Above full-employment equilibrium An equilibrium in which real GDP exceeds potential GDP.
Absolute advantageA person has an absolute advantage in production if by using the same quantities of inputs that person can produce more than another person; a country has an absolute advantage if its output per unit of inputs of all goods is larger than that of another country.
Adverse selection The tendency for the people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less-informed party.
Aggregate demand The relationship between the real GDP demanded and the price level.
Aggregate hours The total number of hours worked by all the people employed, both full time and part time, during a year.
Aggregate planned expenditure The sum of planned consumption expenditure, planned investment, planned government expenditures, and planned exports minus planned imports.
Allocative efficiency The situation that occurs when no resources are wasted—when no one can be made better off without someone else being made worse off. Allocative efficiency is also called Pareto efficiency.
Anti-combine lawA law that regulates and prohibits certain kinds of market behaviour, such as monopoly and monopolistic practices.
Automatic fiscal policy A change in fiscal policy that is triggered by the state of the economy.
Autonomous expenditure The sum of those components of aggregate planned expenditure that are not influenced by real GDP.
Autonomous taxes Taxes that do not vary with real GDP.
Autonomous tax multiplier The amount by which a change in autonomous taxes is multiplied to determine the change in equilibrium expenditure that it generates.
Average cost pricing rule A rule that sets the price equal to average total cost.
Average fixed cost Total fixed cost per unit of output—total fixed cost divided by output.
Average product Average productivity of a factor of production—total product divided by the quantity of the factor employed.
Average revenue The revenue per unit of output sold—total revenue divided by the
quantity of the good sold. Average revenue also equals price.
Average total costTotal cost per unit of output.
Average variable cost Total variable cost per unit of output.
Balanced budget A government budget in which outlays and revenue are equal.
Balanced budget multiplier The amount by which a simultaneous and equal change in government expenditures and autonomous taxes is multiplied to determine the change in equilibrium expenditure.
Balance of payments accountsA country’s record of international trading, borrowing, and lending.
Balance of trade The value of exports minus the value of imports.
Bank rate The interest rate that the Bank of Canada charges the chartered banks on the reserves that it lends them.
Barriers to entry Legal or natural impediments that protect a firm from competition from potential new entrants.
BarterThe direct exchange of one good or service for another good or service.
Below full-employment equilibrium An equilibrium in which real GDP is less than potential GDP.
Big trade-offThe trade-off between inequality and efficiency that is created by the redistribution of income.
Bilateral monopoly A situation in which there is a single buyer (a monopoly) and a single seller (a monopsony).
Black market An illegal trading arrangement in which buyers and sellers do business at a price that is higher than the legally imposed price ceiling.
Bond A legally enforceable debt obligation to pay specified sums of money at specified future dates.
Bond market The market in which the bonds issued by firms and governments are traded.
Budget deficit A government’s budget balance that is negative—outlays exceed revenues.
Budget line The limits to a household's consumption choices.
Budget surplus A government’s budget balance that is positive—revenues exceed outlays.
BureaucratA hired official who works in a government department at either the
federal, provincial, or local level.
Business cycle The periodic but irregular up-and-down movement in economic activity, measured by fluctuations in real GDP around potential GDP.
Canadian interest rate differential The Canadian interest rate minus the foreign interest rate.
CapitalThe equipment, buildings, tools, and other manufactured goods that are used in the production of goods and services.
Capital account A record of foreign investment in a country minus the country’s foreign investment abroad.
Capital accumulationThe growth of capital resources.
Capital gain The income received by selling a stock, bond, or asset for a higher price
than the price paid for it.
Capital stock The stock of plant, equipment, buildings (including residential housing), and inventories.
Capture theory A theory of regulation that states that regulations are supplied to satisfy the demand of producers to maximize producer surplus—to maximize economic profit.
Cartel A group of firms that has entered into a collusive agreement to restrict output so as to increase prices and profits.
Central bank A public authority that supervises financial institutions and markets and that conducts monetary policy.
Ceteris paribus Other things being equal—all other relevant things remaining the same.
Change in demand A change in buyers’ plans that occurs when some influence on these plans other than the price of the good changes. A change in demand is illustrated by a shift of the demand curve.
Change in supply A change in sellers’ plans that occurs when some influence on these plans other than the price of the good changes. A change in supply is illustrated by a shift of the supply curve.
Change in the quantity demanded A change in buyers’ plans that occurs when the price of a good changes but all other influences on buyers’ plans remain the same. A change in the quantity demanded is illustrated by a movement along the demand curve.
Change in the quantity supplied A change in sellers’ plans that occurs when the price of a good changes but all other influences on sellers’ plans remain the same. A change in the quantity demanded is illustrated by a movement along the supply curve.
Chartered bank A private firm, chartered under the bank Act of 1922 to receive deposits and make loans.
Choke price The price at which the quantity demanded of a natural resource is zero.
Classical growth theory A theory of economic growth based on the view that population growth is determined by the level of income per person.
Coase theoremThe proposition that if property rights exist and transactions costs are
low, private transactions are efficient—equivalently, there are no externalities.
Collective bargaining A process of negotiation between representatives of employers and unions.
Collusive agreement An agreement between two (or more) producers to restrict output so as to increase prices and profits.
Comparative advantage A person or country has a comparative advantage in an activity if that person or country can perform that activity at a lower opportunity cost
than anyone else or any other country.
Complement A good that is used in conjunction with another good.
