The Lexicon

Absolute advantage is the ability to produce more of a good with the same inputs. Comparative advantage is the ability to produce at lower opportunity cost.

Adverse selection occurs when one party's inability to observe another's characteristics before a transaction causes the worse-than-average participants to…

Allocative efficiency means resources go to their highest-valued uses (P = MC). Productive efficiency means goods are produced at minimum cost.

Antitrust law prevents firms from monopolizing markets, fixing prices, or merging in ways that substantially reduce competition.

Asymmetric information exists when one party to a transaction has significantly better information than the other.

Average total cost (ATC) is total cost divided by quantity produced — the cost per unit of output.

Barriers to entry are factors that prevent new competitors from entering a profitable market.

Bounded rationality is the concept that real decision-makers are rational within limits — constrained by incomplete information, limited cognitive capacity,…

A budget constraint shows all the combinations of goods a consumer can afford given their income and prices.

Cap-and-trade sets a total limit on emissions, distributes tradeable permits up to that cap, and lets firms buy and sell permits based on their individual…

A carbon tax is a per-unit charge on greenhouse gas emissions, designed to make the private cost of fossil fuel use reflect its social cost.

Collusion occurs when competing firms coordinate on prices, output, or market allocation to raise profits above competitive levels.

A common resource is rival (one person's use reduces availability for others) but non-excludable (no one can be effectively prevented from using it).

Comparative advantage is the ability to produce a good at a lower opportunity cost than a trading partner.

A compensating differential is the wage premium paid to attract workers to jobs with undesirable characteristics — danger, discomfort, irregular hours, or…

Consumer surplus is the difference between what a buyer is willing to pay and what they actually pay.

Cross-price elasticity of demand measures how much quantity demanded of one good changes when the price of another good changes.

Deadweight loss is the reduction in total economic surplus from market inefficiency — units where the benefit to buyers exceeds the cost to sellers that go…

Derived demand is demand for an input that exists only because of demand for the output it helps produce.

Dumping occurs when a foreign producer sells goods in an export market at prices below cost or below the home market price.

Economic profit subtracts all costs — including implicit opportunity costs — from revenue. Zero economic profit is not failure; it means the business is…

Economic rent is the payment to a factor of production above what is needed to keep it in its current use.

Economies of scale occur when long-run average cost falls as output increases. They are the economic engine of industrial concentration — and when they're…

Economic efficiency means producing the maximum possible value from available resources with no waste.

Economic equity is the fairness or justice of economic outcomes and processes. Efficiency maximizes total value; equity addresses its distribution.

Excess capacity is the gap between the output a firm produces and the output at which its average total cost is minimized.

Explicit costs are the cash payments a firm makes; implicit costs are the opportunity costs of resources the firm owns.

An externality is an uncompensated cost or benefit that a market transaction imposes on third parties.

Factors of production are the inputs used to create goods and services: land, labor, capital, and entrepreneurship.

Fixed costs don't change with output; variable costs do. The ratio between them determines a firm's operating leverage, its break-even point, and how it…

Gains from trade are the increases in total production and consumption that occur when countries specialize according to comparative advantage and exchange…

Game theory analyzes strategic interactions where each player's outcome depends on others' decisions.

The Gini coefficient is a single number summarizing the inequality of an income distribution. It ranges from 0 (perfect equality) to 1 (perfect inequality).

Human capital is the stock of skills, knowledge, and experience embodied in workers that increases their productivity.

An import quota is a legal limit on the quantity of a foreign good that can be imported. Like a tariff, it raises domestic prices and protects domestic…

An incentive is anything that motivates a person or organization to act — a reward for doing something or a penalty for not doing it.

Income distribution describes how total national income is divided among households and individuals.

Income elasticity of demand measures how much quantity demanded changes when consumer income changes.

An indifference curve shows all combinations of two goods that give a consumer equal satisfaction.

A labor union is a collective organization of workers that bargains with employers over wages, benefits, and working conditions.

The law of demand states that, all else equal, as price rises the quantity demanded falls. It is one of the most robust empirical regularities in economics.

The law of supply states that, all else equal, as price rises producers are willing to supply more.

Long-run equilibrium is the state a competitive market reaches after all entry and exit adjustments are complete.

The Lorenz curve plots the cumulative share of income held by cumulative income percentiles.

Marginal analysis compares the additional benefit and additional cost of one more unit of an action.

Marginal product is the additional output from one more unit of an input. Average product is output per unit of input.

Marginal cost is the additional cost of producing one more unit of output. It is the cost variable that drives every output, pricing, and hiring decision at…

The marginal revenue product of labor is the additional revenue generated by hiring one more worker.

Marginal revenue is the additional revenue earned from selling one more unit of output. Its relationship with price determines the firm's market power and its…

Marginal utility is the additional satisfaction from consuming one more unit of a good. It is the key variable in every consumer decision at the margin.

