Economics Glossary C -, Learning Economics... Solved!


Economics Glossary C

Capital – The things are used as an input in the production of other goods and services.  Can be broken down into physical capital (tools, factories, robots, shovels, etc.) human capital (education, knowledge, experience, etc.) and natural capital (land, air, water, oil, etc.)

Capital flight – When both human and financial capital leave developing countries in search of higher rates of return (higher wages, or rents) typically in developed countries.  This is similar to brain drain. 

Capital gain – An increase in the value of a financial asset.

Capital goods – Goods that are bought by firms to increase their productive capacity.

Capital market – The factor/input market where households supply savings, and firms demand funds to buy capital goods. 

Capital-intensive technology – A production technique that uses a larger amount of capital relative to labor.

Capture theory – The theory that regulation serves the interest of the producer and results in maximized profit, underproduction and a deadweight loss to the economy.

Cartel – A group of firms acting together to limit out in an attempt to raise prices and increase economic profit.  Or a group of firms attempting to behave as a monopoly.

Cartesian coordinate system – A method of graphing two variables in a graph that uses two perpendicular lines as a mapping system.

Catch up – The theory suggesting that the growth rate of developing country should be higher than the growth rate of developed countries, and that this fact will allow the developing countries to “catch up”.  Most often shown in the catch up curve graph.

Central bank – A public institution that provides banking services to banks and governments.  It can also regulate the financial institutions and markets.  In the United States, there is no central bank, but the Federal Reserve has similar duties.

Ceteris paribus, or all else equal –A method used to analyze the relationship between two variables and ONLY those two variables (hence everything else equal).  All of the other variables in the analysis should remain unchanged so the true relationship between the two variables is understood.  An example would be the law of demand, as price rises quantity demand goes down ceteris paribus (meaning income, preferences, etc, don’t change).

Chained-dollar real GDP – The measure of real GDP as calculated by the Bureau of Economic Analysis.

Change in business inventories – The amount of the change in inventories for all firms within a given time period.  Inventories are the goods produced by firms in the current time period, but will not be sold until future time periods.

Change in demand or a shift in demand – A change in one of the determinants of demand, or one of the factors influencing demand that before was held constant.  Note that a change in price does NOT result in a change in demand.

Change in quantity demanded – A change in the quantity of a good or service that people buy that results from a change in price of the good or service, ceteris paribus (everything else equal).  This typically occurs due to a shift in the supply curve or change in supply.

Change in quantity supplied – A change in the quantity that suppliers supply that results from a change in price of the good or service, ceteris paribus (everything else equal).  This typically occurs due to a shift in the demand curve, or a change in demand.

Change in the quantity supplied – A change in one of the determinates of supply, or one of the factors influencing supply that before was held constant.  Note that a change in price does NOT result in a change in supply.

Circular flow diagram– A diagram showing the income and payments received by each sector (traditionally households and firms, but may include government and the rest of the world) of the economy.

Classical economics – The view that the market economy works well, and that aggregate fluctuations are a natural occurrence of an expanding economy.  They also believe that government intervention cannot improve the efficiency of a market economy.  They believe in the presence of the Long Run Aggregate Supply Curve (LRAS) and that all resources are used efficiently and at capacity.

Coase Theorem – The proposition that if property rights exist, only a small number of parties are involved, and the transactions costs are 0, then private transactions are efficient and the outcome is not affected by who is assigned the property right.  Typically an argument used by free market economists as a solution to solve negative externality problems such as pollution.
Command economy – An economy where a central government sets prices, incomes, and output targets.  The central government may have a direct or indirect role.

Commodity monies –  Goods used as money that also have value in some other use.  For example, gold, jewelry, shells, food, or perhaps cigarettes.

Comparative advantage – When an individual or a country can produce a good or service at a lower opportunity cost than another individual or country.  For example, if Britain’s opportunity cost of producing a bag of tea is ½ bag of coffee, while America’s opportunity cost of a bag of tea is 1 bag of coffee then Britain has the comparative advantage in making tea.

