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Glossary

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    Glossary Entries
    Word(s) Definition Image Caption Link Source
    absolute advantage Condition that exists when one production possibilities frontier can produce more of all goods than another.        
    absolute advantage Condition that exists when one production possibilities frontier can produce more of all goods than another.        
    ad valorem At value.        
    ad valorem At value.        
    arbitrage Buying and reselling to make a profit.        
    arbitrage Buying and reselling to make a profit.        
    Arrow-Pratt measure of risk aversion A measure of risk aversion computed as the negative of the ratio of the second derivative of utility divided by the first derivative of utility.        
    Arrow-Pratt measure of risk aversion A measure of risk aversion computed as the negative of the ratio of the second derivative of utility divided by the first derivative of utility.        
    autarky State of no exchange.        
    autarky State of no exchange.        
    baby boom A dramatic increase in births for the years 1946 to 1964.        
    baby boom A dramatic increase in births for the years 1946 to 1964.        
    bid increments The difference between successive price requests.        
    bid increments The difference between successive price requests.        
    bid-rigging Price fixing in an auction context.        
    bid-rigging Price fixing in an auction context.        
    bidder credits Favoritism in an auction for certain bidders in the form of discounts on payment.        
    bidder credits Favoritism in an auction for certain bidders in the form of discounts on payment.        
    bliss point A point that maximizes utility.        
    bliss point A point that maximizes utility.        
    budget line Set of goods that just exhaust the consumer's budget.        
    budget line Set of goods that just exhaust the consumer's budget.        
    budget set Set of goods a consumer can afford.        
    budget set Set of goods a consumer can afford.        
    business cycle Random fluctuations in output.        
    business cycle Random fluctuations in output.        
    capital accounts Earnings on foreign assets, and the payments from U.S.-based assets owned by foreigners.        
    capital accounts Earnings on foreign assets, and the payments from U.S.-based assets owned by foreigners.        
    certainty equivalent The amount of money that provides equal utility to the random payoff of the gamble.        
    certainty equivalent The amount of money that provides equal utility to the random payoff of the gamble.        
    ceteris paribus Latin phrase meaning “other things equal.”        
    ceteris paribus Latin phrase meaning “other things equal.”        
    circle model A Hotelling model set on a circle.        
    circle model A Hotelling model set on a circle.        
    Civil Rights Act Legislation that prohibited segregation based on race in schools, public places, and employment.        
    Civil Rights Act Legislation that prohibited segregation based on race in schools, public places, and employment.        
    Coasian bargaining Solving the problem of externalities through negotiation.        
    Coasian bargaining Solving the problem of externalities through negotiation.        
    Cobb-Douglas production function A production function that is the product of each input, x, raised to a given power.        
    Cobb-Douglas production function A production function that is the product of each input, x, raised to a given power.        
    common resource A resource shared by many people.        
    common resource A resource shared by many people.        
    common values Situation in which bidders in an auction have the same value, which is generally not known with certainty.        
    common values Situation in which bidders in an auction have the same value, which is generally not known with certainty.        
    comparative disadvantage Condition that exists when one good has a higher opportunity cost over another.        
    comparative disadvantage Condition that exists when one good has a higher opportunity cost over another.        
    comparative static A prediction that allows one to determine how one variable affects another, at least in the setting described by the model.        
    comparative static A prediction that allows one to determine how one variable affects another, at least in the setting described by the model.        
    compensated demand Demand that exists when a change in price is accompanied by just enough additional income to keep utility the same.        
    compensated demand Demand that exists when a change in price is accompanied by just enough additional income to keep utility the same.        
    compensating differential Income or costs that equalize different choices.        
    compensating differential Income or costs that equalize different choices.        
    complement in supply A good whose cost falls as the amount produced of another good rises.        
    complement in supply A good whose cost falls as the amount produced of another good rises.        
    complements For a given good x, a good whose consumption increases the value of x.        
    complements For a given good x, a good whose consumption increases the value of x.        
    compound interest The correct rate of interest that is calculated by adding together the cumulative interest payments earned during one year.        
    compound interest The correct rate of interest that is calculated by adding together the cumulative interest payments earned during one year.        
    concentrated benefits and diffused costs Situation where a small number of people with strong incentives are able to expropriate a small amount per person from a large number of people.        
    concentrated benefits and diffused costs Situation where a small number of people with strong incentives are able to expropriate a small amount per person from a large number of people.        