Constant returns to scale Technological conditions under which a given percentage increase in all the firm's inputs results in the firm’s output increasing by the same percentage.
Consumer efficiency A situation which occurs when consumers cannot make themselves better of by reallocating their budget.
Consumer equilibrium A situation in which a consumer has allocated his or her income in the way that, given prices of goods and services, maximizes his or her total utility.
Consumer Price Index An index that measures the average level of prices of the goods and services that a typical urban Canadian family consumes.
Consumption demand The relationship between consumption expenditure and the real interest rate, other things remaining the same.
Consumption expenditure The amount spent on consumption goods and services.
Consumption function The relationship between consumption expenditure and disposable income, other things remaining the same.
Consumer surplus The value that the consumer places on the good minus the price paid for it.
Contestible market A market structure in which there is one firm (or a small number of firms) and because of freedom of entry and exit, the firm (or firms) faces competition from potential entrants and so it operates as if it were a perfectly competitive firm.
Contractionary fiscal policy A decrease in government expenditures or transfer payments or an increase in taxes.
Cooperative equilibrium The outcome of a collusive agreement between players when each player responds rationally to a credible threat from another player to inflict heavy damage if an agreement is broken.
CopyrightA government-sanctioned exclusive right granted to the inventor of a good,
service, or productive process to produce, use, and sell the invention for a given number of years.
Cost-push inflation Inflation that results from an initial increase in costs.
Countervailing duty A tariff that is imposed to enable domestic producers to compete with subsidized foreign producers.
Craft union A group of workers who have a similar range of skills but work for many different firms in many different industries and regions.
Credit union A cooperative organization that operates under the Co-operative Credit Association Act of 1922 and that receives deposits from and makes loans to its members.
Creditor nation A country that has invested more in the rest of the world than other countries have invested in it.
Cross elasticity of demand The responsiveness of the demand for a good to the price of a substitute or complement, other things remaining the same. Cross elasticity of demand is calculated as the percentage change in the quantity demanded of a good divided by the percentage change in the price of the substitute or complement.
Cross-section graph A graph that shows the values of an economic variable for different groups in a population at a point in time.
Crowding in The tendency for an expansionary fiscal policy to increase investment.
Crowding out The tendency for an expansionary fiscal policy to increase interest rates and decrease in investment.
Crown CorporationA firm that is publically owned and operated under government supervision.
Currency The notes and coins that we use in Canada today.
Currency appreciation The rise in the value of one currency in terms of another currency.
Currency depreciation The fall in the value of one currency in terms of another currency.
Currency drain An increase in currency held by household and firms.
Current account A record of receipts from exports of goods and services sold abroad, the payments for imports of goods and services from abroad, net interest paid abroad, and net transfers (such as foreign aid payments).
Cyclical deficit The budget deficit that is present only because the economy is not at full employment.
Cyclical unemployment The fluctuations in unemployment that coincide with the business cycle.
Deadweight loss A measure of allocative inefficiency, which is equal to the loss of total surplus (consumer surplus plus producer surplus) that results from producing less that the efficient level of output.
Debtor nation A country that during its entire history has borrowed more from the rest of the world than it has lent to it. Its stock of outstanding debt to the rest of the world exceeds the stock of its own claims on the rest of the world.
Decreasing returns to scale Technological conditions under which a given percentage increase in all the firm's inputs results in the firm’s output increasing by a smaller percentage.
Demand The relationship between the quantity demanded of a good and its price, with all other influences on buyers’ plans remaining the same. Demand is described by a demand schedule and illustrated by a demand curve.
Demand curve A curve that shows the relationship between the quantity demanded of a good and its price, all other influences on buyers’ plans remaining the same.
Demand for labour The number of labour hours hired by all firms in the economy.
Demand-pull inflation Inflation that results from an initial increase in aggregate demand.
Deposit money Deposits at banks and other financial institutions such as trust companies.
Deposit multiplier The amount by which an increase in bank reserves is multiplied to calculate the increase in bank deposits.
Depository institution A firm that takes deposits from households and firms and that makes loans to other households and firms.
Depreciation The amount of existing capital that wears out in a given period as a result of wear and tear and the passage of time.
Derived demand Demand for a item not for its own sake but for use in the production of goods and services.
Desired reserve ratio The ratio of reserves to deposits that banks wish to hold.
Diminishing marginal product of labour The marginal product of labour declines as the quantity of labour increases
Diminishing marginal rate of substitution The general tendency for the marginal rate of substitution of one good for another to diminish as the consumer moves along an indifference curve, increasing the consumption of good measure on the x-axis and decreasing the consumption of the good measured on the y-axis.
Diminishing marginal returns The tendency for the marginal product of a variable factor eventually to diminish as additional units of the variable factor are employed.
Diminishing marginal utility The decline in marginal utility that occurs as more and more of a good is consumed.
Direct relationship A relationship between two variables that move in the same direction.
Discounting The conversion of a future amount of money to its present value.
Discouraged workers People who during a recession temporarily leave the labour force and who during an expansion re-enter the labour force and become more active job seekers.
Discretionary fiscal policy A policy action that is initiated by an act of Parliament.
Discretionary policy A policy that responds to the state of the economy in a possibly unique way that uses all the information available, including perceived lessons from past "mistakes."
Diseconomies of scale Technological conditions under which the long-run average cost increases as output increases.
Disposable income Income earned by supplying the services of factors of production (wages, interest, rent, and profit) plus transfer payments from the government minus taxes.
