Know the words.
Understand the story.

Resources are limited relative to the wants they could satisfy, so choices must be made.

For exampleA student cannot use the same hour for both work and study.

The value of the next-best alternative forgone when making a choice.

For exampleAttending a free concert may mean giving up wages from a shift.

The additional benefit from one more unit of an activity.

For exampleOne more hour of study might improve understanding of a difficult topic.

The additional cost from one more unit of an activity.

For exampleAn extra hour of study costs an hour that could be spent elsewhere.

Comparing the extra benefit and extra cost of a small change in an activity.

For exampleStudy longer while the benefit of another hour exceeds its cost.

A model of the maximum combinations of two outputs attainable with available resources and technology.

For exampleA factory can use its machines to make desks or chairs.

Producing on the PPC, where more of one output requires giving up some of the other.

For exampleAll available productive resources are being used efficiently.

Producing the combination of goods that best matches society’s preferences; marginal benefit equals marginal cost.

For exampleMaking the mix of desks and chairs buyers value most.

The ability to produce more output with the same inputs, or the same output with fewer inputs.

For exampleOne worker makes more chairs per hour than another.

The ability to produce a good at a lower opportunity cost than another producer.

For exampleA country gives up fewer units of cloth per unit of wheat.

The exchange ratio between two goods; mutually beneficial trade can occur between producers’ opportunity costs.

For exampleOne unit of wheat trades for two units of cloth.

The additional satisfaction from another unit tends to fall as more of a good is consumed.

For exampleA fourth slice of pizza may add less enjoyment than the first.

Allocating spending so marginal utility per dollar is equal across purchased goods, within the budget.

For exampleCompare extra satisfaction per dollar from one more snack or drink.

A cost already incurred that cannot be recovered and should not determine a marginal decision.

For exampleA nonrefundable ticket is already paid for whether you attend or not.

The quantities consumers are willing and able to buy at different prices during a period.

For exampleA demand curve summarizes purchases at several possible prices.

The amount buyers choose at one particular price; changing the good’s own price moves along demand.

For exampleA lower coffee price raises the quantity demanded, other things equal.

The quantities producers are willing and able to sell at different prices during a period.

For exampleA bakery offers more loaves at higher selling prices, other things equal.

The price and quantity where quantity supplied equals quantity demanded.

For exampleAt the clearing price, planned purchases equal planned sales.

Quantity demanded exceeds quantity supplied at the prevailing price.

For exampleA price below equilibrium can leave buyers unable to obtain tickets.

Quantity supplied exceeds quantity demanded at the prevailing price.

For exampleA price above equilibrium can leave unsold goods.

A good whose demand rises as consumer income rises, other things equal.

For exampleWith higher income, a buyer may demand more restaurant meals.

A good whose demand falls as consumer income rises, other things equal.

For exampleA buyer may switch away from a budget substitute when income rises.

Goods that can replace each other; a higher price of one can raise demand for the other.

For exampleMore expensive tea can increase demand for coffee.

Goods used together; a higher price of one can reduce demand for the other.

For exampleMore expensive printers can reduce demand for printer ink.

The percentage change in quantity demanded divided by the percentage change in price, usually interpreted in absolute value.

For exampleIf quantity falls 10% when price rises 5%, elasticity has magnitude 2.

A legal maximum price; it causes a shortage when binding below equilibrium in the basic model.

For exampleA binding rent ceiling holds rent below the market-clearing level.

A legal minimum price; it creates excess supply when binding above equilibrium in the basic model.

For exampleA binding farm-price floor can leave excess crops offered for sale.

The difference between buyers’ willingness to pay and the amount they actually pay.

For exampleA buyer willing to pay $20 gains $5 of surplus at a $15 price.

The difference between the amount sellers receive and the minimum they would accept for the units sold.

For exampleReceiving $15 for a unit with a $10 minimum acceptable price creates $5 of surplus.

How a tax’s economic burden is shared between buyers and sellers; the less elastic side bears more.

For exampleRelatively inelastic demand can make buyers bear more of a product tax.

A tax on imports; in the small-country model it raises domestic price and reduces imports.

For exampleAn import tax can protect domestic producers while reducing consumer surplus.

Total surplus lost because output differs from the socially efficient quantity.

For exampleA distortionary tax can prevent mutually beneficial trades.

A production period in which at least one input is fixed.

For exampleA restaurant can vary staffing before it can expand its building.

