Economics
Glossaries
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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.
Labour The 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 union An 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-doing People 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 pricing The 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 run A 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.
M1 A 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.
Macroeconomics The 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 benefit The 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 relationship A 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 value The 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 good A good that it is
impossible, or extremely costly, to prevent
someone from benefiting from.
Nonexhaustible natural resources
Natural 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.
Privatization The 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 budget An 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 supplied The 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 rate The interest rate is
the interest rate on a loan minus the expected
inflation rate.
Real wage rate The 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 good A good that has the
characteristic that one person’s consumption
of it decreases the consumption available to
someone else.
Saving The amount of income left over
after meeting consumption expenditures.
Saving function The relationship
between saving and disposable income, other
things remaining the same.
Saving supply The relationship between
saving and the real interest rate, other things
remaining the same.
Scarcity The universal state in which
wants exceed resources.
Scatter diagram A 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 unemployment Unemployment 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 supply 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 aggregate supply curve A
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.
Stock A 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 deficit A budget deficit
that is present only because the economy is not
at full employment.
Structural unemployment The
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 rate The 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 labour The 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 problem A 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-off A 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 rate The 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.
Wealth The current market value of what
a household owns. Wealth is equal to the current
market value of the household’s past saving
plus any inheritances it has derived.
Working-age population The total number
of people aged 15 years and over.
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