Microeconomics: Glossary


Absolute advantage. when country a can produce a good cheaper than another.
Accounting cost. actual expenses + depreciation for capital equipment.
Actual return. return that an asset earns.
Actuarially fair. situation where an insurance payment = the expected payout.
Adverse selection. market failure, where companies sell products of different qualities at a single price due to asymmetric information.
Advertising elasticity of demand. % change in quantity demanded resulting from 1% increase of advertising expenditures.
Advertising-to-sale ratio. advertising expenditures/ sales
Agent. the Individual employed by a principal (director) to achieve the principal’s objective.
Amortization. Policy of treating a one-time expenditure as an annual cost spread out over some years.
Anchoring (—Ź–ļ–ĺ—Ä–Ĺ–ĺ—Ā—ā—Ć). Tendency to¬†rely heavily on¬†one prior piece of¬†information when making a¬†decision.
Antitrust laws. Rules and regulations prohibit actions that can restrain competition.
Arbitrage. the practice of buying at a low price in one place and selling higher in another.
Arc elasticity demand. price elasticity that is calculated over a range of prices.
Asset. Something that provides a flow of money or services to the owner.
? Asset beta. constant that measures the sensitivity of an asset’s return to market movements and, therefore, the asset’s non-diversifiable risk.
Asymmetric information. a situation in which a buyer and a seller possess different information about a transaction.
Auction market. a market in which products are bought and sold through formal bidding processes.
Average expenditure curve. supply curve representing the price per unit that a firm pays for a good.
Average expenditure. the price paid per unit of a good.
Average fixed cost. Fixed cost / the level of output(?).
Average product. Output per unit of a particular input. 
Average total cost. Firm’s total cost / the level of output. 
Average variable cost. variable cost / the level of input.


Bad. the good that is less preferred than more.
Bandwagon (–ľ–į—Ā—Ā–ĺ–≤–ĺ–Ķ –ī–≤–ł–∂–Ķ–Ĺ–ł–Ķ)effect. when a¬†person buys something because others do it either. Positive network externality in¬†which a¬†consumer wishes to¬†possess good in¬†part because others do.¬†
Barrier to entry. Conditions impede (block) entry by new competitors. E.g., when the prices to start are too high or if the monopolists prohibit you from being a partner with anyone.
? Bertrand model. Oligopoly model in which firms produce a homogeneous good, each firm treats the price of its competitors as fixed, and all firms decide simultaneously what price to change.
Bilateral monopoly. Market with one seller and one buyer.
Block pricing. charging different prices for¬†different quantities (‚Äúblocks‚ÄĚ) of¬†a¬†good.
Bond. contract in which a borrower agrees to pay the bondholder (the lender) a stream of money
Bubble. An increase of price not based on fundamentals of demand or value, but instead on a belief that the price will keep going up.
Budget constraints. Constraints that consumers face as a result of limited incomes.
Budget line. All combinations of goods for which the total amount of money spent = income.
Bundling. Practice selling two or more products as a package.


Capital Asset Pricing Model (CAPM). Model in which the risk premium for a capital investment depends on the correlation of the investments return with the return on the entire stock market. (If your return less the market return, then you’ll be paid on this amount?)
? Cardinal utility function. Utility function describing by how much one market basket is preferred to another.
Cartel. Market in which some of all firms explicitly collude (cooperate in a secret by the unlawful way), coordinating prices and output levels to maximize joint profits.
Chain-weighted price index. Cost-of-living index that accounts for changes in quantities of goods and services.
?Coase theorem. Principle that when parties can bargain without cost and to their mutual advantage, the resulting outcome will efficient regardless of how property rights are specified
Cobb-Douglas production function. q = AK^åL^ß, where q is the rate of output, K is the quantity of capital, and L is the quantity of labor, and where A, å, and ß are constants.
Cobb-Douglas utility function. U(X, Y) = A^å*Y^(1-å), where X and Y are two goods and a is a constant. 
Common property resource. a resource to which anyone has free access.
Common-value auction. Auction in which the item has the same value to all bidders, but bidders don’t know. That value precisely and their estimates of it vary.
Company cost of capital. Weighted avatar of the expected return on a company’s stock and the interest Tate that it pays for debt.
Comparative advantage. situation, in which country 1 has an advantage over country 2 in producing a good because the cost of producing the good in 1, relative to the cost of producing other goods in 1, is lower than the cost of producing the good in 2, relative to the cost of producing other goods in 2. 
Complements. two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the ofter.
Completely inelastic demand. Principle that consumers will buy a fixed quantity of a good regardless of its price.
Condominium. A housing unit that is individually owned but provides access to common facilities that are paid for and controlled jointly by an association of owners. 
Constant returns to scale. Situation in which output doubles when all inputs are doubled. 
Constant-cost Industry. Industry whose long-run supply curve is horizontal. 
Consumer Price Index. Measure of¬†the¬†aggregate (—Ā–ĺ–≤–ĺ–ļ—É–Ņ–Ĺ—č–Ļ) price level.¬†
Consumer surplus. Difference between what a consumer is willing to pay for a good and the amount actually paid. 
Constant curve. curve showing all efficient allocations of goods between who consumers, or of two inputs between two production functions.
Cooperative. Association of businesses, or people jointly owned and operated by members for mutual benefit. 
Cooperative game. game in which participants can negotiate binding contracts that allow them to plan joint strategies.
Corner solution. a situation in which the marginal rate of substitution of one good for another in a chosen market basket is not equal to the slope of the budget line.
Cost function. Function relating the cost of production to the level of output and other variables that the firm can control.
Cost-of-living index. Ration of the present cost of a typical bundle of consumer goods and services compared with the cost during a base period. 
Cournot equilibrium. Equilibrium in the Cournot model
Cournot model. Oligopoly model in which firms produce a homogeneous (same) good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously (at the same time) how much to produce.
Cross-price elasticity of demand. Percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another.
Cyclical industries. Industries in which sales tend to magnify cyclical changes in GDP and national income