    Consolidated annuities or consols Bonds that pay a fixed amount in perpetuity (forever).        
    Consolidated annuities or consols Bonds that pay a fixed amount in perpetuity (forever).        
    constant elasticity Condition in which the elasticity remains at the same level while the underlying variables change.        
    constant elasticity Condition in which the elasticity remains at the same level while the underlying variables change.        
    constant returns to scale Situation that exists when increasing all inputs by the same scalar factor increases output by that scalar factor.        
    constant returns to scale Situation that exists when increasing all inputs by the same scalar factor increases output by that scalar factor.        
    consumer price index (CPI) A price deflator that adjusts for what it costs to buy a “standard” bundle of food, clothing, housing, electricity, and other items.        
    consumer price index (CPI) A price deflator that adjusts for what it costs to buy a “standard” bundle of food, clothing, housing, electricity, and other items.        
    consumer surplus The value of consuming a good, minus the price paid.        
    consumer surplus The value of consuming a good, minus the price paid.        
    contract curve Curve in which every point maximizes one person’s utility given another’s utility.        
    contract curve Curve in which every point maximizes one person’s utility given another’s utility.        
    convex function The function that lies below the straight line segment connecting two points, for any two points in the interval.        
    convex function The function that lies below the straight line segment connecting two points, for any two points in the interval.        
    corporate finance The study of funding of operations of companies.        
    corporate finance The study of funding of operations of companies.        
    corporation A single entity owned by shareholders.        
    corporation A single entity owned by shareholders.        
    Cournot model A model of imperfect competition where firms simultaneously set quantities.        
    Cournot model A model of imperfect competition where firms simultaneously set quantities.        
    covary To move together.        
    covary To move together.        
    deadweight loss The buyer’s values minus the seller’s costs of units that are not economic to trade because of a tax or other interference in the market.        
    deadweight loss The buyer’s values minus the seller’s costs of units that are not economic to trade because of a tax or other interference in the market.        
    Diminishing marginal returns The principle that spending more on something reduces the per-unit value produced.        
    Diminishing marginal returns The principle that spending more on something reduces the per-unit value produced.        
    diminishing marginal value Condition in which the value of the last unit declines as the number consumed rises.        
    diminishing marginal value Condition in which the value of the last unit declines as the number consumed rises.        
    discounted The practice of adjusting a sequence of payments to account for the interest these payments would earn in financial markets.        
    discounted The practice of adjusting a sequence of payments to account for the interest these payments would earn in financial markets.        
    discretionary expenditures Government expenditures that aren’t transfers.        
    discretionary expenditures Government expenditures that aren’t transfers.        
    dominant strategy A strategy that is optimal no matter what the other players do.        
    dominant strategy A strategy that is optimal no matter what the other players do.        
    Dutch auction Auction where prices start high and decrease until a bidder signals willingness to pay, at which point the auction stops.        
    Dutch auction Auction where prices start high and decrease until a bidder signals willingness to pay, at which point the auction stops.        
    economy of scale Situation that exists when larger scale lowers average cost.        
    economy of scale Situation that exists when larger scale lowers average cost.        
    economy of scope Situation that exists when producing more related goods lowers average cost.        
    economy of scope Situation that exists when producing more related goods lowers average cost.        
    Edgeworth box A graphical representation of the exchange problem facing participants in a two-good exchange economy.        
    Edgeworth box A graphical representation of the exchange problem facing participants in a two-good exchange economy.        
    efficient Maximizing the gains from trade under the assumption that the only people affected by any given transaction are the buyers and the seller.        
    efficient Maximizing the gains from trade under the assumption that the only people affected by any given transaction are the buyers and the seller.        
    elasticity The percentage change in one variable for a small percentage change in another.        
    elasticity of demand The percentage change in one variable for a small percentage change in another.        
    elasticity of demand The percentage change in one variable for a small percentage change in another.        
    elasticity of supply The percentage increase in quantity supplied resulting from a small percentage increase in price.        
    elasticity of supply The percentage increase in quantity supplied resulting from a small percentage increase in price.        