Dominant strategy equilibrium The outcome of a game in which there is a single best strategy (a dominant strategy) for each player, regardless of the strategy of the other players.
Duopoly A market structure in which two producers of a good or service compete with each other.
Dumping The sale of a export by a foreign firm for a price that is below its cost of production.
Dynamic comparative advantage Comparative advantage that a person or country possesses as a result of having specialized in a particular activity and then, as a result of learning-by-doing, having become the producer of that activity with the lowest opportunity cost.
Economic depreciation The decrease in the market price of a piece of capital during a given period.
Economic efficiency A situation that occurs when the cost of producing a given output is as low as possible.
Economic growth The expansion of production possibilities that results from capital accumulation and technological change.
Economic information Data on prices, quantities, and qualities of goods and services and factors of production.
Economic modelA description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand.
Economic profit A firm’s total revenue minus its opportunity costs.
Economic rent The income received by the owner of a factor in excess of the amount required to induce that owner to offer the factor for use.
Economic stability The absence of wide fluctuations in the economic growth rate, the level of employment, and average prices.
Economic theoryA generalization that that summarizes what we think we understand about the economic choices that people make and the performance of industries and entire economies.
Economics The study of how people use their limited resources to try to satisfy unlimited wants.
Economies of scale Technological conditions under which long-run average cost decreases as output increases.
Economies of scope A situation in which average total cost decreases as a result of increasing the number of different goods produced.
Efficiency wage The wage rate that maximizes profit.
Efficient market A market in which the actual price embodies all currently available relevant information.
Elastic demand Demand with a price elasticity greater than 1; other things remaining the same, the percentage change in the quantity demanded of the good exceeds the percentage change in its price.
Elasticity of supply The responsiveness of the quantity supplied of a good to a change in its price, other things remaining the same. Elasticity of supply is calculated as the percentage change in the quantity supplied of a good divided by the percentage change in its price.
Employment-to-population ratio The percentage of people of working age who have jobs.
Entrants People who enter the labour force.
Entrepreneurial abilityA special type of human resource that organizes the other three factors of production—labour, land, and capital—and makes business decisions, innovates, and bears business risk.
Equation of exchange An equation that states that the quantity of money multiplied by the velocity of circulation equals GDP.
Equilibrium expenditure The level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP.
Equilibrium priceThe price at which the quantity demanded equals the quantity supplied.
Equilibrium quantityThe quantity bought and sold at the equilibrium price.
EquityIn economics, equity has two meanings: economic justice or fairness and the
owner's stake in a business.
Excess reserves A bank’s actual reserves minus its desired reserves.
Exchange efficiency A situation in which a good or service is exchanged at a price that equals both the marginal social benefit and the marginal social cost of the good
or service.
Exchange rate The price at which one currency exchanges for another.
Excise tax A tax on the sale of a good or service. The tax is paid when the good or service is bought.
Excludable goodA good is excludable if its benefits can be restricted to the person who has paid for the good.
Exhaustible natural resources Natural resources that can be used only once and that cannot be replaced once used.
Expansion A business cycle phase in which real GDP increases.
Expansionary fiscal policy An increase in government expenditures or transfer payments or a decrease in taxes.
Expected utility The average utility arising from all possible outcomes.
Exports The goods and services that we sell to people in other countries.
External benefits Benefits that accrue to members of society other than the buyer of a good.
External costs Costs that are borne by members of society other than the producer of the good.
External diseconomies Factors outside the control of a firm that raise the firm’s costs as the industry produces a larger output.
External economies Factors beyond the control of a firm that lower the firm’s costs as the industry produces a larger output.
Externality A cost or a benefit arising from an economic transaction that affects people other than those who decide the scale of the activity.
Factors of productionThe economy's productive resources—land, labour, capital, and entrepreneurial ability.
Farm marketing boardA regulatory agency that intervenes in agricultural markets to stabilize the prices of many agricultural products.
Federal budget A annual statement of the revenues and outlays of the government of Canada together with the laws and regulations that approve or support those revenues and outlays.
Feedback-rule policy A rule that specifies how policy actions respond to changes in the state of the economy.
Financial innovation The development of new financial products—new ways of borrowing and lending.
Financial intermediary An institution that receives deposits and makes loans.
Firm An institution that hires factors of production and that organizes those factors to produce and sell goods and services.
Fiscal policy The government’s attempt to influence the economy by setting and changing taxes and government spending.
Fixed cost A cost that is independent of the output level.
Fixed-rule policy A rule that specifies an action to be pursued independently of the state of the economy.
Four-firm concentration ratio A measure of market power that is calculated as the sales of the four largest firms in an industry as a percentage of total industry sales.
Flow A quantity per unit of time.
Foreign exchange market The market in which the currency of one country is exchanged for the currency of another.
Foreign exchange rate The price at which one currency exchanges for another.
Free rider A person who consumes a good without paying for it.
Frictional unemployment Unemployment arising from normal labour turnover—new entrants are constantly coming into the labour market, and firms are constantly laying off workers and hiring new workers.
Full employment A situation in which the unemployment rate equals the natural rate of unemployment.
Full employment equilibrium An equilibrium in which real GDP equals potential GDP.
Game theory A method of analysing strategic behaviour.
GDP deflator A price index that measures the average level of the prices of all goods and services that are included in GDP.
General Agreement on Tariffs and Trade An international agreement designed to limit government intervention to restrict international trade.