Deadweight loss. Net loss of total (consumer and producer) surplus.
Decreasing returns to scale. Situation in which output less than doubles when all inputs are doubled. (Less productive if more products)
Decreasing-cost industry. industry, whose long-run supply curve is downward sloping.
Degree of economies of scope (SC). Percentage of cost-saving resulting when two or more products are produced jointly (together) rather than individually. (Mb means by one or two companies)
Demand curve. Relationship between the quantity of a good that consumers are willing to buy and the price of the good.
Derived demand. Demand for an input that depends on, and is derived from, both the firms’ level of output and the cost of inputs.
Deviation. Difference between expected payoff and¬†actual payoff (–≤—č–Ņ–Ľ–į—ā–į).
Diminishing marginal utility. principle that as¬†more of¬†a¬†good is consumed, the¬†consumption of¬†additional amounts will yield smaller additions to¬†utility (–≤—č–≥–ĺ–ī–į, –Ņ—Ä–į–ļ—ā–ł—á–Ĺ–ĺ—Ā—ā—Ć, –Ņ–ĺ–Ľ—Ć–∑–į). The¬†more you consume, the¬†less you need to¬†get the¬†benefit.
Discount rate. The rate used to determine the value today of a dollar received in the future.
Diseconomies of scale. A situation in which a doubling of output requires more than a doubling of cost.
Diseconomies of scope. A situation in which the joint output of a single firm is less than could be achieved by separate firms when each produces a single product. 
Diversifiable risk. Risk that can be eliminated either by investing in many projects or by holding the stocks of many companies.
Diversification. Practice of reducing risk by allocating resources to a variety of activities whose outcomes are not closely related.
Dominant Firm. Firm with a large share of total sales that sets the price to maximize profits, taking into account the supply response of smaller firms.
Dominant strategy. Strategy that is optimal no matter what an opponent does.
Double marginalization. when each firm in a vertical chain marks up its price above its marginal cost, thereby increasing the price of the final product.
Duality. Alternative way of looking at the consumer’s utility maximization decision: Rather than choosing the highest indifference curve, given a budget constraint, the consumer chooses the lowest budget line that touches a given indifference curve.
Duopoly. Market in which two firms compete with each other (Airbus and Boeing).
Dutch auction. Auction in which a seller begins by offering a relatively high price, then reduces it by fixed amounts until the item is sold.