Compensation of employees – Includes wages, salaries, and various other benefits that are paid to households by firms and the government.

Complement in production – A good that I produced along with another good.  For example, steaks and hamburgers are outputs from the same input (and use different parts of the input).

Complements or complementary goods – Goods that go well together.  This usually means that a decrease in the price of one good will result in an increase in demand for the other, or the price increases for one good demand will fall for the other.  Examples include hot dogs and hot dog buns, cars and gasoline, bread and deli meat, or beer and aspirin.  Also note that complements are the opposite of substitutes.

Constant returns to scale --  When a firm increases its plant size and labor employed by the same percentage, the output produced by the firm will increase by the same percent.  Long run average total cost will remain the same.

Constrain supply of labor – The amount a household will actually work in a given period of time at the current wage rate.

Consumer goods – goods produced for consumption, usually during the present time period.

Consumer price index (CPI) – A price index computed each month by the Bureau of Labor Statistics using a bundle of goods and services that is meant to represent the market basket purchased monthly by a typical United State’s citizen.

Consumer sovereignty – The idea that consumers choose what will or will not be produced by choosing what to and what not to buy.

Consumer surplus – The difference between the maximum amount a person is willing to pay (the demand curve) for a good or service and the price they have to pay (equilibrium price).  Usually calculated as the area of a triangle: ½(difference between max WTA and price * quantity sold).

Consumption expenditure – The expenditure by households on goods and services.
Consumption function – The relationship between consumption and income, and usually includes two components: autonomous consumption (intercept) and marginal propensity to consume (the slope).

Contraction, recession, or slump – The period in a given business cycle from a peak down to the trough during which GDP/output fall and unemployment rises.

Contractionary fiscal policy – Government policy designed to reduce aggregate output or GDP through a shift in the aggregate demand curve (AD).  Can either be done by increasing taxes, or reducing government expenditures.

Contractionary monetary policy – Central Bank (or Federal Reserve) policy designed to reduce aggregate output or GDP through a shift in the aggregate demand curve (AD).  Usually done in an attempt to fight high inflation.  Can be done by either increasing the discount rate, selling bonds (thus lowering the money supply), or increasing reserve requirements.

Core inflation rate – The annual percentage increase in the PCE price index excluding the change in prices of food and energy.

Corporate bonds – Promissory notes issued by firms in an attempt to acquire funds.

Corporate profits – The difference between revenues and costs of a corporation.

Cost of living adjustments – Contract items that changes wages or payments to match changes in inflation.  Higher inflation rates mean higher wages or payments.

Cost of living index – A measure of the change in the amount of money that people need to spend to achieve a given stand of lving.

Cost shock, or supply shock – A change in costs that shifts the short run aggregate supply curve (SRAS).

Cost-push inflation – Inflation that is caused by an initial increase in wages, which is then followed by an increase in aggregate demand (a rightward shift of AD which leads to an inflationary gap).

Cost-push or supply-side inflation – Inflation that is caused by an increase in costs. 

Cross price elasticity of demand – A measure of the responsiveness of the demand for a good to a change in the price of another good.  The CPEoD for complements is negative, substitutes is positive, and it is near 0 for goods that are entirely independent.

Cross-section graph – A graph that shows the values of an economic variable for different groups in a given point of time for a given population.

Crowding out effect – When private investment and consumption fall because of an increase in government spending or a reduction in taxes.  This occurs because the government must borrow money which leads to increases in the interest rate.  The increased interest rates increase the opportunity cost for money and decrease the amount borrowed by private firms and consumers.

Currency – Bills and coins produced by a government or institution.

Currency debasement – The decrease in the value of a currency that occurs when its supply is rapidly increased.

Current dollars – The current prices that consumers pay for goods and services.

Cyclical deficit – A deficit that occurs because of a downturn in the economy (generally brought on by automatic stabilizers).

Cyclical unemployment – The increase in unemployment that occurs during downturns in the economy (recessions and depressions).