectionist policy: policy that restricts trade to protect domestic producers (chapter 18)

public good: a good or service that has the characteristics of non-rivalry in consumption and non-excludability (chapter 15)

public infrastructure project: an investment project such as a bridge or jail funded by government designed to improve publicly provided services such as transportation or criminal justice (chapter 15)

quantity demanded: the amount of a good that people want to buy at a given price (chapter 3)

quantity supplied: the amount of a good that firms are willing to sell at a given price (chapter 3)

quantity-directed approach: a management technique whereby decisions handed down by executives instruct a division to produce a given quantity (chapter 8)

quintile: a division or grouping of one-fifth of a population ordered by income, wealth or some other statistic (chapter 14)

quota: an upper limit on the quantity of a good that may be imported or sold (chapter 18)

rate of return: the return on an asset stated as a percentage of the price of the asset (chapter 16)

real wage: the wage or price of labour adjusted for inflation. In contrast, the nominal wage has not been adjusted for inflation. (chapter 13)

regressive tax: a tax for which the amount of an individual’s taxes falls as a proportion of income as the person’s income increases (chapter 14)

relatively elastic: a situation in which the elasticity of one good is greater than the elasticity of another good (chapter 4)

rent control: a government price control that sets the maximum allowable rent on a house or apartment (chapter 3)

rental price of capital: the amount that a rental company charges for the use of capital equipment for a specified period of time (chapter 16)

return: the income received from the ownership of an asset. For a stock, the return is the dividend plus the capital gain. (chapter 16)

revenue tariff: an import tax whose main purpose is to provide revenue to the government (chapter 18)

rivalry: a characteristic of a product whereby more consumption of that product by one person makes less of the product available for consumption by another person (chapter 15)

sales tax: a tax on sales of a broad group of goods (chapter 14)

scarcity: the situation in which the quantity of resources is insufficient to meet all wants (chapter 2)

shift of the curve: a change in the position of a curve usually caused by a change in a variable not represented on either axis (chapter 1 appendix)

short run: the period of time during which it is not possible to change all inputs to production. Only some inputs, such as labour, can be changed. (chapter 8)

shortage: the situation in which quantity demanded is greater than quantity supplied (chapter 3)

shutdown point: the point at which price equals the minimum of average variable cost (chapter 8)

slope: refers to a curve and is defined as the change in the variable on the vertical axis divided by the change in the variable on the horizontal axis (chapter 1 appendix)

social regulation: government regulation that aims to overcome or correct externalities in which private costs differ from social costs (chapter 12)

sole proprietorship: a firm owned by a single person (chapter 6)

specialisation: the situation in which a resource, such as labour, concentrates and develops efficiency at a particular task (chapter 2)

specific tariff: a tax on inputs that is proportional to the number of units or items imported (chapter 18)

specific tax: a tax that is proportional to the number of items sold (chapter 7)

standard benefit: compensation that a worker receives excluding direct money payments for time worked (chapter 13)

strategic behaviour: firm behaviour that takes into account the market power and reactions of other firms in the industry (chapter 11)

strategic demand curve: a downward-sloping demand curve in which the firm incorporates its expectations of what other firms will do (chapter 11)

strategic trade policy: a set of government actions designed to encourage large firms to locate or start up in that country (chapter 18)

structure-conduct-performance method: a method of analysing the market power of an industry by looking at the structure of the industry (chapter 12)

substitute: a good that has many of the same characteristics of, and can be used in place of, another good (chapter 3)

substitution effect: the amount by which quantity demanded falls when the price rises, exclusive of the income effect (chapter 5)

supply: a relationship between price and quantity supplied (chapter 3)

supply curve: a graph of supply showing the upward-sloping relationship between price and quantity supplied (chapter 3)

supply schedule: a tabular presentation of supply showing the price and quantity supplied of a particular good, all else being equal (chapter 3)

surplus: the situation in which quantity supplied is greater than quantity demanded (chapters 3 and 7)

systematic risk: the level of risk in asset markets that investors cannot reduce by diversification (chapter 16)

tacit collusion: implicit or unstated cooperation of firms to make mutually beneficial pricing or production decisions (chapter 11)

tangency point: the only point in common for two curves, showing the point where the two curves just touch (chapter 5 appendix)

tariff: a tax on imports (chapter 17)

taxable income: an individual’s income minus deductions (chapter 14)

tax bracket: the range of incomes with the same marginal tax rate (chapter 14)

tax incidence: the allocation of the burden of the tax between buyer and seller (chapter 14)

tax revenue: a tax rate times the amount subject to tax (chapter 14)

taxes on property: a tax on the value of property owned (chapter 14)

terms of trade: quantity of imported goods a country can obtain in exchange for a unit of exported goods (chapter 17)

thinking at the margin: thinking about the costs and benefits of making changes in behaviour (chapter 1)

total costs: the sum of variable costs and fixed costs (chapters 6 and 8)

total revenue: the price per unit times the quantity the firm sells (chapter 6)

tradable permit: a governmentally granted licence to pollute that can be bought and sold (chapter 15)

trade adjustment assistance: transfer payments made to workers who will be hurt by the move to free trade (chapter 17)

trade creation: the increase in trade due to a decrease in trade barriers (chapter 18)

trade diversion: the shifting of trade away from the low-cost producer towards a higher-cost producer as a result of a reduction in trade barriers with the country of the higher-cost producer (chapter 18)

Trade Practices Act : legislation first enacted in 1974 that aims to promote competition, fair trading and consumer protection (chapter 12)

trade union: a coalition of workers, organised to improve wages and working conditions of their members (chapter 13)

trade war: a conflict among nations over trade policies caused by imposition of protectionist policies on the part of one country and subsequent retaliatory actions by other countries (chapter 18)

Tragedy of the Commons: overuse of common resources that creates undesirable outcomes for society (chapter 15)

transaction cost: the cost of buying or selling in a market including the cost of searching, bargaining and writing contracts (chapters 2, 7 and 15)

transfer payment: a grant of funds from the government to an individual (chapter 14)

transfer price: a price that one department of an organisation must pay to receive goods or services from another department in the same organisation (chapter 2)

unilateral disarmament: in trade policy, the removal of trade barriers by one country without reciprocal action on the part of other countries (chapter 18)

unit elastic demand: demand for which price elasticity equals 1 (chapter 4)

unit-free measure: a measure that does not depend on a unit of measurement (chapter 4)

Uruguay Round: the most recent round of negotiations on the GATT, begun in 1986 in Uruguay (chapter 18)

user fee: a fee charged for the use of a good normally provided by the government (chapter 15)

utility: a numerical indicator of a person’s preferences in which higher levels of utility indicate a greater preference (chapter 5)

utility maximisation: an assumption that people try to achieve the highest level of utility given their budget constraint (chapter 5)

variable costs: costs of production that vary with the quantity of production (chapters 6 and 8)

voluntary export restriction (VER): a country’s self-imposed government restriction on exports to a particular country (chapter 18)

wage: the price of labour defined over a period of time worked (chapter 13)

world price: the given price of an internationally traded good determined by the global market (chapter 18)

World Trade Organization (WTO): an international organisation that can mediate trade disputes (chapter 18)