BIBLIOGRAPHY
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Glossary
absolute advantageThe ability to produce more of
a good than all other producers.
absolute (or money) prices The price of a good
measured in units of currency.
accounting profit The difference between total rev-
enue and total explicit cost.
all else equal The assumption that all other variables
are held constant so that we can predict how a
change in one variable affects a second. Also known
as the “ceteris paribus” assumption.
allocative efficiencyProduction of the combination
of goods and services that provides the most net
benefit to society. This is achieved when the
MB =MC of the next unit.
average fixed cost (AFC) Total fixed cost divided by
output.
average product (APL) of labor Total product
divided by the labor employed.
average tax rate The proportion of total income paid
to taxes.
average total cost (ATC) Total cost divided by output.
average variable cost (AVC) Total variable cost
divided by output.
capitalist market system (capitalism) An economic
system based upon the fundamentals of private
property, freedom, self-interest, and prices.
cartel Firms that agree to maximize their joint prof-
its rather than compete.
circular flow of economic activity (or circular of
goods and services) A model that shows how
households and firms circulate resources, goods,
and incomes through the economy. This basic
model is expanded to include the government and
the foreign sector.
collusive oligopoly Models where firms agree to
work together to mutually improve their situation.
comparative advantage The ability to produce a
good at lower opportunity cost than all other
producers.
complementary goods Two goods that provide
more utility when consumed together than when
consumed separately.
constant returns to scale The horizontal range of
long-run average total cost where LRAC is con-
stant over a variety of plant sizes.
constrained utility maximization Given prices and
income, a consumer stops consuming a good when
the price paid for the next unit is equal to the mar-
ginal utility received.
consumer surplus The difference between a buyer’s
willingness to pay and the price actually paid.
cross-price elasticity of demand A measure of how
sensitive the consumption of good X is to a change
in the price of good Y.
deadweight loss The lost net benefit to society
caused by a movement from the competitive market
equilibrium.
demand curve Shows the quantity of a good demanded
at all prices.
demand for labor Shows the quantity of labor
demanded at all wages. Labor demand for a firm
hiring in a competitive labor market is MRPL.
demand schedule A table showing quantity
demanded for a good at all prices.
derived demand Demand for a resource arising
from the demand for the goods produced by the
resource.
determinants of demand The external factors that
shift demand to the left or right.
determinants of supply The external factors that
influence supply. When these variables change, the
entire supply curve shifts to the left or right.
disequilibrium Any price where the quantity
demanded does not equal the quantity supplied.
diseconomies of scale The upward part of the long-
run average total cost curve where LRAC rises as
plant size rises.
domestic price The equilibrium price of a good in a
nation without trade.
dominant strategy A strategy that is always the best
strategy to pursue, regardless of what a rival is
doing.
economic costs The sum of explicit and implicit
costs of production.