    Engel curve Graph that shows the path of consumption as income changes, holding prices constant.        
    Engel curve Graph that shows the path of consumption as income changes, holding prices constant.        
    English auction Auction where bids increase until no one is willing to top the current bid.        
    English auction Auction where bids increase until no one is willing to top the current bid.        
    equilibrium Condition that occurs when the pressure for higher prices is balanced by the pressure for lower prices so that the current rate of exchange between buyers and sellers persists.        
    equilibrium Condition that occurs when the pressure for higher prices is balanced by the pressure for lower prices so that the current rate of exchange between buyers and sellers persists.        
    excess burden of taxation The amount by which the cost of taxation exceeds the taxes raised.        
    excess burden of taxation The amount by which the cost of taxation exceeds the taxes raised.        
    exchange economy An economy where the supply of each good is just the total endowment of that good, and there is no production.        
    exchange economy An economy where the supply of each good is just the total endowment of that good, and there is no production.        
    external benefits Benefits obtained by third parties.        
    external benefits Benefits obtained by third parties.        
    external economy of scale An economy of scale that operates at the industry level, not the individual firm level.        
    external economy of scale An economy of scale that operates at the industry level, not the individual firm level.        
    externality Any effect on people not involved in a particular transaction.        
    externality Any effect on people not involved in a particular transaction.        
    factor price equalization Theory that predicts that the value of factors of production should be equalized through trade.        
    factor price equalization Theory that predicts that the value of factors of production should be equalized through trade.        
    Factors of production Inputs to the production process.        
    Factors of production Inputs to the production process.        
    Federal Trade Commission (FTC) Federal government agency that enforces the antitrust laws, along with the U.S. Department of Justice (DOJ), and provides consumer protection.        
    Federal Trade Commission (FTC) Federal government agency that enforces the antitrust laws, along with the U.S. Department of Justice (DOJ), and provides consumer protection.        
    first mover advantage Situation in which choosing first is better than choosing simultaneously.        
    first mover advantage Situation in which choosing first is better than choosing simultaneously.        
    first-order condition A mathematical condition for optimization stating that the first derivative is zero.        
    first-order condition A mathematical condition for optimization stating that the first derivative is zero.        
    Fixed factors of production Factors that are not readily moved and thus give particular regions a comparative advantage in the production of some kinds of goods and not in others.        
    Fixed factors of production Factors that are not readily moved and thus give particular regions a comparative advantage in the production of some kinds of goods and not in others.        
    fixed-proportions production function A production function that requires inputs be used in fixed proportions to produce output.        
    fixed-proportions production function A production function that requires inputs be used in fixed proportions to produce output.        
    flow The rate of change in the amount of some material that exists from one instant to the next.        
    flow The rate of change in the amount of some material that exists from one instant to the next.        
    Foreclosure Denying access to necessary inputs.        
    Foreclosure Denying access to necessary inputs.        
    free riders Individuals who don’t contribute to the provision of a public good.        
    free riders Individuals who don’t contribute to the provision of a public good.        
    Great Depression A prolonged and severe economic downturn from 1929 to 1939.        
    Great Depression A prolonged and severe economic downturn from 1929 to 1939.        
    grim trigger strategy Strategy that involves being nice initially but not nice forever when someone else isn’t cooperative.        
    grim trigger strategy Strategy that involves being nice initially but not nice forever when someone else isn’t cooperative.        
    gross domestic product (GDP) The value of traded goods and services produced within the borders of the United States.        
    gross domestic product (GDP) The value of traded goods and services produced within the borders of the United States.        
    hedonic pricing Method of valuation in which each item is first evaluated separately and then the item values are added together to arrive at a total value.        
    hedonic pricing Method of valuation in which each item is first evaluated separately and then the item values are added together to arrive at a total value.        
    Hirschman-Herfindahl Index (HHI) The weighted average of the price-cost margins of all firms in the market.        
    Hirschman-Herfindahl Index (HHI) The weighted average of the price-cost margins of all firms in the market.        
    horizontal differentiation Variety.        
    horizontal differentiation Variety.        