A production period in which all inputs can be varied.

For exampleA firm can choose a different factory size.

The additional output from one more unit of an input, holding other inputs constant.

For exampleAn extra worker adds eight meals per hour.

Adding a variable input to fixed inputs eventually yields smaller additions to output.

For exampleExtra cooks crowd a kitchen of fixed size.

A cost that does not vary with output in the short run.

For exampleThe monthly lease on existing equipment remains due at zero output.

A cost that changes as output changes.

For exampleProducing more bread requires additional flour.

Total cost divided by output; it equals average fixed cost plus average variable cost.

For exampleA $1,000 cost for 100 units gives $10 ATC.

Variable cost divided by output; it helps determine the short-run shutdown decision.

For exampleA firm compares price with its minimum AVC.

The change in total cost from producing one additional unit of output.

For exampleIf total cost rises from $40 to $47, the next unit costs $7.

The change in total revenue from selling one additional unit.

For exampleA price-taking firm’s marginal revenue equals the market price.

Total revenue minus both explicit and implicit opportunity costs.

For exampleOwner-provided time and capital have opportunity costs as well as cash expenses.

A market with many price-taking firms selling identical goods and relatively free entry and exit.

For exampleAn individual firm faces a horizontal demand curve at the market price.

The output where MR equals MC with MC crossing MR from below, subject to operating conditions.

For exampleA firm expands while the next unit adds more revenue than cost.

In the short run, a firm shuts down when price is below minimum AVC; it is indifferent at the minimum.

For exampleContinuing production must cover variable costs to be worthwhile.

Long-run average total cost falls as the scale of output increases.

For exampleA larger operation can spread specialized tasks across more output.

The ability to influence a product’s price rather than accept a market price as given.

For exampleA seller with few close substitutes can face downward-sloping demand.

A market with one seller and substantial barriers to entry.

For exampleA protected supplier may be the only seller serving a market.

An obstacle that makes entry by new firms difficult or costly.

For exampleA patent can restrict competing production of a protected invention.

A market in which one firm can supply relevant total demand at lower cost than multiple firms.

For exampleLarge network costs can make duplication of infrastructure expensive.

Many firms sell differentiated products with relatively free entry and exit.

For exampleRestaurants offer distinct menus while competing for customers.

A market dominated by a small number of strategically interdependent firms.

For exampleOne airline considers how rival airlines may respond to its price.

Making a product distinct in buyers’ eyes through features, quality, location, or branding.

For exampleTwo cafés sell coffee with different service and atmosphere.

Charging different prices not explained by cost differences, to capture different willingness to pay.

For exampleA seller separates customer groups with different demand conditions.

A strategy that gives a player the best payoff regardless of rivals’ choices.

For exampleA player prefers one action for every possible action by the opponent.

A set of strategies where no player can improve their payoff by changing alone.

For exampleEach firm’s strategy is a best response to the other’s strategy.

Firms coordinate decisions to increase joint profit, rather than compete independently.

For exampleRivals agree to restrict output; such conduct may violate competition law.

Producing below the output that minimizes ATC; common in long-run monopolistic competition.

For exampleA differentiated firm’s equilibrium output is below its minimum-ATC quantity.

The gap between price and marginal cost; it can arise with market power.

For exampleA monopoly can set price above MC at its chosen quantity.

An input used to produce goods and services, such as labor, land, or capital.

For exampleA bakery combines workers, ovens, and space.

Demand for an input that comes from demand for the output it helps produce.

For exampleDemand for carpenters depends partly on demand for buildings.

The additional revenue from one more unit of an input; marginal product multiplied by marginal revenue.

For exampleAn extra worker producing 4 units with MR $5 has MRP $20.

The additional total input cost from hiring one more unit of that input.

For exampleHiring another worker can increase a monopsonist’s total wage bill by more than that worker’s wage.

A labor market where individual employers and workers take the market wage as given.

For exampleAn individual firm faces a horizontal labor supply curve at the wage.

The quantities of labor employers want at different wages, related to labor’s marginal revenue product.

For exampleA higher product price can raise demand for the workers producing it.

The quantities of labor workers are willing to provide at different wages.

For exampleA change in available workers can shift market labor supply.

Hiring an input up to where MRP equals MFC, with the usual crossing conditions.

For exampleA competitive employer hires until MRP equals the market wage.

A factor market with a single buyer that has buying power.

For exampleOne dominant employer can face upward-sloping labor supply.