Government debt The total amount of borrowing that the government has undertaken.
Government deposit shifting The transfer of government funds by the Bank of Canada from the government’s account at the Bank of Canada to its accounts at the chartered banks or from the government’s accounts at the chartered banks to its account at the Bank of Canada.
Government expenditures Goods and services bought by the government.
Government expenditures multiplier The amount by which a change in government expenditures on goods and services is multiplied to determine the change in equilibrium expenditure that it generates.
Government sector surplus or deficit An amount equal to net taxes minus government expenditures on goods and services.
Great Depression A decade (1929– 1939) of high unemployment and stagnant production throughout the world economy.
Gross domestic product (GDP) The value of aggregate production in the economy in a year.
Gross investment The amount spent on adding to the capital stock and on replacing depreciated capital.
Growth accounting A method of calculating how much real GDP growth has resulted from growth of labour and capital and how much is attributable to technological change.
Herfindahl-Hirschman Index A measure of market power, that is calculated as the sum of the square of the market share (as a percentage) of each of the largest 50 firms (or all firms if there are fewer than 50 firms) in the market.
Hotelling Principle The proposition that the market for a stock of a natural resource is in equilibrium when the price of the resource is expected to rise at a rate equal to the interest rate on similarly risky assets.
Human capitalThe skill and knowledge of people, which arises from their education and on-the-job training.
Implicit rental rateThe rent that a firm pays to itself for the use of the assets that it owns.
Import function The relationship between imports and real GDP, other things remaining the same.
Imports The goods and services that we buy from people in other countries.
Incentive An inducement to take a particular action.
Income effect The change in consumption that results from a change in the consumer’s income, other things remaining the same.
Income elasticity of demand The responsiveness of demand to a change in income, other things remaining the same. Income elasticity of demand is calculated as the percentage change in the quantity demanded divided by the percentage change in income.
Increasing marginal returns The tendency for the marginal product of the variable factor to increase as additional units of the variable factor are employed.
Increasing returns to scale Technological conditions under which the percentage increase in a firm's output exceeds the percentage increase in its inputs.
Indifference curve A curve that shows combinations of goods among which the consumer is indifferent.
Induced expenditure The sum of the components of aggregate expenditure that varies with real GDP.
Induced taxes Taxes that vary as real GDP varies.
Industrial union A group of workers who have a variety of skills and job types but who work for the same firm or industry.
Inelastic demand A demand with a price elasticity between 0 and 1; other things remaining the same, the percentage change in the quantity demanded of a good is less than the percentage change in its price.
Infant-industry argument The argument that protection is necessary to enable an infant industry to grow into a mature industry that can compete in world markets.
Inferior goodA good for which demand decreases when income increases.
Inflation A process in which the price level is rising and money is losing value.
Inflationary gap The amount by which real GDP exceed potential GDP.
Information cost The cost of acquiring information on prices, quantities, and qualities of goods and services and factors of production—the opportunity cost of economic information.
Injection A flow into the circular flow of income and expenditure. It is an expenditure that does not originate with households.
Insider-outsider theory A theory of job rationing that says that to be productive, new workers—outsiders—must receive on-the-job training from existing workers—insiders.
Intellectual property rights Property rights for discoveries that are owned by creators of knowledge.
Interest rate The amount received by a lender and paid by a borrower expressed as a percentage of the amount of the loan.
Interest rate parity A situation in which interest rates on assets denominated in different currencies are equal when converted to the same currency.
Intermediate goods and services Goods and services that firms buy from each other and use as inputs in the goods or services that they eventually produce and sell to final users.
International crowding out The tendency for an expansionary fiscal policy to decrease net exports.
Inverse relationshipA relationship between two variables that move in opposite directions.
Investment The purchase of new plant, equipment, and buildings and additions to inventories.
Investment demand The relationship between the level of investment and real interest rate, all other influences on investment remaining the same.
Involuntary part-time rate The percentage of the people in the labour force who have part-time jobs and want full-time jobs.
Job leavers People who voluntarily quit their jobs.
Job losers People who are laid off, either permanently or temporarily, from their jobs.
Job rationing The practice of paying a wage that creates an excess supply of labour and a shortage of jobs.
Job search The activity of people looking for acceptable vacant jobs.
Keynesian A macroeconomist whose view about the functioning of the economy is based on the theories of John Maynard Keynes.
Keynesian activist An economist who believes that fluctuations in aggregate demand combined with sticky wages (and/or sticky prices) are the main source of economic fluctuations.
Keynesian theory of the business cycle A theory that regards volatile expectations as the main source of economic fluctuations.
LabourThe time and effort that people allocate to producing goods and services.
Labour demand curve A curve that shows the quantity of labour that firms plan to hire at each possible real wage rate.
Labour force The sum of the people who are employed and the people who are unemployed.
Labour force participation rate The percentage of the working-age population who are members of the labour force.
Labour productivity Total output per person employed.
Labour supply curve A curve that shows the quantity of labour that households plan to supply at each possible real wage rate.
Labour unionAn organized group of workers whose purpose is to increase their wages and to influence their other job conditions.
Land All the natural resources used to produce goods and services.
Law of diminishing returns As a firm increases the quantity of a variable factor, given the quantities of other factors (fixed factors), the marginal product of the variable factor eventually diminishes.
Leakage A flow from the circular flow of income and expenditure. It is income that is not spent on domestically produced goods and services.
Learning-by-doingPeople can become more productive in an activity (learn) just by repeatedly producing a particular good or service (doing).
