Economics Glossary: E

Earnings sharing regulation – A regulation that requires businesses to refund customers when their profits exceed the regulated level.

Easy monetary policy – Federal Reserve policies that expand the money supply.  This results in lower interest rates and is intended to stimulate the economy (by shifting AD right).

Economic depreciation – The opportunity cost to a firm from using capital that it owns during a given time period instead of selling it.  It is measured by the change in market value of the capital over a given period.  For example, if you could sell your forklift today for $1,000 or $500 a year from now, the economic depreciation of the forklift for the year is $500. 

Economic freedom – A condition where people are able to make choices, private property is protected, rule of law is enforced, and voluntary exchange is present such that agents can buy and sell goods and services in markets.

Economic growth – The expansion of the production possibilities of an economy.

Economic growth rate – The yearly percentage change of real GDP (gross domestic product).

Economic integration – When two or more nations form a free-trade zone.

Economic profit – A firm’s total revenue minus total cost (including all associated opportunity costs).

Economic theory – A statement about cause and effect that can be tested.

Economics – The social science that studies the choices that individuals, businesses, and governments make.  The science considers the concepts of scarcity, the associated incentives, and other factors that influences the choices being made.

Economies of scale – Occurs when a firm increases its plant size and labor employed by the same percentage and its output increases by a larger percentage.  Economies of scale occurs towards the left side of the long run average total cost curve on the part of the LRATC curve where it is sloping down.

Efficiency – Also called allocative efficiency, and happens when an economy produces what people want at the lowest possible cost.

Efficiency wage theory – An explanation for why the productivity of workers can rise as wages rise which explains why firms may pay higher wages than necessary to get employees.

Efficient market – A market where opportunities for profit are eliminated nearly immediately (example: firms entering a perfectly competitive market in the long run).

Efficient scale – The quantity at which average total cost is at its minimum (where the marginal cost curve crosses the average total cost curve).

Elastic demand – When the percentage change in quantity demanded is higher than the percentage change in price.

Elastic supply – When the percentage change in the quantity supplied is higher than the percentage change in price.

Empirical economics – The use of data to test economic theories.
Employed – A person who is 16 years or older who works for pay 1 or more hours per week, OR who works without pay for 15 or more hours per week in a family business, OR who has a job but has been absent.

Entrepreneurship – The human resource that organizes labor, land, and capital to produce goods and services.  Also faces the most risk (of loss) in the production process.

Equilibrium – The condition that exists when quantity supplied equals quantity demanded.  When at equilibrium there is no reason for price to change.  There is no shortage or surplus of goods or services.

Equilibrium price – The price at which quantity demanded is equal to quantity supplied.

Equilibrium quantity – The quantity bought and sold at the equilibrium price.

Equity – Another word for fairness.

Excess burden – The amount the burden of the tax exceeds the tax revenue received by the government.  This amount is also equal to the deadweight loss created from the tax.

Excess capacity – The amount  of the efficient quantity a firm could produce (at the efficient scale) minus the quantity that the firm is currently producing.

Excess demand – A scenario where the quantity demanded is higher than the quantity supplied, also called a “shortage” and typically happens when the market price is lower than the equilibrium price.

Excess reserves – A bank’s actual reserves minus its desired reserves.

Excess supply – A scenario where the quantity supplied is higher than the quantity demanded, also called a “surplus” and typically happens when the market price it greater than the equilibrium price.

Exchange rate – The ratio at which two currencies are traded or the price of one country’s currency in terms of another country’s currency.

Exogenous variable – A variable that does not depend on the model (or the state of the economy with respect to economics).   This means that the variable does not change when anything inside the model changes (or within the economy).  For example, the number of rainy days per year should not depend on the unemployment rate, therefore the number of rainy days is an exogenous variable.

Expansion – The period in a business cycle from the trough to the peak.  Also called a boom, and output (GDP) will rise and unemployment will fall.

Expansionary fiscal policy – An increase in government spending or a reduction in taxes with the intent of stimulating the economy (shifting AD right).

Expansionary monetary policy – An increase in the money supply with the intent of stimulating the economy (shifting AD right).  An include purchasing T bills, or lowering the reserve requirement or discount rate.

Expenditure approach -- A method of computing GDP that measures the total amount spent on goods and services (rather than the value produced) during the year.

Explicit contracts – Contracts that fix a worker’s wages for a period of time.

Explicit cost – A cost that is paid money (as opposed to an implicit cost).

Export goods and services – Goods and services that are produced in one country and shipped to and sold in another country.

Export promotion – A policy designed to encourage domestic firms to export their products.

Export subsidies – Government payments made to domestic firms to encourage exports.  The subsidies in effect raise the price received by the domestic firms.

Exports – The goods and services that firms in one country ship to and sell to households and firms in another country.

Externality – A cost or benefit that arises from a transaction that falls on a third party not directly involved in the transaction.  Pollution from a factory is the most common example because the person buying the factory’s product may not be subject to its pollution but people who live near the factory that did NOT buy the product have to deal with the pollution.

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