This glossary of economics is a list of definitions containing terms and concepts used in economics, its sub-disciplines, and related fields.
A
absolute advantage Also called resource cost advantage. The ability of a party (whether an individual, firm, or country) to produce a greater quantity of a good, product, or service than competitors using the same amount of resources.
absorption The total demand for all final marketed goods and services by all economic agents resident in an economy, regardless of the origin of the goods and services themselves
abandonment of the gold standard The decision by a government to abandon a monetary system in which the standard economic unit of account is based on a fixed quantity of gold.
accelerator effect A positive effect on private fixed investment because of the growth of the market economy. Rising GDP usually implies that profit expectations and business confidence rise, encouraging businesses to build more factories and other buildings and to install more machinery.
adaptive expectations A hypothetical process by which people form expectations about what will happen in the future based on what has happened in the past.
AD–AS model A macroeconomic model that explains price level and output through the relationship of downward-sloping aggregate demand (AD) and upward-sloping aggregate supply (AS).
AD–IA model A macroeconomic model that explains inflation and output through the relationship of downward-sloping aggregate demand (AD) and horizontal inflation adjustment (IA). The monetary policy rule (MPR) is assumed, which is that the central bank increases interest rates in response to increase in inflation and vice versa.
adverse selection A market situation where buyers and sellers have different information, and participants with key information participate selectively in trades at the expense of other parties.
advertising elasticity of demand (AED) Also called advertising elasticity. Measures the sensitivity of a good's demand to a change in advertising.
agflation Also called agrarian inflation. An increase in the price of food and industrial agricultural crops when compared to the general rise in prices.
aggregate demand (AD) Also called domestic final demand (DFD) or effective demand. The total demand for goods and services in an economy. It specifies the amounts of goods and services that will be purchased at all possible price levels. Aggregate demand can also be interpreted as the demand for the gross domestic product of a country. It is often called effective demand, though this term also has a distinct meaning.
aggregate supply (AS) Also called domestic final supply (DFS). The total supply of goods and services in an economy.
aggregation problem The difficult problem of finding a valid way to treat an empirical or theoretical aggregate as if it reacted like a less-aggregated measure, say, about behavior of an individual agent as described in general microeconomic theory.
agent An actor or, more specifically, a decision maker in a model of some aspect of the economy.
agricultural economics An applied field of economics concerned with the application of economic theory in optimizing the production and distribution of food.
AK model A macroeconomic model that explains output through the relationship of total factor productivity and capital. It assumes that there is no diminishing return of capital.
Alchian–Allen effect Also called the shipping the good apples out theorem, or the third law of demand. When the prices of two substitute goods, such as high and low grades of the same product, are both increased by a fixed per-unit amount, consumption will shift toward the higher-grade product. This is because the added per-unit amount decreases the relative price of the higher-grade product.
Allais paradox A choice problem showing an inconsistency of actual observed choices with the independence axiom of expected utility theory.
allocative efficiency A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing. In the single-price model, at the point of allocative efficiency, price is equal to marginal cost.
alternative minimum tax (AMT) A tax imposed by the U.S. federal government in addition to the regular income tax for certain individuals, estates, and trusts. High-income taxpayers must calculate and pay the greater of the AMT or regular tax.
ambiguity aversion Also called uncertainty aversion. Any preference for known risks over unknown risks.
American school Also called the national system. A school of thought based around industry protection, government investment in infrastructure, and a national bank.
Amoroso–Robinson relation An equation that describes the relation between price, marginal revenue, and price elasticity of demand.
ancient economic thought The economic ideas proposed by ancient thinkers, in the history of economic thought.
Anglo-Saxon model A school of thought based around low levels of regulation and taxation, minimal public services, strong private property rights, contract enforcement, overall ease of doing business, and low barriers to free trade.
annual effective discount rate (AER) The amount of interest paid or earned as a percentage of the balance at the end of the annual period.
anti-rival good The opposite of a rival good. The more people share an anti-rival good, the more utility each person receives.
antitrust law Also called a competition law or anti-monopoly law. Any law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as "antitrust law" in the United States for historical reasons and as "anti-monopoly law" in China and Russia.
applied economics The application of economic theory and econometrics in specific settings. As one of the two sets of fields of economics (the other being the core), it is typically characterized by the application of the core, i.e. economic theory and econometrics, to address practical issues in a range of fields.
appropriate technology A movement (and its manifestations) encompassing technological choice and application that is small-scale, decentralized, labor-intensive, energy-efficient, environmentally sound, and locally autonomous.
arbitrage The practice of taking advantage of a price difference between two or more markets by striking a combination of matching deals that capitalize upon the imbalance, with the profit being the difference between the market prices.