Economic cost. cost to a firm utilizing economic resources in production.
Economic efficiency. Maximisation of aggregate consumer and producer surplus.
Economic rent. Amount that firms are willing to pay for input less the minimum amount necessary to obtain it.
Economics of scale. a situation in which output can be doubled for less than a doubling of cost (So then more, then more effective production).
Economics of¬†scope. Situation in¬†which joint (—Ā–ĺ–≤–ĺ–ļ—É–Ņ–Ĺ—č–Ļ) output of¬†a¬†single firm is greater than output that could be achieved by¬†2 different firms when each produces a¬†single product.
Edgeworth box. a diagram showing all possible allocation of either 2 goods between 2 people or of 2 inputs between 2 production processes.
Effective yield (rate of return). percentage return that one receives by investing in a bond.
Efficiency wage. Wage that a¬†firm will pay to¬†an¬†employee as¬†an¬†incentive not¬†to¬†shirk (—Ā—ā–ł–ľ—É–Ľ —á—ā–ĺ–Ī—č –Ĺ–Ķ —É–ļ–Ľ–ĺ–Ĺ—Ź—ā—Ć—Ā—Ź –ĺ—ā —Ä–į–Ī–ĺ—ā—č, —ā–Ķ–ľ —Ā–į–ľ—č–ľ —É–ľ–Ķ–Ĺ—Ć—ą–į—Ź –Ī–Ķ–∑—Ä–į–Ī–ĺ—ā–ł—Ü—É).
Efficiency wage theory. Explanation for the presence of unemployment and wage discrimination which recognizes that labor productivity may be affected by the wage rate.
Elasticity. Percentage change in one variable resulting from a 1-percent increase in another variable.
Emissions fee. Charge levied on each unit of a firm’s emissions.
Emissions standard. Legal limit in the number of pollutants that a firm can emit.
? Endowment (–Ņ–ĺ–∂–Ķ—Ä—ā–≤–ĺ–≤–į–Ĺ–ł–Ķ) effect. Tendency of¬†individuals to¬†value an¬†item more when they own it than when they don‚Äôt.
Engel curve. Curve relating the quantity of a good consumed to income. 
English auction. Auction in which a seller actively solicits progressively higher bids from a group of potential buyers.
? Equal marginal principle. Principle that utility is maximised when the consumer has equalised the marginal utility per dollar of expenditure across all goods.
Equilibrium (market clearing) price. Price that equates the quantity supplied to the quantity demanded. 
? Equilibrium in dominant strategies. Outcome of a game in which each firm is doing the best it can regardless of what its competitors are doing.
Excess demand. When the quantity demanded of a good exceeds the quantity supplied.
Excess supply. When the quantity supplied of a good exceeds the quantity demanded.
Exchange economy. Market in which 2 or more consumers trade 2 goods among themselves.
? Expansion path. Curve passing through points of tangency between a firm’s isocost lines and its isoquants.
Expected return. Return that an asset should earn on average.  
Expected utility. Sum of the utilities associated with all possible outcomes, weighted by the probability that each outcome will occur.
Expected value. Probability-weighted average of the payoffs associated with all possible outcomes.
? Extensive form or a game. Representation of possible moves in a game in the form of a decision tree.
Extent of a market. Boundaries of a market, both geographical and in terms of range of products produced and sold within it.
? Externality. Action by either a producer or a consumer which affects other producers or consumers, but is not accounted for in the market price.


Factors of production. Inputs into the production process (e. g. Labor, capital, materials).
First-degree price discrimination. Practice of charging each customer her reservation price.
First-price auction. Auction in which the sales price is equal to the highest bid.
Fixed cost (FC). Cost that does not vary with the level of output and that can be eliminated only by shutting down.
Fixed input. Production factor that cannot be varied.
? Fixed-proportions production function. Production function with L-shaped isoquants, so that only one combination of labor and capital can be used to produce each level of output.
Fixed-weight index. Cost-of-living index in which the quantities of goods and services remain unchanged.
Framing. Tendency to rely on the context in which a choice is described when making a decision.
Free entry (or exit). Condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry.
Free rider. Consumer or producer who does not pay for a nonexclusive good in the expectation that others will.


Game. Situation in which players (participants) make strategic decisions that take into account each other’s actions and responses.
General equilibrium analysis. Simultaneous (–ĺ–ī–Ĺ–ĺ–≤—Ä–Ķ–ľ–Ķ–Ĺ–Ĺ–ĺ–Ķ, —Ā–ł–Ĺ—Ö—Ä–ĺ–Ĺ–Ĺ–ĺ–Ķ) determination of¬†the¬†prices and¬†quantities in¬†all relevant markets, taking feedback effects into account.
? Giffen good. Good whose demand curve slopes upward because the¬†(negative) income effect is larger than the¬†substitution (–∑–į–ľ–Ķ—Č–Ķ–Ĺ–ł–Ķ) effect. (e.¬†g. with luxury good when price is low, then demand falls, or¬†cheap fast food or¬†cheap fruits**. if it‚Äôs to¬†cheap, then people will be afraid to¬†buy it).