    Hotelling model Model of imperfect competition in which customers’ preferences and products are located by points on the same line segment.        
    Hotelling model Model of imperfect competition in which customers’ preferences and products are located by points on the same line segment.        
    households Groups of people sharing living quarters.        
    households Groups of people sharing living quarters.        
    incidence of the tax Changes in the price paid for a good based on the amount of tax on the good.        
    incidence of the tax Changes in the price paid for a good based on the amount of tax on the good.        
    income effect The effect on consumption of a change in income.        
    income effect The effect on consumption of a change in income.        
    indifference curve The set of goods that produce equal utility; also known as iso-utility curve.        
    indifference curve The set of goods that produce equal utility; also known as iso-utility curve.        
    indirect price discrimination Offering a menu or set of prices and permitting customers to choose distinct prices.        
    indirect price discrimination Offering a menu or set of prices and permitting customers to choose distinct prices.        
    Individual rationality Situation in which the outcome offers a present value of profits at least as high as that offered in the worst equilibrium in the stage game from that player’s perspective.        
    Individual rationality Situation in which the outcome offers a present value of profits at least as high as that offered in the worst equilibrium in the stage game from that player’s perspective.        
    informational asymmetry Situation in which some parties have information that others do not.        
    informational asymmetry Situation in which some parties have information that others do not.        
    internal rate of return (IRR) Method of analyzing an investment that solves the equation NPV = 0 for the interest rate.        
    internal rate of return (IRR) Method of analyzing an investment that solves the equation NPV = 0 for the interest rate.        
    isocost Line that holds constant the expenditure on inputs.        
    isocost Line that holds constant the expenditure on inputs.        
    isoquant Curves that describe all the combinations of inputs that produce the same level of output.        
    isoquant Curves that describe all the combinations of inputs that produce the same level of output.        
    iterated elimination of dominated strategies Eliminating strategies by sequentially removing strategies that are dominated for a player.        
    iterated elimination of dominated strategies Eliminating strategies by sequentially removing strategies that are dominated for a player.        
    law of one price Identical goods sell at the same price.        
    law of one price Identical goods sell at the same price.        
    linkage principle The expected price in an auction to sell rises the more the price is linked to the actual value.        
    linkage principle The expected price in an auction to sell rises the more the price is linked to the actual value.        
    local public goods Goods that are produced and consumed in a limited geographical area.        
    local public goods Goods that are produced and consumed in a limited geographical area.        
    logarithmic scale Scale on which a straight line gives constant percentage growth.        
    logarithmic scale Scale on which a straight line gives constant percentage growth.        
    long-run average variable cost The long-run total cost divided by output.        
    long-run average variable cost The long-run total cost divided by output.        
    long-run total cost The total cost of output with all factors varying.        
    long-run total cost The total cost of output with all factors varying.        
    marginal Term meaning “the derivative of.”        
    marginal Term meaning “the derivative of.”        
    marginal product The derivative of the production function with respect to an input.        
    marginal product The derivative of the production function with respect to an input.        
    marginal rate of substitution (MRS) The amount extra of one good needed to make up for a decrease in another good, staying on an indifference curve.        
    marginal rate of substitution (MRS) The amount extra of one good needed to make up for a decrease in another good, staying on an indifference curve.        
    marginal rate of technical substitution The amount of one input needed to make up for a decrease in another input while holding output constant.        
    marginal rate of technical substitution The amount of one input needed to make up for a decrease in another input while holding output constant.        
    marginal revenue The derivative of revenue pq with respect to quantity.        
    marginal revenue The derivative of revenue pq with respect to quantity.        
    market demand The quantity purchased by all market participants for each price.        
    market demand The quantity purchased by all market participants for each price.        
    market failure A situation where a competitive market does not yield the socially efficient outcome.        
    market failure A situation where a competitive market does not yield the socially efficient outcome.        
    market for lemons A model where sellers are better informed about quality than buyers.        
    market for lemons A model where sellers are better informed about quality than buyers.        
    market power The ability to increase their price above marginal cost and sustain sales for a long period of time.        
    market power The ability to increase their price above marginal cost and sustain sales for a long period of time.        