Arrow–Debreu model Also called the Arrow–Debreu–McKenzie model or ADM model. A model that suggests there must be a set of prices such that aggregate supplies will equal aggregate demands for every commodity in the economy, given certain assumptions. It can be used to prove the existence of general equilibrium (or Walrasian equilibrium) of an economy.
Arrow-Debreu security Also called a state-price security, pure security, or primitive security. A contract that agrees to pay one unit of a numeraire (a currency or a commodity) if a particular state occurs at a particular time in the future and pays zero numeraire in all the other states.
Arrow information paradox (AIP) Also called Arrow's disclosure paradox. A problem faced by companies when considering the transfer of intellectual property. A company may wish to sell some information, but it cannot fully describe the capabilities of the information without effectively transferring the information for free.
Arrow's impossibility theorem Also called the general possibility theorem or Arrow's paradox. When voters have three or more distinct options, no ranked voting electoral system can convert the ranked preferences of individuals into a community-wide (complete and transitive) ranking while also meeting the specified set of criteria: unrestricted domain, non-dictatorship, Pareto efficiency, and independence of irrelevant alternatives.
Associate's Degree An academic program taken at the undergraduate level and after secondary school, which is considered a two-year degree and can be obtained from a community college, junior college, or some four-year universities.
Atkinson–Stiglitz theorem Where the utility function is separable between labor and all commodities, no indirect taxes need be employed.
Aumann's agreement theorem If the probabilistic beliefs of agents who share a common prior and update their probabilistic beliefs by Bayes' rule, regarding a fixed event, are common knowledge then these probabilities must coincide. Thus, agents cannot have common knowledge of a disagreement over the posterior probability of a given event.
austerity A set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both.
Austrian School A heterodox school of economic thought that is based on methodological individualism—the concept that social phenomena result from the motivations and actions of individuals.
autarky The characteristic of being self-sufficient; the term is usually applied to political states or their economic systems. Autarky is possible when an entity can survive or continue its activities without external assistance or international trade. If a self-sufficient economy also deliberately refuses all trade with the outside world, then it is called a closed economy.
automatic stabilizer A feature of the structure of modern government budgets, particularly income taxes and welfare spending, that acts to damp out fluctuations in real GDP.
autonomous consumption Also called exogenous consumption. The consumption expenditure that occurs when income levels are zero. Such consumption is considered autonomous of income only when expenditure on these consumables does not vary with changes in income; generally, it may be required to fund necessities and debt obligations. If income levels are actually zero, this consumption counts as dissaving, because it is financed by borrowing or using up savings.
average cost Also called unit cost. A quantity equal to the total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q).
average fixed cost The fixed costs (FC) of production divided by the quantity (Q) of output produced. Fixed costs are those costs that must be incurred in fixed quantity regardless of the level of output produced.
average variable cost A firm's variable costs (labour, electricity, etc.) divided by the quantity of output produced. Variable costs are those costs which vary with the output.
average tax rate The ratio of the total amount of taxes paid to the total tax base (taxable income or spending), expressed as a percentage.
B
Backus–Kehoe–Kydland puzzle Also called the Backus–Kehoe–Kydland consumption correlation puzzle or BKK puzzle. The observation that consumption is much less correlated across countries than output. According to theory we should observe that consumption is much more correlated across countries than output in an Arrow–Debreu economy.