Payment for a unit of labor input, such as an hour of work.

For exampleA wage of $18 per hour is a labor price.

Skills, knowledge, and experience embodied in people that can improve productivity.

For exampleTraining helps a worker produce more per hour.

Payment to an input above the minimum needed to keep it in its current use.

For exampleA highly sought-after input can receive more than its next-best alternative pays.

A situation where an unregulated market does not produce the socially efficient outcome.

For examplePollution costs imposed on neighbors can be omitted from a market transaction.

A cost or benefit of an activity affecting a third party outside the transaction.

For exampleA factory’s emissions can affect nearby residents.

An uncompensated external cost; it can make market output exceed the efficient quantity.

For exampleA polluter may ignore damage to people downstream.

An uncompensated external benefit; it can make market output below the efficient quantity.

For exampleA beneficial activity can help people who did not pay for it.

The additional cost to society, including marginal private and marginal external cost.

For exampleMSC exceeds private production cost when extra output causes pollution damage.

The additional benefit to society, including marginal private and marginal external benefit.

For exampleMSB exceeds private benefit when a purchase benefits third parties.

A good that is both nonrival and nonexcludable.

For exampleA warning siren can inform many people without excluding nonpayers.

One person’s consumption does not reduce the amount available to another.

For exampleAnother listener does not use up a public broadcast signal.

It is difficult or costly to prevent nonpayers from benefiting.

For examplePeople may receive benefits without being charged individually.

People can benefit without paying, weakening private incentives to supply a nonexcludable good.

For exampleA person waits for others to fund a shared benefit.

A rival but nonexcludable resource, vulnerable to overuse.

For exampleOpen-access fishing can reduce the fish remaining for others.

A tax intended to make decision-makers account for external costs.

For exampleA well-calibrated pollution tax can align private and social marginal costs.

A graph of cumulative income share against cumulative population share, ordered from lowest to highest income.

For exampleA curve farther below the equality line indicates greater income inequality.

A numerical inequality measure based on the gap between the Lorenz curve and perfect equality.

For exampleZero represents perfect equality in the standard measure.

Available resources cannot satisfy every want, so societies must choose how to use them.

For exampleAllocating workers to one activity leaves fewer available elsewhere.

The value of the best alternative given up by a decision.

For exampleBuilding more schools can mean forgoing another public project.

The frontier of feasible output combinations with current resources and technology.

For exampleAn economy chooses combinations of capital and consumer goods.

An increase in productive capacity over time; it can shift the PPC outward.

For exampleBetter technology allows more output with the same resources.

Produced resources used to make other goods and services.

For exampleFactories and equipment support future production.

Goods purchased for direct use rather than as inputs into further production.

For exampleA household buys a bicycle for personal use.

The ability to produce a good at a lower opportunity cost than another producer.

For exampleSpecialization by lower opportunity cost can support mutually beneficial trade.

Producing more with the same resources, or using fewer resources for the same output.

For exampleOne economy produces more grain per worker-hour.

Concentrating production on a narrower range of activities or goods.

For exampleAn economy emphasizes goods in which it has comparative advantage.

A change in quantities demanded at every price caused by something other than the good’s own price.

For exampleHigher income can increase demand for a normal good.

A change in quantities supplied at every price caused by a non-price determinant.

For exampleA lower input cost can increase supply.

The point where quantity demanded equals quantity supplied.

For exampleThe market-clearing price balances planned buying and selling.

The market value of final goods and services produced within a country during a period.

For exampleA newly produced domestic final good contributes to current GDP.

A good purchased for end use, rather than as an input into another good counted in GDP.

For exampleA new car sold to a household is a final good.

Output valued at current-period prices, so changes can reflect both prices and quantities.

For exampleHigher prices can raise nominal GDP even with unchanged output.

Output adjusted for price changes to better isolate changes in production.

For exampleBase-year prices can be used to compare quantities across years.

A price index equal to nominal GDP divided by real GDP, multiplied by 100.

For exampleNominal GDP 120 and real GDP 100 imply a deflator of 120.

An index tracking the cost of a consumer basket relative to a reference period.

For exampleA CPI increase measures a change in that basket’s price level.

The percentage change in a price index over a stated period.

For exampleAn index rising from 100 to 103 indicates 3% inflation.

People who are employed plus unemployed people who are available for work and actively seeking it.

For exampleAn available job seeker actively applying is part of the labor force.