Hicksian substitution effect. alternative to the Slutsky equation for decomposing price changes without resource to indifference curves.
Horizontal integration. Organisational form in which several plants produce the same or related products for a firm.
Human capital. Knowledge, skills, and experience that make an individual more productive and thereby able to earn a higher income over a lifetime 


Ideal cost-of-living index. cost of attaining a given level of utility at current prices relative to the cost of attaining the same utility at base-year prices.
Import quota. Limit on the quantity of a good that can be imported
Income effect. Change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant.
Income elasticity of demand. Percentage change in the quantity demanded resulting from a 1-percent increase in income
Income-consumption curve. Curve tracing the utility-maximizing combinations of 2 goods as a consumer’s income changes.
Increasing returns to scale. Situation in which output more than doubles when all inputs are doubled.
Increasing-cost industry. Industry whose long-run supply curve is upward sloping.
Indifference curve. Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction. (2 indifference curves can’t intersect).
Indifference map. Graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent.
Individual demand curve. Curve relating the quantity of a good that a single consumer will buy to its price.
Inferior (–Ņ–ĺ–ī—á–ł–Ĺ—Ď–Ĺ–Ĺ—č–Ļ) good. A¬†good that has a¬†negative income effect.

Infinitely elastic demand. Principle that consumers will buy as much of a good as they can get at a single price, but for any higher price, the quantity demanded drops to zero, while for any lower price, the quantity demanded increases without limit.
Informational cascade. An assessment (e. g., of investment opportunity) based in part on the actions of others, which in turn were based on the actions of others.
Interest rate. the rate at which one can borrow or lend money.
? Intertemporal price discrimination. Practice of separating consumers with different demand functions into different groups by charging different prices at different points in time. (Hardcover and paperback books difference at a price is high)
Isocost line. Graph, showing all possible combinations of labor and capital that can be purchased for a given total cost.
Isoelastic demand curve. Demand curve with constant price elasticity.
Isoquant. curve showing all possible combinations of inputs that yield the same output. 
Isoquant map. graph combining a number of isoquants used to describe a production function.


Kinked demand curve model. oligopoly model in which each firm faces a demand curve kinked at the currently prevailing price: at higher prices, demand is very elastic, whereas at lower prices, it is inelastic.


Labor productivity. Average product of labor for an entire industry or for the economy as a whole.
Lagrangian. function to be maximized or minimised, plus a variable (the Long-range multiplier) multiplied by the constraint.
Laspeyres price index. Amount of money at current-year prices that an individual requires to purchase a bundle of goods and services chosen in a base year / cost of purchasing the same bundle at base-year prices.
Law of diminishing marginal returns. Principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease.
Law of small numbers. Tendency to overstate the probability that a certain event will occur when faced with relatively little information. 
Learning curve. Graph relating amount of inputs needed by a firm to produce each unit of output to its cumulative output.
Least-squares criterion. Criterion of¬†‚Äúbest fit‚ÄĚ used to¬†choose values for¬†regression parameters, usually by¬†minimising the¬†sum of¬†squared residuals between the¬†actual values of¬†the¬†dependent variable and¬†the¬†fitted values.
Lerner Index of Monopoly Power. Measure of monopoly power = excess of price / marginal cost as a fraction of price.
Linear demand curve. Demand curve that is a straight line.
? Linear regression. Model specifying a linear relationship between a dependent variable and several independent (or explanatory) variables and an error term
Long run. Amount of time needed to make all production inputs variable.
Long-run average cost curve (LAC). Curve relating average cost of production to output when all inputs, including capital, are variable.
Long-run competitive equilibrium. All firms in¬†an¬†industry are maximizing profit, no¬†firm has an¬†incentive (—Ā—ā–ł–ľ—É–Ľ) to¬†enter or¬†exit, and¬†price is such that quantity supplied equals quantity demanded.
Long-run marginal cost curve (LMC). Curve showing the change in long-run total cost as output is increased incrementally by 1 unit.
Loss aversion. Tendency for individuals to prefer avoiding losses over acquiring gains.