Backus–Smith puzzle Also called the Backus-Smith consumption-real exchange rate puzzle or consumption – real-exchange-rate anomaly. The observation that the correlations between consumption and real exchange rates are zero or negative. This is contrary to economic theory which predicts that with full risk sharing, relative consumption should be perfectly correlated with the real exchange rate.
backward advantage Also called the advantage of backwardness or the latecomer's advantage. The advantage that a still-developing country has because it can take advantage of the technology/industry gap with a developed country by implementing a new technology or venturing into an industry that is new to its economy but mature in the developed country.
backward disadvantage Also called the latecomer's disadvantage. The fact that it is easier for late-development countries to imitate technologies, but more difficult to imitate the system, because the reform will offend vested interests.
backward induction The process of reasoning backward in time, from the end of a problem or situation, to determine a sequence of optimal actions. It proceeds by first considering the last time a decision might be made and choosing what to do in any situation at that time. Using this information, one can then determine what to do at the second-to-last time of decision. This process continues backward until one has determined the best action for every possible situation (i.e. for every possible information set) at every point in time.
balance of payments Also called balance of international payments and abbreviated B.O.P. or BoP. A record or summary of all economic transactions between the residents of a country and the rest of the world in a particular period of time (e.g. over a quarter of a year or, more commonly, over a year). These transactions are made by individuals, firms and government bodies. Thus the balance of payments includes all external visible and non-visible transactions of a country.
balance of trade Also called commercial balance or net exports (NX). The difference between the monetary value of a nation's exports and imports over a certain period. Sometimes a distinction is made between a balance of trade for goods versus one for services. "Balance of trade" can be a misleading term because trade measures a flow of exports and imports over a given period of time, rather than a balance of exports and imports at a given point in time. Also, balance of trade does not necessarily imply that exports and imports are "in balance" with each other or anything else.
balanced budget A budget in which revenues equal expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts "balance"). The term may also refer more generally to a budget that has no budget deficit but could possibly have a budget surplus. A cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but is balanced over the economic cycle, running a surplus in boom years and running a deficit in lean years, with these offsetting over time.
bank A financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.
bank rate Also called the discount rate in American English. The rate of interest which a central bank charges on its loans and advances to a commercial bank.
bankruptcy The inability to pay debt due to loss of income, increased spending, or an unforeseen financial crisis.
bargaining model of war A method of representing the potential gains and losses and ultimate outcome of war between two actors as a bargaining interaction.
barriers to entry In theories of competition in economics, a cost that must be incurred by a new entrant into a market that incumbents do not have or have not had to incur. Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies or give companies market power.
barter also called direct exchange. In trade, a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists distinguish barter from gift economies in many ways; barter, for example, features immediate reciprocal exchange that is not delayed in time. Barter usually takes place on a bilateral basis, but may be multilateral (i.e. mediated through a trade exchange). In most developed countries, barter usually only exists parallel to monetary systems to a very limited extent. Market actors use barter as a replacement for money as the method of exchange in times of monetary crisis, such as when currency becomes unstable (e.g. by hyperinflation or a deflationary spiral) or simply unavailable for conducting commerce.
base erosion and profit shifting (BEPS) Corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations.
Baxter-Stockman neutrality of exchange rate regime puzzle Also called the exchange rate disconnect puzzle. The unexpectedly weak relationship between the exchange rate and any other macroeconomic variable.
Beckstrom's law "The value of a network equals the net value added to each user’s transactions conducted through that network, summed over all users."
behavioral economics The branch of economics that studies the effects of psychological, cognitive, emotional, cultural and social factors on the economic decisions of individuals and institutions and how those decisions vary from those implied by classical theory.
Bellman equation The dynamic programming equation associated with discrete-time optimization problems. It writes the "value" of a decision problem at a certain point in time in terms of the payoff from some initial choices and the "value" of the remaining decision problem that results from those initial choices.
bequest motive Seeks to provide an economic justification for the phenomenon of intergenerational transfers of wealth; in other words, to explain why people leave money behind when they die.
Bertrand competition A model of competition that describes interactions among producers that set prices and their consumers that choose quantities at the prices set.
Bertrand–Edgeworth model A microeconomic model of price-setting oligopoly which studies what happens when there is a homogeneous product (i.e. consumers want to buy from the cheapest seller) where there is a limit to the output of firms which they are willing and able to sell at a particular price. This differs from the Bertrand competition model where it is assumed that firms are willing and able to meet all demand. The limit to output can be considered a physical capacity constraint which is the same at all prices (as in Edgeworth’s work) or to vary with price under other assumptions.