The unemployed divided by the labor force, multiplied by 100.

For example20 unemployed people in a labor force of 500 imply 4% unemployment.

The labor force divided by the relevant working-age population, multiplied by 100.

For exampleParticipation changes when people enter or leave the labor force.

Temporary unemployment associated with job search and matching.

For exampleA worker searches after voluntarily leaving a job.

Unemployment caused by a mismatch between workers’ skills or locations and available jobs.

For exampleAn industry’s changing skill requirements can leave some workers unmatched.

Unemployment associated with fluctuations in overall economic activity.

For exampleA recession reduces demand for workers across many businesses.

The unemployment rate consistent with potential output; it includes frictional and structural unemployment.

For exampleFull employment does not mean zero unemployment.

Fluctuations in economic activity around its longer-run trend.

For exampleAn expansion can be followed by a peak and contraction.

Income adjusted for the price level, reflecting purchasing power.

For examplePay rising more slowly than prices can reduce real income.

Total planned spending on domestic output at each price level; C + I + G + NX.

For exampleHigher planned investment can shift AD right.

Household spending on goods and services, excluding new housing investment in GDP accounting.

For exampleHouseholds buy meals, clothing, and transportation services.

Spending on new capital, new residential construction, and changes in inventories; not purchases of stocks.

For exampleA firm purchases newly produced machinery.

Real output firms supply at different price levels while some input prices adjust slowly.

For exampleHigher input costs can shift SRAS left.

An economy’s potential output, determined by resources and technology rather than the price level.

For exampleMore productive capacity shifts LRAS right.

Actual real output is below potential output in the AD–AS model.

For exampleAn economy operates to the left of LRAS.

Actual real output exceeds potential output in the short run.

For exampleStrong demand can push output temporarily beyond its sustainable level.

The share of an additional dollar of disposable income spent on consumption.

For exampleAn extra $100 of income producing $80 of spending implies MPC 0.8.

The share of an additional dollar of disposable income saved; MPC + MPS = 1.

For exampleAn MPC of 0.8 implies MPS of 0.2.

In the simple fixed-price model, the total spending response to autonomous spending; 1 / (1 − MPC).

For exampleAn MPC of 0.75 gives a simple spending multiplier of 4.

In the simple model, the output effect of a tax change; −MPC / (1 − MPC).

For exampleAt MPC 0.75, a tax increase has a multiplier of −3.

Higher government spending or lower taxes intended to increase aggregate demand.

For exampleAn increase in public purchases can shift AD right.

Lower government spending or higher taxes intended to reduce aggregate demand.

For exampleA tax increase can reduce consumption and shift AD left.

A feature of taxes or transfers that moderates fluctuations without new legislation.

For exampleTax receipts fall as income falls under an existing tax system.

Nominal wages that adjust slowly to changing economic conditions.

For exampleContracted pay may not immediately fall when aggregate demand weakens.

Assets broadly accepted as payment; money serves as a medium of exchange, unit of account, and store of value.

For exampleA transaction account balance can be used to pay for purchases.

How readily an asset can be used for payment or converted to cash with little loss.

For exampleCurrency is more liquid than a building.

The stated interest rate before adjusting for inflation.

For exampleA loan contract lists a nominal annual interest rate.

The interest rate adjusted for inflation; approximately nominal rate minus expected inflation when decisions are made.

For exampleA 6% nominal rate and 2% expected inflation imply about 4% real interest.

For a bond with fixed promised payments, a higher purchase price implies a lower yield, and vice versa.

For exampleExisting fixed-payment bonds lose value when comparable market yields rise.

Funds banks hold as vault cash or balances at the central bank, subject to the system’s definitions.

For exampleReserve balances help banks settle payments.

A rule specifying required reserves relative to certain deposits; it may be zero and is not always the active policy tool.

For exampleTextbook reserve examples must state the assumed reserve ratio.

The maximum textbook deposit expansion from new reserves under restrictive assumptions; 1 / required reserve ratio.

For exampleA 10% assumed ratio gives a multiplier of 10 if no cash or excess reserves leak out.

The amount of money people wish to hold at different nominal interest rates.

For exampleHigher interest rates raise the opportunity cost of holding non-interest-bearing money.

A model relating money demand and money supply to the nominal interest rate.

For exampleAn increase in money demand raises the rate if supply is fixed in the model.

A model relating saving and borrowing to the real interest rate.