Market equilibrium is the price and quantity at which the amount buyers want to purchase exactly equals the amount sellers want to sell.

Market failure occurs when a free market fails to allocate resources efficiently on its own.

Market power is the ability of a firm to profitably set price above marginal cost. It is the defining feature of monopoly and oligopoly — and the primary…

Markup is the percentage difference between a firm's price and its marginal cost. It measures the degree of market power — competitive firms have near-zero…

Means-tested programs provide benefits only to individuals or households below an income or asset threshold.

The minimum wage is a legally mandated floor on wages that employers must pay workers. It protects workers from poverty wages but may reduce employment in…

Monopolistic competition has many firms selling differentiated products with free entry and exit.

A monopoly is a market with a single seller who faces no close substitutes and sets price above marginal cost.

Monopsony is a market with a single buyer of labor — or more broadly, a situation where employers have enough wage-setting power to pay workers less than…

Moral hazard occurs when one party takes more risk because another party bears the cost of that risk.

Nash equilibrium is a set of strategies in which no player can improve their outcome by unilaterally changing their choice.

A natural monopoly exists when one firm can supply the entire market at lower cost than two or more competing firms.

A negative externality is an uncompensated cost imposed on third parties by a market transaction.

Normal goods see demand rise when income rises; inferior goods see demand fall. The distinction reveals how consumption patterns shift as living standards…

A nudge is a policy intervention that changes the choice architecture — the context in which decisions are made — to steer people toward better outcomes while…

An oligopoly is a market dominated by a small number of large firms whose decisions are strategically interdependent — each firm must anticipate how rivals…

Opportunity cost is the value of the best alternative you give up when making a choice. It is the true cost of any decision — not just the price tag.

Perfect competition is a market structure with many sellers, identical products, free entry and exit, and full information.

Physical capital is produced equipment and infrastructure used in production. Financial capital is money used to fund investment.

A Pigouvian subsidy is a payment to producers or consumers of goods with positive externalities, set equal to the marginal external benefit.

A Pigouvian tax is a per-unit tax on a good or activity set equal to the external cost it imposes.

Platform economics analyzes two-sided (or multi-sided) markets where a platform intermediary connects two distinct user groups that each benefit from the…

A positive externality is an uncompensated benefit conferred on third parties by a market transaction.

Positive economics describes what is; normative economics prescribes what ought to be. Distinguishing them is essential for keeping factual disputes separate…

The poverty line is the income threshold below which a household is classified as poor. The U.S.

Present value converts a future cash flow into its equivalent value today using a discount rate.

A price ceiling is a legal maximum price below the market equilibrium. It protects buyers from high prices but creates shortages, non-price rationing, and…

Price discrimination occurs when a seller charges different prices to different buyers for the same good based on their willingness to pay.

Price elasticity of demand (PED) measures how much quantity demanded changes when price changes.

Price elasticity of supply (PES) measures how much quantity supplied changes when price changes.

A price floor is a legal minimum price above the market equilibrium. It protects sellers from very low prices but creates surpluses — excess supply that…

Price leadership is an implicit coordination mechanism in oligopoly where one firm — typically the dominant player — sets price and rivals follow.

A price signal is the information a price conveys to buyers and sellers about relative scarcity, value, and opportunity.

Producer surplus is the difference between the price a seller receives and the minimum price they would have accepted.

Product differentiation is the process of distinguishing a product from competitors' offerings through quality, features, branding, design, or customer…

A progressive tax takes a larger percentage of income from higher earners; a regressive tax takes a larger percentage from lower earners.

Property rights are the legal rights to use, exclude others from, and transfer resources. Secure, well-defined property rights are necessary for markets to…

Prospect theory, developed by Kahneman and Tversky, describes how people actually evaluate outcomes: relative to a reference point, with losses hurting more…

Protectionism is the use of trade barriers — tariffs, quotas, subsidies, and regulations — to shield domestic industries from foreign competition.

A public good is non-excludable and non-rival. Free-riding prevents private markets from supplying it efficiently, making government provision or subsidy…

Returns to scale describe how output responds when all inputs are increased proportionally.

Scarcity is the condition in which unlimited wants exceed limited resources. It is the foundational constraint that makes economics necessary.

Signaling is when an informed party communicates their type to an uninformed party. Screening is when the uninformed party designs mechanisms to reveal the…

Social mobility measures how much a person's economic position can differ from their parents' — whether birth circumstances determine destiny.

Status quo bias is the tendency to prefer the current state of affairs and resist change, even when alternatives are objectively superior.

A subsidy is a government payment to producers or consumers that lowers the effective price of a good or service.