    Market supply The sum of all the individual supply curves for all market participants.        
    Market supply The sum of all the individual supply curves for all market participants.        
    matching pennies A child’s game in which the sum of the payoffs is zero.        
    matching pennies A child’s game in which the sum of the payoffs is zero.        
    maximum sustainable yield Policy that maximizes the long-run average value of a sustainable resource.        
    maximum sustainable yield Policy that maximizes the long-run average value of a sustainable resource.        
    mean variance preferences Preference that describe people who value risk linearly with the expected return.        
    mean variance preferences Preference that describe people who value risk linearly with the expected return.        
    mechanism A means of arranging a trade.        
    mechanism A means of arranging a trade.        
    median voter The voter whose preferences fall in the middle of the range.        
    median voter The voter whose preferences fall in the middle of the range.        
    minimum wage The minimum amount that a worker can be paid per hour.        
    minimum wage The minimum amount that a worker can be paid per hour.        
    mixed strategies Random strategies.        
    mixed strategies Random strategies.        
    monopoly A firm that faces a downward sloping demand and has a choice about what price to charge.        
    monopoly A firm that faces a downward sloping demand and has a choice about what price to charge.        
    Multi-tasking Performing several activities simultaneously.        
    Multi-tasking Performing several activities simultaneously.        
    Myerson-Satterthwaite theorem A theorem that shows private information about value may prevent efficient trade.        
    Myerson-Satterthwaite theorem A theorem that shows private information about value may prevent efficient trade.        
    Nash equilibrium Situation in which a player chooses the strategy that maximizes his or her expected payoff, given the strategies employed by others.        
    Nash equilibrium Situation in which a player chooses the strategy that maximizes his or her expected payoff, given the strategies employed by others.        
    natural monopoly Situation that arises when a single firm can efficiently serve the entire market because average costs are lower with one firm than with two firms.        
    natural monopoly Situation that arises when a single firm can efficiently serve the entire market because average costs are lower with one firm than with two firms.        
    net present value, or NPV The present value of a stream of net payments.        
    net present value, or NPV The present value of a stream of net payments.        
    network externality Situation that arises when others’ use of a product makes it more valuable to each consumer.        
    network externality Situation that arises when others’ use of a product makes it more valuable to each consumer.        
    nonprofit firm Firm that is prohibited from distributing a profit to its owners.        
    nonprofit firm Firm that is prohibited from distributing a profit to its owners.        
    nonrivalry Condition in which many people can use a good simultaneously.        
    nonrivalry Condition in which many people can use a good simultaneously.        
    normal good Goods whose demand increases with income.        
    normal good Goods whose demand increases with income.        
    normative analyses A study that makes value judgments.        
    normative analyses A study that makes value judgments.        
    numeraire A good used as a reference good, so that prices are denominated in units of that good.        
    numeraire A good used as a reference good, so that prices are denominated in units of that good.        
    opportunity cost The value that one forgoes in purchasing a product or undertaking an activity.        
    opportunity cost The value that one forgoes in purchasing a product or undertaking an activity.        
    option The right to buy or sell at a price determined in advance.        
    option The right to buy or sell at a price determined in advance.        
    Pareto efficiency Condition that exists when there is no waste or slack in a system, even if it is wildly unfair.        
    Pareto efficiency Condition that exists when there is no waste or slack in a system, even if it is wildly unfair.        
    peak-load pricing The pricing of a service when demand for it is at its highest.        
    peak-load pricing The pricing of a service when demand for it is at its highest.        
    perfect substitutes Two goods that can be substituted for each other at a constant rate while maintaining the same output level.        
    perfect substitutes Two goods that can be substituted for each other at a constant rate while maintaining the same output level.        
    permanent income The present value of the income stream.        
    permanent income The present value of the income stream.        
    Perron-Frobenius theorem Theorem that states that if B is a positive matrix (each component positive), then there is an eigenvalue λ > 0 and an associated positive eigenvector p; and, moreover, λ is the largest (in absolute value) eigenvector of B.        