For exampleHigher saving shifts loanable funds supply right.

A central bank purchase or sale of securities used in implementing monetary policy.

For exampleA purchase can add reserves to the banking system.

A central-bank target or administered rate used to influence financial conditions.

For exampleAn overnight rate target can influence broader borrowing conditions.

A system in which reserves are abundant and administered rates help steer overnight interest rates.

For exampleA central bank can adjust interest paid on reserves rather than rely on reserve scarcity.

The rate a central bank pays eligible banks on reserve balances; it can help anchor short-term rates.

For exampleRaising this administered rate can support a higher policy-rate range.

Policy intended to ease financial conditions and increase demand, often through lower policy rates.

For exampleLower borrowing rates can encourage interest-sensitive investment, other things equal.

Policy intended to tighten financial conditions and reduce demand, often through higher policy rates.

For exampleHigher rates can discourage some borrowing and spending.

A relationship showing a short-run inflation–unemployment tradeoff for given inflation expectations and supply conditions.

For exampleA demand expansion can move the economy along a given SRPC.

A vertical relationship at the natural unemployment rate; no permanent inflation–unemployment tradeoff in the basic model.

For exampleHigher expected inflation does not permanently keep unemployment below its natural rate.

Beliefs about future price growth that can influence wage-setting and current decisions.

For exampleHigher expected inflation can shift SRPC upward.

A framework linking money, velocity, prices, and output through MV = PY.

For exampleWith stable velocity and fixed real output, faster money growth raises prices in the simple model.

Nominal spending divided by the money stock; how often money supports final spending in a period.

For exampleVelocity equals PY divided by M in the quantity equation.

The long-run proposition that money-supply changes affect nominal variables rather than real output in the basic model.

For exampleDoubling money does not permanently double real productive capacity.

Government spending exceeds revenue during a period.

For exampleA government borrows to finance a current shortfall.

Government revenue exceeds spending during a period.

For exampleA surplus can reduce borrowing needs.

The accumulated stock of outstanding government borrowing, distinct from a one-period deficit.

For exampleRepeated deficits can add to the stock of debt.

Government borrowing raises real interest rates and reduces some private investment in the basic loanable funds model.

For exampleA larger demand for borrowing can make private capital spending more expensive.

Produced equipment and structures used to make output.

For exampleMore productive machinery can raise output per worker.

Skills and knowledge embodied in workers that can raise productivity.

For exampleEducation and training can improve productive capacity.

Output per unit of labor input, such as output per worker-hour.

For exampleMore output from the same hours means higher productivity.

An increase in potential real output supported by resources, capital, skills, or technology.

For exampleBetter technology shifts LRAS right, rather than only raising current demand.

Accounts recording transactions between an economy’s residents and the rest of the world.

For exampleTrade and cross-border asset transactions appear in different accounts.

An account including trade in goods and services, primary income, and current transfers.

For exampleAn exported service contributes to the trade component of the current account.

An account recording cross-border financial-asset and liability transactions; textbook sign conventions should be stated.

For exampleA foreign purchase of a domestic bond is a financial transaction.

A separate account for certain capital transfers and nonproduced nonfinancial assets; not the broad financial account.

For exampleSome debt forgiveness can be recorded as a capital transfer.

Exports minus imports of goods and services.

For exampleExports of $120 and imports of $150 give NX of −$30.

Imports of goods and services exceed exports over a period.

For exampleA negative trade balance is only one component of the current account.

The price of one currency in terms of another; the quotation must be specified.

For exampleA quote of 1 euro = $1.20 expresses dollars per euro.

A currency rises in value relative to another currency.

For exampleIf a dollar buys more euros than before, the dollar appreciates against the euro.

A currency falls in value relative to another currency.

For exampleIf a dollar buys fewer euros, it depreciates against the euro.

An exchange rate determined primarily by supply and demand in the currency market.

For exampleChanges in currency demand can change its exchange value.

An exchange rate maintained near an official target through policy intervention.

For exampleAn authority may buy or sell foreign reserves to defend its target.

Foreign funding enters through purchases of domestic assets or claims.

For exampleForeign investors purchase domestic bonds.

The difference between countries’ real interest rates; it can affect financial flows, other things equal.

For exampleA higher domestic real return can attract foreign funds if risk expectations are unchanged.

Foreign assets held by monetary authorities, including to support currency-market intervention.

For exampleA central bank can sell foreign currency reserves to buy its domestic currency.