Legal monopoly A market structure in which competition and entry is restricted by the granting of a public franchise, licence, patent, or copyright or the firm has acquired ownership of a significant portion of a key resource.
Limit pricingThe practice of charging a price below the monopoly profit-maximizing price and producing a quantity greater than that at which marginal revenue equals marginal cost so as to deter entry.
Linear relationship The relationship between two variables that is illustrated by a straight line.
Liquidity The property of being instantly convertible into a means of payment with little loss in value.
Loan market A market in which households and firms make and receive loans.
Long runA period of time in which the quantities of all inputs can be varied.
Long-run aggregate supply The relationship between the quantity of real GDP supplied and the price level when real GDP equals potential GDP.
Long-run aggregate supply curve A curve that shows the relationship between the quantity of real GDP supplied and the price level when real GDP equals potential GDP.
Long-run cost The cost of production when a firm uses the economically efficient plant size.
Long-run industry supply curve A curve that shows how the quantity supplied by an industry varies as the market price varies, after all possible changes in plant size and the
number of firms in the industry have been made.
Long-run Phillips curve A curve that shows the relationship between inflation and unemployment when the actual inflation rate equals the expected inflation rate.
Lorenz curve A curve that graphs the cumulative percentage of income or wealth against the cumulative percentage of families or population.
Low-income cutoff The income level, determined separately for different types of families (for example, single persons, couples, one parent), that is selected such that families with incomes below that limit normally spend 54.7 percent or more of their income on food, shelter, and clothing.
M1A measure of money that consists of currency outside the banks, and privately held demand deposits at chartered banks.
M2+ A measure of money that consists of M1 plus personal savings deposits and nonpersonal notice deposits at chartered banks plus deposits at mortgage companies, credit unions, caisses populaires, and other financial institutions.
MacroeconomicsThe study of the national economy and the global economy, the way that economic aggregates fluctuate and grow, and the effects of government actions on them.
Marginal benefitThe extra benefit received from a small increase in the consumption of a good or service. Marginal benefit is calculated as the increase in total benefit divided
by the increase in consumption.
Marginal cost The change in total cost that results from a unit increase in output. Marginal cost is calculated as the increase in total cost divided by the increase in output.
Marginal cost pricing rule The rule that sets price equal to marginal cost.
Marginal product The extra output produced as a result of a small increase in the variable factor. Marginal product is calculated as the increase in total product divided by the increase in the variable factor employed, when the quantities of all other factors are constant.
Marginal product of labour The additional real GDP produced by one additional hour of labour, all other influences on production remaining the same.
Marginal propensity to consume The fraction of the last dollar of disposable income that is spent on consumption goods and services.
Marginal propensity to import The fraction of the last dollar of real GDP spent on imports.
Marginal propensity to save The fraction of the last dollar of disposable income that is saved.
Marginal rate of substitution The rate at which a person will give up one good in order to get more of another good and at the same time remain indifferent.
Marginal revenue The extra total revenue received from selling one additional unit of the good or service. Marginal revenue is calculated as the change in total revenue divided by the change in quantity sold.
Marginal revenue product The extra total revenue received from employing one more unit of a factor of production while the quantities of all other factors remain the same. Marginal revenue product is calculated as the increase in total revenue divided by the increase in the quantity of the factor.
Marginal social benefit The marginal benefit received by the consumer of a good (marginal private benefit) plus the marginal benefit received by other members of society (external benefit).
Marginal social cost The marginal cost incurred by a producer of a good (marginal private cost) plus the marginal cost imposed on other members of society (external cost).
Marginal tax rate The proportion of each extra dollar of real GDP that flows to the government as net taxes.
Marginal utility The change in total utility resulting from a one-unit increase in the quantity of a good consumed.
Marginal utility per dollar spent The marginal utility obtained from the last unit of a good consumed divided by the price of the good.
Market Any arrangement that enables buyers and sellers to get information and to
do business with each other.
Market activity People undertake market activity when they buy goods and services in goods markets or sell the services of the factors of production that they own in factor markets.
Market demand The relationship between the total quantity of a good demanded and its price, all other influences on buying plans remaining the same.
Market failure The inability of an unregulated market to achieve, in all circumstances, allocative efficiency.
Market socialismAn economic system that combines state ownership of capital and land with incentives based on a mixture of market prices and laws and regulations.
Means of payment A method of settling a debt.
Median voter theorem The proposition that political parties will pursue policies that appeal most to the median voter.
Merger The combining of the assets of two firms to form a single, new firm.
Microeconomics The study of the decisions of people and businesses, the interactions of those decisions in markets, and the effects of government regulation and taxes on the prices and quantities of goods and services.
Minimum wage law A regulation that makes hiring labour below a specified wage illegal.
Monetarist An macroeconomist who believes that fluctuations in the money stock are the main source of economic fluctuations.
Monetarist theory of the business cycle A theory that regards fluctuations in the money stock as the main source of economic fluctuations.
Monetary base The sum of Bank of Canada notes outside the Bank, chartered bank deposits at the Bank of Canada and coins held by households, firms, and banks.
Monetary policy The Bank of Canada’s attempt to achieve macroeconomic objectives by adjusting the quantity of money in the economy and interest rates.
Monetary policy indicators The current features of the economy that the Bank of Canada looks at to determine whether it needs to apply the break or accelerator to the economy to influence its future real GDP, employment, and inflation.
