Appendix A — Glossary

Balanced trade: When the value of exports equals the value of imports.

Budget constraint line: Shows the possible combinations of two goods that are affordable given a consumer’s limited income.

Complements: Goods that go together; a decrease in the price of one results in an increase in demand for the other, and vice versa.

Competitive market: A market in which there are many buyers and many sellers, ensuring that no single buyer or seller can significantly impact the market price.

Consumer equilibrium: Occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities, indicating the point at which a consumer achieves maximum satisfaction.
Deadweight loss: The loss in social surplus that occurs when a market produces an inefficient quantity of goods.

Demand: Refers to the willingness and ability of consumers to purchase a quantity of a good or service at a given point in time or over a period.

Demand curve: A graph illustrating how much of a given product a household would be willing to buy at different prices.

Demand schedule: A table that shows the relationship between the price of a good and the quantity demanded.

Diminishing marginal utility: The principle that each additional unit of a good consumed provides less additional satisfaction than the previous unit.

Elasticity: A concept used to quantify the responsiveness of one variable when another variable changes.

Equilibrium: The condition that exists when the quantity supplied equals the quantity demanded, resulting in no tendency for price changes.

Excess demand: The condition where the quantity demanded exceeds the quantity supplied at the current price.

Excess supply: The condition where the quantity supplied exceeds the quantity demanded at the current price.

Exports: Goods and services sold to other countries.

Giffen good: A type of good for which an increase in price leads to an increase in quantity demanded, contrary to the basic law of demand.

Imports: Goods and services bought from other countries.

Inferior good: A good for which an increase in income results in a decrease in demand.

Labor demand: Refers to the amount of work that employers are willing to hire at a given wage.

Labor supply: Refers to the amount of time workers are willing to work at a given wage.

Law of demand: The principle that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

Law of supply: The principle that, other things being equal, the quantity supplied of a good rises when the price of the good rises.

Marginal utility: The additional satisfaction gained from consuming one more unit of a good.
Marginal utility per dollar: The additional satisfaction gained from purchasing a good adjusted by the product’s price; calculated as MU/Price.

Market: A group of buyers and sellers engaged in the exchange of a particular good or service.

Market-clearing price: An alternative term for market equilibrium; it refers to the fact that the market is cleared of all unsatisfied demand and excess supply at the equilibrium price.

Net capital outflow: The difference between the purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners. This equals net exports, indicating that a country’s savings can fund investments domestically or abroad. We will elaborate on that later on in greater detail.

Normal good: A type of good for which an increase in income or a decrease in price leads to an increase in demand.

Perfectly competitive market: A market characterized by the identical nature of goods offered for sale and a large number of buyers and sellers, ensuring no single entity can influence the market price.

Perfect substitutes: Goods that are identical in nature and can be used in place of one another.

Price ceiling: A legally mandated maximum price that sellers may charge for a good, typically set by the government.

Price control: Government regulations aimed at influencing the prices of goods and services rather than allowing market forces to determine them.

Price floor: A legally mandated minimum price set by the government.

Producer surplus: The extra benefit producers receive from selling a good, calculated as the price received minus the minimum acceptable price.

Quantity demanded: The total amount of a good that buyers are willing and able to purchase at a given price.

Quantity supplied: The total amount of a particular good that sellers are willing and able to sell at a given price.

Subsidy: An economic incentive given to remove some type of burden in the interest of market welfare; a subsidy drives a wedge, decreasing the price consumers pay.

Substitutes: Goods that can be used in place of one another; when the price of one increases, demand for the other often rises.

Supply: The willingness and ability of producers to create goods and services and bring them to market.

Supply curve: A graph that illustrates the quantity of a good that a firm will supply at various price levels.

Tax: Money collected by a government from buyers or sellers, directly or indirectly, in exchange for services provided to the community.

Total utility: The overall satisfaction derived from consuming a certain quantity of goods or services.

Trade balance: The difference between the value of goods and services a country sells abroad and those it buys from abroad, also known as net exports.

Trade surplus: When a country sells more than it buys, resulting in a positive trade balance.

Trade deficit: When a country buys more than it sells, leading to a negative trade balance.