    Perron-Frobenius theorem Theorem that states that if B is a positive matrix (each component positive), then there is an eigenvalue λ > 0 and an associated positive eigenvector p; and, moreover, λ is the largest (in absolute value) eigenvector of B.        
    Pigouvian tax A per-unit tax on a good.        
    Pigouvian tax A per-unit tax on a good.        
    Predatory pricing Pricing below cost in order to drive a rival out of business.        
    Predatory pricing Pricing below cost in order to drive a rival out of business.        
    price discrimination Charging distinct customers different prices for the same good.        
    price discrimination Charging distinct customers different prices for the same good.        
    price dispersion Price variation across stores.        
    price dispersion Price variation across stores.        
    price support The combination of a minimum price, or price floor, and government purchase of any surplus.        
    price support The combination of a minimum price, or price floor, and government purchase of any surplus.        
    price system System that involves a specific price for trading Y for X, and vice versa, that is available to both parties.        
    price system System that involves a specific price for trading Y for X, and vice versa, that is available to both parties.        
    principal The entity—person or corporation—on whose behalf an agent works.        
    principal The entity—person or corporation—on whose behalf an agent works.        
    prisoner’s dilemma Game in which the strategies are to confess or not to confess; the first player to confess avoids jail.        
    prisoner’s dilemma Game in which the strategies are to confess or not to confess; the first player to confess avoids jail.        
    private benefit The benefit obtained by the buyer.        
    private benefit The benefit obtained by the buyer.        
    production function The mapping from inputs to an output or outputs.        
    production function The mapping from inputs to an output or outputs.        
    production possibilities The collection of feasible outputs of an individual, group or society, or country.        
    production possibilities The collection of feasible outputs of an individual, group or society, or country.        
    production possibilities frontier The boundary of the production possibilities set.        
    production possibilities frontier The boundary of the production possibilities set.        
    property rights Rights that come with ownership.        
    property rights Rights that come with ownership.        
    pure strategy Nash equilibrium A Nash equilibrium in which no player randomizes.        
    pure strategy Nash equilibrium A Nash equilibrium in which no player randomizes.        
    quasilinear utility Utility that is additively separable.        
    quasilinear utility Utility that is additively separable.        
    quintile One fifth, or 20%, of a group.        
    quintile One fifth, or 20%, of a group.        
    quota A maximal production quantity, usually set based on historical production.        
    quota A maximal production quantity, usually set based on historical production.        
    Raising rivals’ costs Increasing input prices as a means of harming a rival.        
    Raising rivals’ costs Increasing input prices as a means of harming a rival.        
    Ramsey rule For resources in fixed supply, prices rise at the interest rate.        
    Ramsey rule For resources in fixed supply, prices rise at the interest rate.        
    rate of return regulation Price-limiting strategy that limits the profitability of firms.        
    rate of return regulation Price-limiting strategy that limits the profitability of firms.        
    recessions Periods marked by a drop in gross domestic output.        
    recessions Periods marked by a drop in gross domestic output.        
    relevant antitrust market A set of products sold in a geographic area in which a hypothetical monopoly can profitably raise price.        
    relevant antitrust market A set of products sold in a geographic area in which a hypothetical monopoly can profitably raise price.        
    reservation price The maximum acceptable price a consumer will pay without visiting another supplier.        
    reservation price The maximum acceptable price a consumer will pay without visiting another supplier.        
    Reserve prices Minimum bids in an auction.        
    Reserve prices Minimum bids in an auction.        
    revealed preference Kind that states that choice implies preference.        
    revealed preference Kind that states that choice implies preference.        
    revenue equivalence Situation in which two auctions produce the same price on average.        
    revenue equivalence Situation in which two auctions produce the same price on average.        
    Ricardian theory Theory that suggests nations, responding to price incentives, will specialize in the production of goods in which they have a comparative advantage, and purchase the goods in which they have a comparative disadvantage.        
    Ricardian theory Theory that suggests nations, responding to price incentives, will specialize in the production of goods in which they have a comparative advantage, and purchase the goods in which they have a comparative disadvantage.        
    risk premium The difference between the expected payoff and the certainty equivalent.        
    risk premium The difference between the expected payoff and the certainty equivalent.        
    risk premium The difference between the expected payoff and the certainty equivalent.        
    risk premium The difference between the expected payoff and the certainty equivalent.        
    risk-averse Preferring the expected value of a gamble to the gamble.        
    risk-averse Preferring the expected value of a gamble to the gamble.        