Macroeconomics. branch of economics that deals with aggregate economic variables, such as the level and growth rate of national output, interest rates, unemployment, and inflation.
Marginal benefit. Benefit from the consumption of one additional unit of a good.
Marginal cost. Cost of one additional unit of a good.
Marginal expenditure. Additional cost of buying one more unit of a good
Marginal expenditure curve. curve describing the additional cost of purchasing one additional unit of a good.
Marginal external benefit. Increased benefit that accrues (–Ĺ–į—Ä–į—Č–ł–≤–į–Ķ—ā –Ņ—Ä–ĺ—Ü–Ķ–Ĺ—ā) to¬†other parties as¬†a¬†firm increases output by¬†one unit.
Marginal external cost. Increase in cost imposed external as one or more firms increase output by one unit.
Marginal product. Additional output produced as an input is increased by one unit.
Marginal rate of substitution (MRS). Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good.
Marginal rate of technical substitution (MRTS). Amount by which the quantity of one input can be reduced when one extra unit of another input is used, so that output remains constant. 
? Marginal rate of transformation. Amount of one good that must be given up to produce one additional unit of a second good.
Marginal revenue. Change in revenue resulting from an increase in output by one unit.
Marginal revenue product. Additional revenue resulting from the sale of output created by the use of one additional unit of an input.
Marginal social benefit. Sum of the marginal private benefit + marginal external benefit.
Marginal social cost. Sum of the marginal cost of production and the marginal external cost.
Marginal utility (MU). Additional satisfaction obtained from consuming one additional unit of a good.
Marginal value. Additional benefit derived from purchasing one more unit of a good.
Market. Collection of buyers and sellers that, through their actual or potential interactions, determine the price of product or set of products.
Market basket (or bundle). List with specific quantities of one or more goods. 
Market definition. Determination of the buyers, sellers, and range of products that should be included in a particular market.
Market demand curve. curve relating the quantity of a good that all consumers in a market will buy to its price. 
? Market failure. Situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers.
Market mechanism. Tendency In a free market for price to change until the market clears.
Market power. Ability of a seller or buyer to affect the price of a good.
Market price. Price prevailing (–Ņ—Ä–Ķ–ĺ–Ī–Ľ–į–ī–į—é—Č–į—Ź) in¬†a¬†competitive market.
Market signalling. Process by which sellers send signals to buyers conveying information about product quality.
Maximin strategy. strategy that maximises the minimum gain that can be earned.
Method of Lagrange multipliers. Technique to max or min a function subject to one or more constraints.
Microeconomics. a¬†branch of¬†economics that deals with the¬†behavior of¬†individual economic units¬†‚Äď consumers, firms, workers, and¬†investors¬†‚Äď as¬†well as¬†the¬†markets that these units comprise.
Mixed bundling. Selling two or more goods both as a package and individually (MB like gel and shampoo for gifts and normally separately)
Mixed strategy. Strategy in which a player makes a random choice among two or more possible actions based on a set of chosen probabilities.
Monopolistic competition. Market in which firms can enter freely, each producing its own brand or version of a differentiated product. 
Monopoly. Market with only one seller.
Monopsony. Market with only one buyer.
Monopsony power. buyer’s ability to affect the price of a good.
Moral hazard. when a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event.
Multiple regression analysis. Statistical procedure for quantifying economic relationships and testing hypotheses about them.
Mutual fund. Organisation that pools funds of individual investors to buy a large number of different stocks or other financial assets.


Nash equilibrium. set of strategies or actions in which each firm does the best it can given its competitors’ actions. 
Natural monopoly. Firm that can produce the entire output of the market at a cost lower than what it would be if there were several firms.
Negatively correlated variables. Variables having a tendency to move in opposite directions.
Net present value (NPV) criterion. Rule holding that one should invest in the present value of the expected future cash flow from on investment is larger than the cost of the investment.
Network externality. Situation in which each Individual’s demand depends on the purchases of other individuals. (If everyone buys Tesla, I buy too)
Nominal price. Absolute price of a good, unadjusted for inflation.
Noncooperative game. Game in¬†which negation (–ĺ–Ņ—Ä–ĺ–≤–Ķ—Ä–≥–į—é—Č–ł–Ķ) and¬†enforcement of¬†binding (–ĺ–Ī—Ź–∑—č–≤–į—é—Č–ł–Ķ) contracts are not¬†possible.
Nondiversifiable risk. Risk that cannot be eliminated by investing in many projects or by holding the stocks of many companies.
? Nonexclusive good. Good that is difficult or impossible to charge for its use, and this good can’t be excluded from consumption.
Nontrivial good. Good for which the marginal cost of its provision to an additional consumer is zero (e. g., a game license for the second friend)
Normative analysis. Analysis examining questions of what ought to be.


Oligopoly. Market in which only a few firms compete with one another, and entry by new firms is impeded (barrier)
Oligopsony. market with only a few buyers.
Opportunity cost. Cost associated with opportunities forgone the firm’s resources are not put to their best alternative use.
Opportunity cost of capital. Rate of return that one could earn by investing in an alternate project with similar risk.
**Optimal strategy. -Strategy that maximizes a player’s expected payoff.
Ordinal utility function. Utility function that generates a ranking of market baskets in order of most to least preferred.
Overconfidence. Overestimating an Individual’s prospects or abilities.
Over-optimism. An unrealistic belief that things will work out well.
Over-precision. An unrealistic belief that one can accurately predict outcomes.