Money Any commodity or token that is generally acceptable as a means of payment.
Money multiplier The amount by which a change in the monetary base is multiplied to determine the resulting change in the quantity of money.
Money wage rate The wage rate expressed in dollars per hour.
Monopolistic competition A market type in which a large number of firms compete with each other by making similar but slightly different products.
Monopoly An industry that produces a good or service for which no close substitute exits, and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms.
Monopsony A market structure in which there is just a single buyer.
Moral hazard A situation in which one of the parties to an agreement has an incentive, after the agreement is made, to act in a manner that benefits himself or herself at the expense of the other party.
Multiplier The amount by which a change in autonomous expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP.
Nash equilibrium The outcome of a game in which player A takes the best possible action given the action of player B and player B takes the best possible action given the
action of player A.
National saving Private saving plus government saving.
Natural monopoly A monopoly that occurs when one firm can supply the entire market at a lower price than two or more firms can.
Natural rate of unemployment The unemployment rate when there is no cyclical unemployment or equivalently when all the unemployment is frictional, structural, and seasonal.
Natural resources The nonproduced factors of production, which can be exhaustible or nonexhaustible.
Negative income tax A redistribution scheme that gives every family a guaranteed annual income and that decreases the family's benefit at a specified benefit loss rate as its market income increases.
Negative relationshipA relationship between two variables that move in opposite directions.
Neoclassical growth theory A theory of economic growth that explains how saving, investment, and economic growth respond to population growth and technological change.
Net borrower A country that borrows more from the rest of the world than it lends to it.
Net domestic income at factor cost The sum of the income of all the factors of production.
Net exporter A country whose value of exports exceeds its value of imports—its balance of trade is positive.
Net exports The value of exports to the rest of the world minus the value of imports from the rest of the world.
Net importer A country whose value of imports exceeds its value of exports—its balance trade is negative.
Net investment The change in the capital stock in a given period of time. Net investment is calculated as gross investment minus depreciation.
Net lender A country that lends more to the rest of the world than it borrows from it.
Net present valueThe present value of the future flow of marginal revenue product generated by capital minus the cost of the capital.
Net lender A country that lends more to the rest of the world than it borrows from it.
Net taxes Taxes paid to governments minus transfer payments received from governments.
New classical theory of the business cycle A rational expectations theory of the business cycle that regards unanticipated fluctuations in aggregate demand as the main source of economic fluctuations.
New growth theory A theory of economic growth based on the idea that technological change results from the choices that people make in the pursuit of ever greater profit.
New Keynesian theory of the business cycle A rational expectations theory of the business cycle that regards both anticipated and unanticipated fluctuations in aggregate demand as sources of economic fluctuations.
Nominal GDP GDP valued in the current year’s prices.
Nonexcludable goodA good that it is impossible, or extremely costly, to prevent someone from benefiting from.
Nonexhaustible natural resourcesNatural resources that can be used repeatedly without depleting what is available for future use.
Nonmarket activity Leisure and nonmarket production activities, including housework, education and training, shopping, cooking, and other activities in the home.
Nonrival goodA good that has the characteristic that one person’s consumption of it does not decrease the quantity available for another person to consume.
Nontariff barriers Any action other than a tariff that restricts international trade.
Normal good A good for which demand increases as income increases.
Normal profit The return that a firm’s owner could obtain in the best alternative business.
Official international reserves The government’s holdings of foreign currency.
Official settlement The change in a country’s official international reserves
Official settlements account An account that shows the net increase or decrease in a country’s official international reserves.
Oligopoly A market type in which a small number of producers compete with each other.
Open market operation The purchase or sale of government of Canada securities by the Bank of Canada to the public.
Opportunity cost The opportunity cost of an action is the best forgone alternative.
Overnight loans rate The interest rate on large-scale loans that chartered banks make to each other and to dealers in financial markets.
Patent A government-sanctioned exclusive right granted to the inventor of a good,
service, or productive process to produce, use, and sell the invention for a given number of years.
Payoff matrix A table that shows the payoffs for every possible action by each player for every possible action by each other player.
Perfect competition A market structure in which there are many firms; each firm sells an identical product; there are many buyers; there are no restrictions on entry into the industry; firms in the industry have no advantage over potential new entrants; and all firms and buyers are completely informed about the price of each firm’s product.
Perfectly elastic demand Demand with an infinite price elasticity; the quantity demanded is infinitely responsive to a change in the price.
Perfectly inelastic demand Demand with a price elasticity of zero; the quantity demanded remains constant when the price changes.
Phillips curve A curve that shows the relationship between inflation and unemployment.
Political equilibrium A situation in which the choices of voters, politicians, and bureaucrats are all compatible and in which no one group can improve its position by making a different choice.
Policy conflict A situation that arises when the government and the Bank of Canada pursue different goals and the actions of one make it harder to achieve the goals of the other.
Policy coordination A situation that arises when the government and the Bank of Canada work together to achieve a common set of goals.
Positive relationship A relationship between two variables that move in the same direction.
Potential GDP The GDO produced when all the economy’s labour, capital, land, and entrepreneurial ability are fully employed.
Poverty A state in which a family’s income is too low to be able to buy the quantities of food, shelter, and clothing that are deemed necessary.
Present value The amount of money that, if invested today, will grow to be as large as a given future amount when the interest that it will earn is taken into account.
Price ceiling A regulation that makes it illegal to charge a price higher than a specified level.