Bertrand paradox A situation in which two players (firms) reach a state of Nash equilibrium where both firms charge a price equal to marginal cost.
biflation Also called mixflation. A state of the economy in which the processes of inflation and deflation occur simultaneously in different parts of the economy.
big push model A concept in development economics or welfare economics that emphasizes that a firm's decision whether to industrialize or not depends on its expectation of what other firms will do. It assumes economies of scale and oligopolistic market structure and explains when industrialization would happen.
Birmingham school A school of thought based around opposing the gold standard, advocating for expansionary monetary policy, and belief in underconsumption.
Bishop–Cannings theorem A theorem in evolutionary game theory that states that (i) all members of a mixed evolutionarily stable strategy have the same payoff, and (ii) that none of these can also be a pure ESS.
Black–Scholes model Also called the Black–Scholes–Merton model. A mathematical model for the dynamics of a financial market containing derivative investment instruments. From the partial differential equation in the model, known as the Black–Scholes equation, one can deduce the Black–Scholes formula, which gives a theoretical estimate of the price of European-style options and shows that the option has a unique price regardless of the risk of the security and its expected return (instead replacing the security's expected return with the risk-neutral rate). The formula led to a boom in options trading and provided mathematical legitimacy to the activities of the Chicago Board Options Exchange and other options markets around the world. It is widely used, although often with adjustments and corrections, by options market participants.
board of governors The main governing body that directs the operations of the United States Federal Reserve System. Its seven members supervise the 12 Federal Reserve Districts.
bond In finance, an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds. The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals (semiannual, annual, or sometimes monthly). Very often the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond, it is highly liquid on the secondary market.
Bondareva–Shapley theorem Describes a necessary and sufficient condition for the non-emptiness of the core of a cooperative game in characteristic function form.
boots theory Also called the Sam Vimes theory of socioeconomic unfairness. Purchasing cheap, low-quality goods may become more expensive in the long run because they must be replaced more frequently. For example, purchasing expensive, high-quality boots may be cheaper over a long time because cheaper boots would quickly wear out and require replacement.
borrower See debtor.
bounded rationality The idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal.
Braess's paradox The observation that adding one or more roads to a road network can slow down overall traffic flow through it.
Brander–Spencer model An economic model in international trade that illustrates a situation where a government can subsidize domestic firms to help them in their competition against foreign producers and in doing so enhances national welfare.
break-even Also called the break-even point (BEP). The point at which total cost and total revenue are equal, i.e. "even". There is no net loss or gain, and one has "broken even", though opportunity costs have been paid and capital has received the risk-adjusted, expected return. In short, all costs that must be paid are paid, and there is neither profit nor loss.
Bretton Woods system A monetary system which established the rules for commercial and financial relations among the United States, Canada, Western Europe, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The chief features were an obligation for each country to adopt a monetary policy that maintained its external exchange rates within 1 percent by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments; there was also a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies.
budget The itemization of an individual's or firm's total income and total expenses for a set period of time, usually a month or a year.
budget deficit Also simply called spending. The amount by which spending exceeds revenue over a particular period of time; it is the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual.
budget set Also called an opportunity set. The set of all possible consumption bundles that an individual can afford, given the prices of goods and the individual's income level. The budget set is bounded above by the budget line. Graphically speaking, all the consumption bundles that lie inside and on the budget constraint form the budget set. By most definitions, budget sets must be compact and convex.
budget share Engel curve Describes how the proportion of household income spent on a good or service varies with income.
budget surplus A budget's revenues in excess of its expenditures.
buffer stock scheme Also called intervention storage or the ever-normal granary. An attempt to use commodity storage for the purposes of stabilising prices in an entire economy or an individual (commodity) market. Specifically, commodities are bought when a surplus exists in the economy, stored, and are then sold from these stores when economic shortages in the economy occur.
bullionism An economic theory that defines wealth by the amount of precious metals owned.
business cycle Also called the economic cycle or trade cycle. The downward and upward movement of gross domestic product (GDP) around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansions or booms) and periods of relative stagnation or decline (contractions or recessions).
business economics A branch of applied economics which uses economic theory and quantitative methods to analyze business enterprises and the factors contributing to the diversity of organizational structures and the relationships of firms with labour, capital and product markets.
business sector Also called the corporate sector or sometimes simply business. The part of the economy made up by companies. It is generally considered a subset of the domestic economy, excluding the economic activities of general government, of private households, and of non-profit organizations serving individuals.
