Key words

• ability-to-pay principle

  The idea that taxes should be levied on a person according to how well that person can shoulder the burden.
• Absolute advantage

  The comparison  among producers of a good according  to their productivity 
• Accounting profit

  Total revenue - total explicit cost 
• Adverse selection

  The tendency for the  mix of unobserved attributes to become  undesirable from the standpoint of an  uninformed party 
• Agent

  A person who is performing an act for another person, called the principal
• Aggregate demand curve

  A curve that shows the quantity of goods and services that households, firms and the government want to buy at each price level
• Aggregate risk

  Risk that affects all economic actors at once
• Aggregate supply curve

  A curve that shows the quantity of goods and services that firms choose to produce and sell at each price level
• Appreciation

  An increase in the value of a currency as measured by the amount of foreign currency it can buy
• Arrow's impossibility theorem

  A mathematical result showing that, under certain assumed conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences
• Automatic stabilizers

  Changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession, without policymakers having to take any deliberate action
• Average fixed cost

  Fixed costs divided by the quantity of output
• Average revenue

  Total revenue / quantity sold
• Average tax rate

  Total taxes paid / total income
• Average total cost

  Total cost / quantity of output
• Average variable cost

  Variable costs / quantity of output
• Balanced trade

  A situation in which exports equal imports
• Bank of England

  The central bank of the United Kingdom
• Bank run

  When a substantial number of depositors suspect that a bank may go bankrupt and withdraw their deposits
• Benefits principle

  The idea that people should pay taxes based on the benefits they receive from government services
• Bond

  A certificate of indebtedness
• Budget constraint

  The limit on the consumption bundles that a consumer can afford
• Budget deficit

  A shortfall of tax revenue from government spending
• Budget surplus

  An excess of tax revenue over government spending
• Business cycle

  Fluctuations in economic activity, such as employment and production
• Capital

  The equipment and structures used to produce goods and services
• Capital flight

  A large and sudden reduction in the demand for assets located in a country
• Cartel

  A group of firms acting in unison
• Catch-up effect

  The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
• Central bank

  An institution designed to regulate the quantity of money in the economy
• Circular-flow diagram

  A visual model of the economy that shows how money and production inputs and outputs flow through markets among households and firms
• Classical dichotomy

  The theoretical separation of nominal and real variables
• Closed economy

  An economy that does not interact with other economies in the world
• Coase theorem

  The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
• Collective bargaining

  The process by which unions and firms agree on the terms of employment
• Collusion

  An agreement among firms in a market about quantities to produce or prices to charge
• Commodity money

  Money that takes the form of a commodity with intrinsic value
• Common currency area

  A geographical area, possibly covering several countries, in which a common currency circulates as the medium of exchange
• Common resources

  Goods that are rivalrous but not excludable
• Comparative advantage

  The comparison among producers of a good according to their opportunity cost