Paasche index. Amount of money at current-year prices that an individual requires to purchase a current bundle of goods and services / the cost of purchasing the same bundle in a base year.
Pareto efficient allocation. Allocation of goods in which no one can be made better off unless someone else is made worse off.
Parallel conduct. Form of¬†implicit (—Ā–ļ—Ä—č—ā—č–Ļ) collusion (—Ā–≥–ĺ–≤–ĺ—Ä) in¬†which one firm consistently follows actions of¬†another.
Partial equilibrium analysis. Determination of equilibrium prices and quantities in a market independent of effects from other markets.
Payoff. (–≤—č–Ņ–Ľ–į—ā–į) value associated with a¬†possible outcome.
Payoff matrix. Table showing profit (or payoff) to each firm given its decision and the decision of its competitor.
Peak-load pricing. Practice of¬†charging higher prices during peak periods when capacity constraints (–ĺ–≥—Ä–į–Ĺ–ł—á–Ķ–Ĺ–ł—Ź) cause marginal costs to¬†be high (e.¬†g., in¬†winter people need ski, but¬†the¬†production is restricted).
Perfect complements. Two goods for which the Marginal Rate of Substitution (MRS is how much of one good you’re ready to give up for another) is zero or infinite; The indifference curves are shaped as right angles.
Perfect substitutes. Two goods for which the Marginal Rate of Substitution of one for the other is constant.  
Perfectly competitive market. Market with many many buyers and sellers, so that no single buyer or seller has a significant impact on price.
Perpetuity. Bond paying out a fixed amount of money each year forever.
Point of elasticity of demand. Price elasticity at a particular point on the demand curve.
Positive analysis. Analysis describing relationships of cause and effect
Positively correlated variables. Variables having a tendency to move in the same direction.
Predatory pricing. Practice of pricing to drive current competitors out of business and to discourage new entrants in a market so that a firm can enjoy higher future profits.
Present discounted value (PDV). The current value of an expected future cash flow.
Price discrimination. Practice of charging different prices to different consumers for similar goods.
Price elasticity of demand. Percentage change in quantity demanded of a good resulting from a 1-percent increase in price.
Price elasticity of supply. Percentage change in quantity supplied of a good resulting from a 1-percent increase in price.
Price leadership. Pattern of pricing in which one firm regularly announces price changes that other firms should match.
Price of risk. Extra risk that an investor must incur to enjoy a higher expected return.
? Price rigidity. characteristic of oligopolistic markets by which firms are reluctant (unwilling) to change prices even if costs of demands change.
Price signaling. form of¬†implicit collusion (—Ā–ļ—Ä—č—ā—č–Ļ —Ā–≥–ĺ–≤–ĺ—Ä) in¬†which a¬†firm announces a¬†price increase in¬†the¬†hope that other firms will follow suit.
Price support. Price set by government above free-market level and maintained by governmental purchases of excess supply.
Price taker. Firm that has no influence over market price and thus takes the price as given.
Price-consumption curve. Curve tracing the utility-maximizing combinations of two goods as the price of one changes.
Principal. (Director) Individual who employs one or more agents to achieve an objective.
Principal-agent problem. Problem arising when agents (e. g., firm’s managers) pursue their own goals rather than the goals of principals (e. g., the firm’s owners).
Prisoners’ dilemma. Game theory example in which two prisoners must separately decide whether to sell the other prisoner out or not**. if he does, he will not get a sentence, when another gets ten years; if they both don’t confess, then they get one year, and if both confess, then they will get 15 years (Time can differ).
Private-value auction. Auction in which each bidder knows his or her individual valuation of the object up for bid, with valuations differing from bidder to bidder.
Profitability. Likelihood that a given outcome will occur. 
Producer Price Index. Measure of the aggregate price level for intermediate products and wholesale goods.
Producer surplus. Sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production. 
? Product transformation curve. Curve showing the various combination of two different outputs (products) that can be produced with a given set of inputs.
Production function. Function showing the highest output that a firm can produce for every specified combination of inputs.
Production possibilities frontier. Curve showing the combinations of two goods that can be produced with fixed quantities of inputs.
Profit. Difference between revenue and total cost.
Property rights. Legal rules stating what people or firms may do with their property.
Public good. Nonexclusive and¬†non-rival (–Ĺ–Ķ–ļ–ĺ–Ĺ–ļ—É—Ä–Ķ–Ĺ—ā–ĺ—Ā–Ņ–ĺ—Ā–ĺ–Ī–Ĺ—č–Ļ) good: the¬†marginal cost of¬†provision to¬†an¬†additional consumer is zero, and¬†people cannot be excluded from consuming it.
Pure bundling. Selling products only as a package.
Pure strategy. Strategy in which a player makes a specific choice or takes a specific action.