C
Cambridge capital controversy Also called the capital controversy or the two Cambridges debate. A dispute between proponents of two differing theoretical and mathematical positions in economics concerning the nature and role of capital goods and a critique of the neoclassical vision of aggregate production and distribution.
Cambridge equation Relates money demand, price level, and real national income in the Cambridge quantity theory of money.
cameralism A German science of public administration in the 18th and early 19th centuries that aimed at strong management of a centralized economy for the benefit mainly of the state.
cap and trade (CAT) A market-based approach to limiting negative externalities (for example, pollution) by providing economic incentives for reducing the production of said negative externalities. A central authority or governmental body allocates or sells a limited number (a "cap") of permits that allow the creation of a specific negative externality over a set time period. Permit owners are then allowed to sell these permits to others.
capacity utilization The extent to which an enterprise or a nation uses its installed productive capacity. It is the relationship between output that is produced with the installed equipment and the potential output which could be produced with it if capacity was fully used.
capital Any asset that can enhance one's power to perform economically useful work. Capital goods, real capital, or capital assets are already-produced, durable goods or any non-financial asset that is used in production of goods or services. Capital is distinct from land (or non-renewable resources) in that capital can be increased by human labor. At any given moment in time, total physical capital may be referred to as the capital stock (which is not to be confused with the capital stock of a business entity).
capital account Also called the capital and financial account Reflects net change in ownership of national assets. A surplus in the capital account means money is flowing into the country, and the inbound flows effectively represent borrowings or sales of assets. A deficit in the capital account means money is flowing out of the country, and it suggests the nation is increasing its ownership of foreign assets.
capital accumulation Any net addition to existing wealth and/or a redistribution of wealth. Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return.
capital cost A fixed, one-time expense incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. In other words, it is the total cost needed to bring a project to a commercially operable status. Whether a particular cost is capital or not depends on many factors, such as accounting, tax laws, and materiality.
capital flight Occurs when money or assets rapidly flow out of a country due to an event of economic consequence. Such events may include an increase in taxes on capital or capital holders or the government of the country defaulting on its debt that disturbs investors and causes them to lower their valuation of the assets in that country or otherwise to lose confidence in its economic strength.
capital formation Any method for increasing the amount of capital owned or under one's control, or any method in using or mobilizing capital resources for investment purposes. Capital formation also sometimes refers to a specific statistical concept, also known as net investment, which measures the net additions to the (physical) capital stock of a country (or an economic sector) in an accounting interval. Capital formation is also sometimes a modern general term for capital accumulation, referring to the total "stock of capital" that has been formed, or to the growth of this total capital stock.
capital gain The profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares.
capital good A durable good that is used in the production of goods or services. Capital goods are one of the three types of producer goods, the other two being land and labour, which are also known collectively as primary factors of production. This classification originated with classical economics and has remained the dominant method for classification.
capital intensity The amount of fixed or real capital present in relation to other factors of production, especially labor. At the level of either a production process or the aggregate economy, it may be estimated by the capital to labor ratio, such as from the points along a capital/labor isoquant.
capitalism An economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price systems, private property, property rights recognition, voluntary exchange, and wage labor.
cartel Any group of firms that colludes and acts as a single coordinated whole to restrict output and drive up prices.
cash Money in the physical form of currency, such as banknotes and coins.
cash crop A cash crop, also called profit crop, is an agricultural crop which is grown to sell for profit. It is typically purchased by parties separate from a farm.
central bank Also called a reserve bank or monetary authority. An institution that manages the currency, money supply, and interest rates of an entire state or nation. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency, which usually serves as the state's legal tender. Central banks also act as a "lender of last resort" to the banking sector during times of financial crisis. Most central banks usually also have supervisory and regulatory powers to ensure the solvency of member institutions, prevent bank runs, and prevent reckless or fraudulent behavior by member banks.