Price discrimination The practice of charging some customers a lower price than others for an identical good or of charging an individual customer a lower price on a large purchase than on a small one, even though the cost of servicing all customers is the same.
Price effect The change in consumption that results from a change in the price of a good or service, other things remaining the same.
Price elasticity of demand The responsiveness of the quantity demanded of a good to a change in its price. Price elasticity of demand is measured by the percentage change in the quantity demanded of a good divided by the percentage change in its price.
Price level The average level of prices.
Price taker A firm that cannot influence the price of the good or service it produces.
Principal-agent problem The problem of devising compensation rules that induce an agent to act in the best interest of a principal.
Principle of minimum differentiation As competitors attempt to appeal to the maximum number of clients or voters, they tend to make themselves identical.
Principle of substitution When the opportunity cost of an activity increases, people substitute other activities that have lower opportunity costs.
Private information Information that is available to one person but is too costly for anyone else to obtain.
Private sector surplus or deficit Saving minus investment.
PrivatizationThe process of selling publically owned enterprises to private individuals and firms.
Producer efficiency A situation in which it is not possible to produce more of one good without producing less of some other good.
Producer surplus The price a producer gets for a good or service minus the opportunity cost of producing it.
Product differentiation Making a product slightly different from that of a competing firm.
Production efficiency Production is efficient when it is not possible to produce more of one good without producing less of some other good. Production efficiency occurs
only at points on the production possibility frontier.
Production function A relationship that shows how the maximum output attainable varies as quantities of all inputs vary. For the economy as a whole, it is the relationship between real GDP and the quantity of labour employed, all other influences on production remaining the same.
Production possibility frontier The boundary between those combinations of goods and services that can be produced and those that cannot.
Productivity Real GDP per hour of work.
Productivity function A relationship that shows how real GDP per hour of labour changes as the amount of capital per hour of labour changes with no change in technology.
Progressive income tax A tax on income at a marginal rate that increases with the level of income.
Property rightsSocial arrangements that govern the ownership, use, and disposal of factors of production and goods and services.
Proportional income tax A tax on income that remains at a constant rate, regardless of the level of income.
Protectionism The restriction of international trade.
Provincial budgetAn annual statement of the revenues and outlays of a provincial government together with the laws and regulations that approve or support those revenues and outlays.
Public good A good or service that can be consumed simultaneously by everyone and from which no one can be excluded.
Public interest theory A theory of regulation that states that regulations are supplied to satisfy the demand of consumers and producers to maximize total surplus—that is, to attain allocative efficiency.
Purchasing power parity A situation in which different currencies will buy the same amount of goods and services.
Quantity demanded The amount of a good or service that consumers plan to buy in a given period of time at a particular price.
Quantity of labour demanded The number of hours of labour hired by all firms in the economy.
Quantity of labour supplied The number of hours of labour services that households supply to firms.
Quantity suppliedThe amount of a good or service that producers plan to sell in a given period of time at a particular price.
Quantity theory of money The proposition that in the long run, an increase in the quantity of money brings an equal percentage increase in the price level.
Quota A restriction on the quantity of a good that a farm can produce or on the quantity of a good that can be imported.
Rand formula A rule (set out Mr. Justice Ivan Rand in 1945) that makes it compulsory for all workers to contribute to the union, whether or not they belong to it.
Rank-tournament compensation scheme A scheme in which the payment to a worker depends on the workers’ rank in a tournament or game.
Rate of return regulation A regulation that determines a regulated price by setting the price at a level that enables the regulated firm to earn a specified target percent return on its capital.
Rate of time preference The target real interest rate that savers want to achieve.
Rational expectation A most accurate forecast possible, one that is based on all available relevant information.
Rational ignorance The decision not to acquire information because the cost of acquiring the information is greater than the benefit derived from having it.
Real exchange rate An index number that gives the opportunity cost of foreign-produced goods and services in terms of Canadian-made goods and services.
Real Gross Domestic Product (real GDP)The value of aggregate production measured in the prices of a single year.
Real GDPGDP values in the prices of the base year.
Real income The quantity of a good that a consumer’s income will buy. Real income is the consumer’s income expressed in units of goods and is calculated as income divided by the price of the good.
Real interest rateThe interest rate is the interest rate on a loan minus the expected inflation rate.
Real wage rateThe quantity of goods and services that an hour’s work will buy. It is calculated as the wage rate per hour divided by the price level.
RecessionA period in which real GDP decreases for at least two successive quarters.
Recessionary gapThe amount by which real GDP falls short of potential GDP.
Re-entrantsPeople who re-enter the labour force.
Regressive income tax A tax on income at a marginal rate that falls with the level of income.
Relative priceThe ratio of the price of one good or service to the price of another good or service. A relative price is an opportunity cost.
Rent ceiling A regulation making it illegal to charge a rent higher than a specified level.
Rent seeking The activity of attempting to create a monopoly.
Reservation price The highest price that the buyer is willing to pay for the good.
Reservation wage The lowest wage rate for which a person will supply labour to the market. The person will not supply labour at a lower wage rate.
Reserve ratioThe fraction of a bank’s total deposits that are held in reserves.
ReservesCash in a bank’s vault plus the bank’s deposits at the Bank of Canada.
Returns to scale The increase in output that results when a firm increases all its inputs by the same percentage.
Risk A situation in which more than one outcome might occur and the probability of each possible outcome can be estimated.
Rival goodA good that has the characteristic that one person’s consumption of it decreases the consumption available to someone else.