Quantity forcing. Use of a sales quota or other incentives to make downstream firms sell as much as possible.


Rate-of-return regulation. Maximum price allowed by a regulatory agency is based on the (expected) rate of return that a firm will earn.
Reaction curve. Relationship between a firm’s profit-maximizing output and the amount that the firm thinks its competitor will produce.
Real price. Price of a good relative to an aggregate measure of prices; price adjusted for inflation.
Real return. Simple (or nominal) return on an asset**. the rate of inflation.
Reference point. The point from which an individual makes a consumption decision.
Rent-seeking. Spending money in socially unproductive efforts to acquire, maintain, or exercise monopoly.
Rental rate. Cost per year of renting one unit of capital.
Repeated game. Game in which actions are taken, and payoffs received over and over again.
Reservation price. Maximum price that a customer is willing to pay for a good.
Return. Total monetary flow of an asset as a fraction of its price.
Returns to scale. Rate at which output increases as inputs are increased proportionately. 
Rist averse (opposition). Condition of preferring a certain income to a risky income with the same expected value.
Risk loving. Condition of preferring a risky income to a certain income with the same expected value.
Risk neutral. Condition of being indifferent between a certain income and an uncertain income with the same expected value. 
Risk premium. Maximum amount of money that a risk-averse individual will pay to avoid taking a risk.
Riskless (risk-free) asset. Asset that provides a flow of money or services that is known with certainty.
Risky asset. Asset that provides an uncertain flow of money or services to its owner.
? R-squared (R^2). the percentage of the variation in the independent variable that is accounted for by all the explanatory variables.


Salience. (–∑–Ĺ–į—á–ł–ľ–ĺ—Ā—ā—Ć) The¬†perceived importance of¬†a¬†good or¬†service.
Sample. Set of observations for study, drawn from a larger universe.
Sealed-bid auction. Auction in¬†which all bids are made simultaneously in¬†sealed (–Ņ–Ķ—á–į—ā–Ĺ—č–Ļ) envelopes (–ļ–ĺ–Ĺ–≤–Ķ—Ä—ā), the¬†winning bidder being the¬†Individual who has submitted the¬†highest bid.
Second-degree price discrimination. Practice of charging different prices per unit for different quantities of the same good or service.
Second-price auction. Auction in which the sales price is equal to the second-highest bid. (Hmm, what if I say an infinity on the bet of 1$?)
Sequential game. Game in which players move in turn, responding to each other’s actions and reactions.
? Shirking (avoiding) model. Principle that workers still have an incentive to shirk (=avoid) if a firm pays them a market-clearing wage because fired workers can be hired somewhere else for the same wage.
Short-run. Period of time in which quantities of one or more production factors cannot be changed.
Short-run average cost curve (SAC). Curve relating average cost of production to output when level of capital is fixed.
Shortage. Situation in which the quantity demanded exceeds the quantity supplied.
? Slutsky equation. Formula for¬†decomposing the¬†effects of¬†a¬†price change into effects of¬†substitution (–∑–į–ľ–Ķ–Ĺ—č) and¬†income.
? Snob effect. Negative network externality in which a consumer wishes to own an exclusive or unique good.
Social rate of discount. Opportunity cost to society as a whole of receiving an economic benefit In the future rather than in the present.
Social welfare function. Measure describing the well-being of society as a whole in terms of the utilities of individual members.
Specific tax. Tax of a certain amount of money per unit sold.
Speculative demand. Demand-driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the goodwill increase. 
? Stackelberg model. Oligopoly model in which one firm sets its output before other firms do.
Standard deviation. Square root of¬†weighted average of¬†the¬†squares of¬†the¬†deviations (–ĺ—ā–ļ–Ľ–ĺ–Ĺ–Ķ–Ĺ–ł–Ļ) of¬†the¬†payoffs associated with each outcome from their expected values.
Standard error of the regression. estimate of the standard deviation of the regression error.
Stock of capital. Total amount of capital available for use in production.
? Stock externality. Accumulated result of action by a producer of the consumer which, though not accounted for in the market’s price, affects other producers or consumers.
Strategy. Rule or plan of action for playing a game
Subsidy. (negative tax) Payment reducing the buyer’s price below the seller’s price. 
Substitutes. two goods for which an increase in the price of one leads to an increase in the quantity of the other.
Substitution effect. Change in consumption of a good associated with a change in its price, with the level of utility held constant.
Sunk cost. Expenditure that has been made and cannot be recovered.
Supply curve. Relationship between the quantity of a good that producers are willing to sell and the price of a good.
Surplus. Situation in which the quantity supplied exceeds the quantity demanded.