Certificate of Deposit (CD or COD) A savings instrument that usually earns more interest than a savings account but is bound by limits set within a contract.
ceteris paribus A phrase or clause often loosely translated as "holding all else constant." It does not imply that no other things will in fact change; rather, it isolates the effect of one particular change.
charitable giving A gift of cash or property made to a nonprofit organization to help it accomplish its goals, for which the donor receives nothing of value in return. In the U.S. however, some charitable giving is tax deductible.
chartalism A heterodox theory of money that argues that money originated historically with states' attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt, and that fiat currency has value in exchange because of sovereign power to levy taxes on economic activity payable in the currency they issue.
check (money) A check is a written, dated, and signed draft that directs a bank to pay a specific sum of money to the bearer. The person or entity writing the check is known as the payor or drawer, while the person to whom the check is written is the payee.
Chicago school A neoclassical school of thought once based around rational expectations, monetarism, and free market supremacy.
Choice (CD or COD) Making a decision when facing multiple possible options.
choice modelling A method of modelling the decision process of an individual or segment via revealed or stated preferences.
circular flow of income Also called circular flow model. A model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. The circular flow analysis is the basis of national accounts and hence of macroeconomics.
circulation The continuous movement of goods, services, and money within an economy.
citizen's dividend A proposed set of regular payments to all citizens from revenue raised by leasing or taxing the monopoly of valuable land and other natural resources. It is based on the Georgist principle that the natural world is the common property of all people.
classical economics Also called classical political economy. A school of thought in economics that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Robert Malthus, and John Stuart Mill. These economists produced a theory of market economies as largely self-regulating systems, governed by natural laws of production and exchange (famously captured by Adam Smith's metaphor of the invisible hand).
classical general equilibrium model A model that aims to describe the economy by aggregating the behavior of individuals and firms. Note that the classical general equilibrium model is unrelated to classical economics, and was instead developed within neoclassical economics beginning in the late 19th century.
club good Also called artificially scarce goods, toll goods, collective goods or quasi-public goods. A good that is excludable but non-rivalrous, at least until reaching a point where congestion occurs.
Coase conjecture A model in which a monopolist must sell its product at a low price because it is effectively in competition with itself over multiple periods. It is assumed that the monopolist sells a durable good to a market where resale is impossible, faces an infinite time horizon, faces consumers who have different valuations, and does not know individuals' valuations.
Coase theorem States that if the provision of a good or service results in an externality and trade in that good or service is possible, then bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property. This requires sufficiently low transaction costs in the bargaining and exchange process.
cobweb model Also called cobweb theory. A model which describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers' expectations about prices are assumed to be based on observations of previous prices. It explains why prices may be subjected to periodic fluctuations in certain types of markets.
collateral loan Also known as a secured loan, it is a loan where the borrower pledges an asset to a financial institution to access funds. The asset, called collateral, protects the lender from possible defaulting as they would take ownership in case of default.
collective action Any action taken together by a group of people whose goal is to enhance their condition and achieve a common objective.
collective action problem Also called social dilemma A situation in which all individuals would be better off cooperating but fail to do so because of conflicting interests between individuals that discourage joint action.
collusion A deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right.
command economy An economy in which the government directs all economic activity.
commerce Relates to "the exchange of goods and services, especially on a large scale". It includes legal, economic, political, social, cultural and technological systems that operate in a country or in international trade.
commercial agriculture It is a type of agriculture, both of crop plants and of animals, with higher levels of input and output per unit of agricultural land area.
commodity An economic good or service that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
communism An ideology centered around common ownership of the means of production, distribution, and exchange that allocates products to everyone in the society based on need. comparative advantage Also called opportunity cost advantage. The ability to produce most efficiently given all of the other products that could be produced.
compensating differential Also called compensating wage differential or equalizing difference. The additional amount of income that a given worker must be offered to motivate them to accept a given undesirable job, relative to other jobs that worker could perform.
Competition (CD or COD) The presence in a market of independent buyers and sellers competing with one another and the freedom of buyers and sellers to enter and leave the market.
competition law Also called an antitrust law or anti-monopoly law. Any law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies.
competitive market A market in which many sellers compete against each other to attract customers. Each seller has an incentive to sell at the lowest price possible to attract customers, so prices tend to be driven so low that the sellers can just barely make a profit.
comple