    Robinson-Patman Section of the Clayton Act prohibiting price discrimination that lessens competition.        
    Robinson-Patman Section of the Clayton Act prohibiting price discrimination that lessens competition.        
    satiation The point at which increased consumption does not increase utility.        
    satiation The point at which increased consumption does not increase utility.        
    sealed-bid auction Auction where bidders simultaneously submit sealed bids, and the highest bidder wins and pays the highest bid.        
    sealed-bid auction Auction where bidders simultaneously submit sealed bids, and the highest bidder wins and pays the highest bid.        
    second welfare theorem of general equilibrium Theorem that states that any Pareto-efficient point is an equilibrium of the price system for some endowment.        
    second welfare theorem of general equilibrium Theorem that states that any Pareto-efficient point is an equilibrium of the price system for some endowment.        
    second-order condition A mathematical condition for maximization stating that the second derivative is nonpositive.        
    second-order condition A mathematical condition for maximization stating that the second derivative is nonpositive.        
    self-interested behavior Selfishness.        
    self-interested behavior Selfishness.        
    shadow value The value associated with a constraint.        
    shadow value The value associated with a constraint.        
    sharing rule In agency theory, sharing a fixed proportion of the output with the agent.        
    sharing rule In agency theory, sharing a fixed proportion of the output with the agent.        
    Sherman Act The first U.S. antitrust law; it makes restraint of trade (monopolization) illegal.        
    Sherman Act The first U.S. antitrust law; it makes restraint of trade (monopolization) illegal.        
    short run Time interval in which not all inputs can be changed.        
    short run Time interval in which not all inputs can be changed.        
    short-run average variable cost The average cost ignoring the investment in capital equipment.        
    short-run average variable cost The average cost ignoring the investment in capital equipment.        
    short-run equilibrium The point where short-run demand equals short-run supply.        
    short-run equilibrium The point where short-run demand equals short-run supply.        
    short-run fixed cost The difference between variable cost and total cost.        
    short-run fixed cost The difference between variable cost and total cost.        
    short-run marginal cost The derivative of short-run total cost with respect to output.        
    short-run marginal cost The derivative of short-run total cost with respect to output.        
    short-run total cost The total cost of output with only short-run factors varying.        
    short-run total cost The total cost of output with only short-run factors varying.        
    short-run variable cost The total cost minus the cost of producing zero units.        
    short-run variable cost The total cost minus the cost of producing zero units.        
    shortage Condition in which the quantity demanded exceeds the quantity supplied.        
    shortage Condition in which the quantity demanded exceeds the quantity supplied.        
    signaling Expenditures of time or money whose purpose is to convince others of something.        
    signaling Expenditures of time or money whose purpose is to convince others of something.        
    social costs The total costs for all parties.        
    social costs The total costs for all parties.        
    stage game The game that is repeated in a supergame.        
    stage game The game that is repeated in a supergame.        
    steady state Condition in which the variables stay constant and forces are balanced.        
    steady state Condition in which the variables stay constant and forces are balanced.        
    strategic equivalence Situation in which two games are strategically equivalent if they have the same strategies (after a renaming) and the strategies lead to the same outcomes.        
    strategic equivalence Situation in which two games are strategically equivalent if they have the same strategies (after a renaming) and the strategies lead to the same outcomes.        
    strike price The amount one pays to obtain a share of stock.        
    strike price The amount one pays to obtain a share of stock.        
    subgame perfection The idea that every stage of a dynamic game is played in an optimal way.        
    subgame perfection The idea that every stage of a dynamic game is played in an optimal way.        
    substitute For a given good x, a good whose consumption decreases the value of x.        
    substitute For a given good x, a good whose consumption decreases the value of x.        
    substitute in supply A good whose cost rises as the amount produced of another good rises.        
    substitute in supply A good whose cost rises as the amount produced of another good rises.        
    substitution effect The effect on consumption of a change in the relative price, with a sufficient change in income to keep the consumer on the same utility isoquant.        