SavingThe amount of income left over after meeting consumption expenditures.
Saving functionThe relationship between saving and disposable income, other things remaining the same.
Saving supplyThe relationship between saving and the real interest rate, other things remaining the same.
Scarcity The universal state in which wants exceed resources.
Scatter diagramA diagram that plots the value of one economic variable against the value of another.
Search activity The time spent in searching for someone with whom to do business.
Seasonal unemploymentUnemployment that arises because the number of jobs available has decreased because of the season.
Short run The short run in microeconomics has two meanings. For the firm, it is the period of time in which the quantity of at least one input (usually capital) is fixed and the quantities of the other inputs can be varied. For the industry, the short run is the period of time in which the each firm has a given plant size and the number of firms in the industry is fixed.
Short-run aggregate supplyThe relationship between the quantity of real GDP supplied and the price level, when the money wage rate and all other influences on production plans remain the same.
Short-run aggregate supply curveA curve that shows the relationship between the quantity of real GDP supplied and the price level, when the money wage rate and all other influences on production plans remain the same.
Short-run equilibriumA situation in which the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the SAS curve.
Short-run industry supply curve A curve that shows how the total quantity supplied by the industry varies as the market price varies when the plant size of each firm and the number of firms in the industry remain the same.
Short-run Phillips curveA curve that shows the relationship between inflation and unemployment, when the expected inflation rate and the natural unemployment rate remain the same.
Shutdown point The price and output level at which the firm just covers its total variable cost. In the short run, the firm is indifferent between producing the profit-maximizing output and shutting down temporarily. If the firm produces, it makes a loss equal to its total fixed cost.
Signal An action taken outside a market that conveys information that can be used by that market.
Slope The change in the value of the variable measured on the y-axis divided by the
change in the value of the variable measured on the x-axis.
StagflationThe combination of a rise in the price level and a fall in real GDP.
StockA quantity that exists at a point in time.
Stock market The market in which the stocks of corporations are traded.
Strategies All the possible actions of each player in a game.
Structural deficitA budget deficit that is present only because the economy is not at full employment.
Structural unemploymentThe unemployment that arises from shifts in the structure or location of jobs.
Subsidy A payment made by the government to producers that depends on the level of
output.
Subsistence real wage rateThe minimum real wage rate needed to maintain life.
Substitute A good that can be used in place of another good.
Substitution effect The effect of a change in price on the quantities consumed when the consumer remains indifferent between the original and the new combinations of goods consumed.
Sunk costs The past economic depreciation of a firm’s capital (buildings, plant, and equipment).
Supply The relationship between the quantity of a good that producers plan to sell and the price of the good, with all other influences on sellers’ plans remaining the same. Supply is described by a supply schedule and illustrated by a supply curve.
Supply curve A curve that shows the relationship between the quantity supplied and the price of a good, all other influences on producers’ planned sales remaining the same.
Supply of labourThe quantity of labour supplied at each real wage rate.
Takeover The purchase of the stock of one firm by another firm.
Tariff A tax that is imposed by the importing country when an imported good crosses its international boundary.
Technological efficiency A situation that occurs when it is not possible to increase output without increasing inputs.
Technological progress The development of new and better ways of producing goods and services and the development of new goods.
Time-inconsistency problemA problem that occurs if a plan looks good when viewed from one point in time but bad when viewed from a different point in time.
Time-series graph A graph that measures time (for example, months or years) on the x-axis and the variable or variables in which we are interested on the y-axis.
Total cost The sum of the costs of all the inputs the firm uses in production.
Total fixed cost The total cost of the fixed inputs.
Total product The total quantity produced by a firm in a given period of time.
Total revenue The value of a firm's sales. Total revenue is calculated as the price of the good multiplied by the quantity of the good sold.
Total revenue test A method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same.
Total surplus The sum of consumer surplus and producer surplus.
Total utility The total benefit or satisfaction that a person gets from the consumption of goods and services.
Total variable cost Total cost of the variable inputs.
Trade-offA constraint that entails giving up one thing to get something else.
Transactions costs The costs incurred in searching for someone with whom to do business, in reaching an agreement about the price and other aspects of the exchange, and in ensuring that the terms of the agreement are fulfilled.
Transfer earnings The income that an owner of a factor of production requires to induce the owner to supply the factor.
TrendThe general direction (rising or falling) in which a variable is moving over the long term.
Trust and mortgage loan companyA privately owned depository institution that operates under the Trust and Loan Companies Act of 1922. It receives deposits and makes loans and in addition acts as a trustee for pension funds and for estates.
Uncertainty A situation in which more than one event might occur but we don't know which one will occur.
Unemployment rateThe percentage of the people in the labour force who are unemployed.
Unit elastic demand Demand with a price elasticity of 1; other things remaining the same, the percentage change in the quantity demanded equals the percentage change in the price.
Utility The benefit or satisfaction that a person obtains from the consumption of a good
or service.
Utility of wealth The amount of utility that a person attaches to a given amount of wealth.
Value The maximum amount that a person is willing to pay for a good.
Value addedThe value of a firm’s output minus the value of the intermediate goods bought from other firms.
Variable cost A cost that varies with the output level.
Velocity of circulationThe average number of times a dollar of money is used annually to buy the goods and services that make up GDP.
Voluntary export restraint A self-imposed restriction by an exporting country on the volume of its exports of a particular good. Voluntary export restraints are often called VERs.