Learn

adverse selection

Bad types crowding out good ones when quality is hidden before a deal, the lemons problem.

aggregate demand

Total planned spending on an economy's output at each price level, consumption, investment, government, and net exports.

arbitrage

Riskless profit from price differences, whose pursuit eliminates those very differences.

beta

An asset's sensitivity to market-wide swings, the only risk that earns a premium in the CAPM.

capital mobility

How freely financial capital crosses borders chasing returns.

comparative advantage

Being able to produce something at a lower opportunity cost than others, the true basis for trade.

consumer surplus

The gap between what buyers would have paid and what they actually paid.

crowding out

When government borrowing raises interest rates and squeezes out private investment.

deadweight loss

Value that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen.

depreciation

The wearing out of capital over time, or, for currencies, a fall in value against others.

diminishing returns

Each extra unit of an input adds less output than the one before, holding other inputs fixed.

discounting

Converting future values into today's terms, because a dollar later is worth less than a dollar now.

dominant strategy

A choice that's best no matter what opponents do.

elasticity

How strongly one variable responds to another, usually quantity's percentage response to a price change.

equilibrium

The point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.

exchange rate

The price of one currency in terms of another.

expectations

Beliefs about the future that shape behavior today, the hinge variable of modern macroeconomics.

externality

A cost or benefit that lands on someone outside the transaction, pollution's harm, vaccination's protection.

fiscal policy

Government spending and tax decisions used to influence the macroeconomy.

fixed cost

A cost that doesn't vary with output, like rent, it moves average cost but never marginal cost.

inflation

A sustained rise in the overall price level, eroding money's purchasing power.

liquidity trap

When interest rates are so low that extra money is simply hoarded, blunting monetary policy.

loss aversion

The finding that losses hurt roughly twice as much as equal gains feel good.

LRAS

Long-run aggregate supply: the economy's potential output, fixed by resources and technology, independent of the price level.

marginal cost

The cost of producing one more unit.

marginal product

The extra output from one more unit of an input, holding others fixed.

marginal revenue

The extra revenue from selling one more unit, below price for any firm that must cut price to sell more.

market power

The ability to profitably hold price above marginal cost.

monetary policy

Central-bank control of interest rates or the money supply to steer inflation and output.

monopsony

A market with a single dominant buyer, for labor, one employer with the power to set wages below competitive levels.

moral hazard

Behavior changing for the worse once someone else bears the risk, hidden actions after a deal.

MPC

Marginal propensity to consume: the fraction of an extra dollar of income that gets spent rather than saved.

multiplier

The amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case.

NAIRU

The unemployment rate at which inflation neither accelerates nor decelerates, the economy's sustainable floor.

Nash equilibrium

A strategy profile where no player can gain by changing their choice alone.

natural rate

The unemployment level set by structural forces (matching, turnover, institutions) rather than the business cycle.

nominal

Measured in current dollars, unadjusted for inflation.

opportunity cost

What you give up to get something, the value of the next-best alternative you didn't choose.

output gap

The distance between actual output and potential output; positive gaps overheat, negative gaps mean slack.

Pigouvian tax

A tax set equal to the external harm of an activity, forcing the market to price the damage it causes.

potential output

The output an economy can sustain with normal use of its resources, where it returns once prices fully adjust.

present value

What a future payment is worth today after discounting.

price taker

A participant too small to influence the market price, it can only choose quantity.

producer surplus

The gap between the price sellers receive and the minimum they would have accepted.

rational expectations

The assumption that people forecast using all available information, so policy can't systematically fool them.

real

Adjusted for inflation, measured in actual purchasing power.

reference point

The benchmark (often the status quo) against which outcomes are felt as gains or losses.

risk premium

The extra expected return demanded for bearing risk instead of holding the safe asset.

seigniorage

Government revenue from printing money, an implicit tax paid through inflation.

SRAS

Short-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky.

stagflation

The ugly combination of falling output and rising prices, the signature of a negative supply shock.

steady state

The resting point of a growth model, where capital per worker stops changing because investment exactly covers depreciation and dilution.

sticky prices

Prices and wages that adjust slowly, giving demand shocks real short-run effects.

subsidy

A government payment per unit that lowers effective production costs and expands output.

sunk cost

A cost already paid and unrecoverable, irrelevant to any rational forward-looking decision.

tariff

A tax on imports, raising their domestic price.

terms of trade

The rate at which exports exchange for imports.

TFP

Total factor productivity: the output growth unexplained by capital and labor, technology, in the broadest sense.

velocity

How many times a unit of money changes hands per period, the V in MV = PY.