    substitution effect The effect on consumption of a change in the relative price, with a sufficient change in income to keep the consumer on the same utility isoquant.        
    sunk cost fallacy A psychological tendency to invest more once one has made a significant nonrecoverable investment, even when subsequent investment isn’t warranted.        
    sunk cost fallacy A psychological tendency to invest more once one has made a significant nonrecoverable investment, even when subsequent investment isn’t warranted.        
    supply The function that gives the quantity offered for sale as a function of price.        
    supply The function that gives the quantity offered for sale as a function of price.        
    support price The minimum price the government is willing to pay for a product.        
    support price The minimum price the government is willing to pay for a product.        
    surplus Condition in which the quantity supplied exceeds the quantity demanded.        
    surplus Condition in which the quantity supplied exceeds the quantity demanded.        
    the battle of the sexes A coordination game that involves a married couple who are going to meet each other after work but haven’t decided where they are meeting.        
    the battle of the sexes A coordination game that involves a married couple who are going to meet each other after work but haven’t decided where they are meeting.        
    total expenditure Price times the quantity purchased.        
    total expenditure Price times the quantity purchased.        
    Tradable permits Quotas for pollution that can be exchanged to create a market in the right to pollute.        
    Tradable permits Quotas for pollution that can be exchanged to create a market in the right to pollute.        
    tragedy of the commons Overuse of a resource due to lack of ownership.        
    tragedy of the commons Overuse of a resource due to lack of ownership.        
    Transfers to individuals Direct payments to individuals in the form of a check.        
    Transfers to individuals Direct payments to individuals in the form of a check.        
    Treasury bill A bond that has a fixed redemption value.        
    Treasury bill A bond that has a fixed redemption value.        
    two-part pricing Price discrimination featuring a fixed charge plus a marginal charge.        
    two-part pricing Price discrimination featuring a fixed charge plus a marginal charge.        
    two-part test In antitrust, the requirement for an antitrust violation that a firm had monopoly power and abused that power.        
    two-part test In antitrust, the requirement for an antitrust violation that a firm had monopoly power and abused that power.        
    U.S. Department of Justice Federal government agency that enforces the antitrust laws, along with the Federal Trade Commission (FTC), among other responsibilities.        
    U.S. Department of Justice Federal government agency that enforces the antitrust laws, along with the Federal Trade Commission (FTC), among other responsibilities.        
    unilateral effect In antitrust, a situation in which merging parties increase price unilaterally after the merger is consummated.        
    unilateral effect In antitrust, a situation in which merging parties increase price unilaterally after the merger is consummated.        
    unitary elasticity When elasticity is equal to one.        
    unitary elasticity When elasticity is equal to one.        
    usury laws Laws that limit the legal interest rate that can be charged.        
    usury laws Laws that limit the legal interest rate that can be charged.        
    Utility Flow of pleasure or happiness that a person enjoys.        
    Utility Flow of pleasure or happiness that a person enjoys.        
    value of the marginal product The marginal product times the price of the output.        
    value of the marginal product The marginal product times the price of the output.        
    vertical merger A merger between an input supplier and an input buyer.        
    vertical merger A merger between an input supplier and an input buyer.        
    Vickrey auction Auction where bidders bid simultaneously, and the highest bidder wins and pays the second-highest bid.        
    Vickrey auction Auction where bidders bid simultaneously, and the highest bidder wins and pays the second-highest bid.        
    von Neumann-Morgenstern utility function The value of each outcome, constructed in such a way that a consumer values gambles as if they were the expected utility.        
    von Neumann-Morgenstern utility function The value of each outcome, constructed in such a way that a consumer values gambles as if they were the expected utility.        
    Welfare analysis A normative analysis that trades off gains and losses to different individuals.        
    Welfare analysis A normative analysis that trades off gains and losses to different individuals.        
    willingness-to-pay The amount a customer is willing and able to pay for a good.        
    willingness-to-pay The amount a customer is willing and able to pay for a good.        
    winner’s curse The bidder who most overestimates the value of the object wins the bidding.        
    winner’s curse The bidder who most overestimates the value of the object wins the bidding.        
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