Tariff. Tax on an imported good.
?Technical efficiency. Condition under which (different?) firms combine inputs to produce a given output as inexpensively as possible.
Technological change. Development of new technologies allowing factors of production to be used more effectively.
Theory of consumer behavior. Description of how consumers allocate incomes among different goods and services to maximize their well-being.
Theory of the firm. Explanation of how a firm makes cost-minimizing production decisions and how a firm makes cost-minimizing production decisions, and how its cost varies with its output.
Third-degree price discrimination. Practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group.
Tit-for-tat strategy. Repeated-game strategy in which a player responds in kind to an opponent’s previous play, cooperating with cooperative opponents and retaliating (make an attack in return) against uncooperative ones. 
Total cost (TC or C). Total economic cost of production, consisting of fixed and variable costs (TC = FC + VC).
Transfer prices. Internal prices at¬†which parts and¬†components from upstream divisions are ‚Äúsold‚ÄĚ to¬†downstream divisions within a¬†firm.
Tradeable emissions permit. System of marketable permits, allocated among firms, specifying the maximum level of emissions that can be generated.
Two-part tariff. Form of pricing in which consumers are charged both an entry and a usage fee.
Tying. Practice of requiring a customer to purchase one good in order to purchase another.


User cost of capital. The annual cost of owning and using a capital asset = economic depreciation + forgone interest.
User cost of production. The opportunity cost of producing and selling a unit today and so making it unavailable for production and sale in the future.
? Utility. (–ü–ĺ–Ľ–Ķ–∑–Ĺ–ĺ—Ā—ā—Ć/–Ņ—Ä–į–ļ—ā–ł—á–Ĺ–ĺ—Ā—ā—Ć) Numerical score representing the¬†satisfaction that a¬†consumer gets from a¬†given market basket.
Utility function. Formula that assigns a level of utility to the individual market basket.
Utility possibilities frontier. Curve showing all efficient allocations of resources measured in terms of the utility levels of two individuals.


? Value of complete information. Difference between the expected value of a choice when there is complete information and the expected value when information is incomplete.
Variability. Extent to which possible outcomes of an uncertain event differ.
Variable cost (VC). Cost that varies as output varies. 
Variable profit. Sum of profits on each incremental unit produced by a firm that means profit ignoring fixed costs.
Vertical Integration. Organisational form in which a firm contains several divisions, with some producing parts and components that others use to produce finished products.


Welfare economics. Normative (through norms and standards) evaluation of markets and economic policy.
Welfare effects. Gains and losses to consumers and producers.
Winner‚Äôs curse. Situation in¬†which the¬†winner of¬†a¬†common-value auction is worse off as¬†a¬†consequence of¬†overestimating the¬†value of¬†the¬†item and¬†thereby overbidding (—Ā–ł—ā—É–į—Ü–ł—Ź, –≤ –ļ–ĺ—ā–ĺ—Ä–ĺ–Ļ –Ņ–ĺ–Ī–Ķ–ī–ł—ā–Ķ–Ľ—Ć –į—É–ļ—Ü–ł–ĺ–Ĺ–į —Ā –ĺ–Ī—Č–Ķ–Ļ —Ā—ā–ĺ–ł–ľ–ĺ—Ā—ā—Ć—é –Ĺ–į—Ö–ĺ–ī–ł—ā—Ā—Ź –≤ —Ö—É–ī—ą–Ķ–ľ –Ņ–ĺ–Ľ–ĺ–∂–Ķ–Ĺ–ł–ł –≤ —Ä–Ķ–∑—É–Ľ—Ć—ā–į—ā–Ķ –∑–į–≤—č—ą–Ķ–Ĺ–ł—Ź —Ā—ā–ĺ–ł–ľ–ĺ—Ā—ā–ł –Ņ—Ä–Ķ–ī–ľ–Ķ—ā–į –ł, —Ā–Ľ–Ķ–ī–ĺ–≤–į—ā–Ķ–Ľ—Ć–Ĺ–ĺ, –Ņ–Ķ—Ä–Ķ–ļ—É–Ņ–ļ–ł).


Zero economic profit. A firm is earning a normal return on its investment, which means that it is doing as well as it could by investing its money elsewhere.