214 › Glossary
economic growth The increase in an economy’s PPF
over time.
economic profit The difference between total rev-
enue and total economic cost.
economicsThe study of how society allocates scarce
resources.
economies of scale The downward part of the long-
run average total cost curve where LRAC falls as
plant size rises.
egalitarianism The philosophy that all citizens
should receive an equal share of the economic
resources.
elasticityMeasures the sensitivity, or responsiveness,
of a choice to a change in an external factor.
elasticity along the demand curve At the midpoint
of a linear demand curve, Ed=1. Above the mid-
point demand is elastic, and below the midpoint
demand is inelastic.
excess capacity The difference between the long-
run output in monopolistic competition and the
output at minimum average total cost.
excess demandThe difference between quantity
demanded and quantity supplied. A shortage.
excess supply The difference between quantity
supplied and quantity demanded. A surplus.
excise tax A per unit tax on a specific good or
service.
explicit costs Direct, purchased, out-of-pocket
costs, paid to resource suppliers outside the firm.
Also referred to as accounting costs.
exports Goods and services produced domestically
but sold abroad.
factors of production Inputs or resources that go
into the production function to produce goods
and services.
firmAn organization that employs factors of produc-
tion to produce a good or service that it hopes to
profitably sell.
fixed inputsProduction inputs that cannot be
changed in the short run.
four-firm concentration ratio The sum of the market
share of the four largest firms in an industry.
free rider An individual who receives the benefit of
a good without incurring any cost for the good.
free-rider problemThe lack of private funding for a
public good due to the presence of free riders.
game theory An approach for modeling the strategic
interactions of firms in oligopoly markets.
Gini ratio A measure of income inequality. As the Gini
ratio gets closer to zero, the more equally the
income is distributed. As the Gini ratio gets closer to
one, the more unequally the income is distributed.
human capital The amount of knowledge and skills
that labor can apply to the work that they do.
implicit costs Indirect, non-purchased, or opportu-
nity costs of resources provided by the entrepreneur.
imports Goods produced abroad but consumed
domestically.
incidence of tax The division of a tax between con-
sumers and producers.
income effect Due to a higher price, the change in
quantity demanded that results from a change in
the consumer’s purchasing power (or real income).
income elasticity A measure of how sensitive con-
sumption of a good is to a change in consumers’
income.
inferior goods A good for which demand decreases
with an increase in consumer income.
law of demand All else equal, when the price of a
good rises, the quantity demanded of that good
falls.
law of diminishing marginal returns As successive
units of a variable input are added to a fixed input,
beyond some point the marginal product declines.
law of diminishing marginal utility In a given time
period, as consumption of an item increases, the
marginal (additional) utility from that item falls.
law of increasing costs As more of a good is pro-
duced, the greater is its opportunity (or marginal)
cost.
law of increasing marginal cost As a producer pro-
duces more of a good, the marginal cost rises. This
is very similar to the idea of increasing opportunity
costs in Chapter 5.
law of supply All else equal, when the price of a
good rises, the quantity supplied of that good rises.
least-cost rule The combination of labor and capital
that minimizes total costs for a given production
rate is where MPL/PL=MPK/PK.
long run A period of time long enough for the
firm to alter all production inputs, including the
plant size.
Lorenz curve A graphical device that shows how a
nation’s income is distributed across the nation’s
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