Substitutes can replace each other — a price rise in one increases demand for the other. Complements are used together — a price rise in one decreases demand…

A sunk cost is a cost already incurred that cannot be recovered. Rational decision-making ignores sunk costs — only future costs and benefits are relevant to…

A surplus occurs when the quantity supplied at a given price exceeds the quantity demanded.

Switching costs are the costs a buyer incurs when changing from one supplier or product to another.

A tariff is a tax on imported goods. It raises import prices, protects domestic producers, generates government revenue — and reduces total welfare by…

Tax incidence describes the economic burden of a tax — who actually bears the cost, which may differ from who is legally required to pay it.

Terms of trade is the ratio of export prices to import prices. When it rises, a country can buy more imports per unit of exports — a welfare gain.

The Coase Theorem states that when property rights are clearly defined and transaction costs are zero, private bargaining will produce an efficient outcome…

The entrepreneur is the factor of production responsible for combining other inputs, bearing risk, and innovating.

The free-rider problem occurs when individuals can enjoy a benefit without paying for it, creating an incentive to let others bear the cost.

The law of diminishing marginal utility states that as consumption of a good increases, each additional unit provides less additional satisfaction.

The law of diminishing returns states that adding more of one input to a fixed set of other inputs will eventually yield smaller and smaller increases in…

George Akerlof's Market for Lemons model shows how asymmetric information about quality can cause high-quality goods to be driven out of a market entirely,…

Network effects occur when a product's value increases as more people use it. They are the primary driver of winner-take-all market dynamics in technology,…

The principal-agent problem arises when one party (the principal) hires another (the agent) to act on their behalf, but the agent has different interests and…

The Prisoner's Dilemma is a game in which two rational players each choose a dominant strategy that makes both worse off than if they had cooperated.

A production function describes the relationship between the quantities of inputs a firm uses and the maximum output it can produce.

The profit-maximization rule states that firms maximize profit by producing where marginal revenue equals marginal cost.

The rational actor model assumes people make consistent, self-interested decisions that maximize their well-being.

The short run is the period when at least one input is fixed. The long run is when all inputs are variable.

A shortage occurs when quantity demanded at a given price exceeds quantity supplied. Free markets resolve shortages through rising prices; price ceilings lock…

The shutdown condition tells a firm when it loses less money by halting production than by continuing.

When price rises, consumers buy less for two distinct reasons: the substitution effect (the good is now relatively more expensive) and the income effect (real…

The total revenue test uses the direction of revenue change after a price change to determine whether demand is elastic or inelastic — no elasticity formula…

The tragedy of the commons describes how rational individual behavior destroys a shared resource.

A trade surplus means a country exports more than it imports; a deficit means it imports more than it exports.

A trade-off is the exchange of one benefit for another when resources are limited. Recognizing trade-offs is the starting point of any rigorous economic…

A transfer payment is a government payment to an individual not in exchange for a good or service.

Unintended consequences are outcomes of policies or interventions that were not anticipated or desired by their designers.

Utility maximization is the principle that rational consumers allocate their budgets to achieve the highest possible total satisfaction.

Utility is the satisfaction or benefit a consumer receives from consuming a good or service. It is the fundamental concept behind all consumer choice theory.

Wage discrimination occurs when workers with equal productivity receive different pay based on characteristics unrelated to job performance — most studied…

A savings strategy where automatic transfers to savings happen immediately upon income arrival.

A 401(k) is a tax-advantaged, employer-sponsored retirement account. Learn how it works, how the match works, and the mistakes that cost real money.

Moving debt from one credit card to another, typically to a card offering lower APR to reduce interest costs.

A market where stock prices fall 20%+ from recent highs, characterized by pessimism and selling pressure.

A loan you give to a company or government, paying interest. Bonds are lower-risk, lower-return investments than stocks.

A plan that allocates expected income across spending categories, savings, and debt repayment. Learn how budgets enable intentional financial decisions.

A market where stock prices rise 20%+ from recent lows, characterized by optimism and buying pressure.

A three-digit number representing creditworthiness, calculated from payment history, debt levels, and credit history length. Ranges from 300-850.

Your total monthly debt payments divided by gross monthly income. Lenders use it to assess whether you can afford new borrowing.

Payments made by companies to shareholders, usually from earnings. A key component of stock returns.

The most widely used credit score model, developed by Fair Isaac Corporation. Used by 90% of lenders.

A firm is an organization that buys inputs, transforms them into output, and sells the result.

A savings account paying significantly higher interest rates than traditional banks. The ideal home for emergency funds.

A debt or financial obligation you owe to another party. Learn how liabilities reduce net worth.

Your collection of investments held together. The building block of wealth is intentional portfolio design.

A Roth IRA grows and withdraws tax-free in retirement. Here's how it works, the 2026 limits, and who it's best for.

A retirement account where you contribute after-tax dollars and withdraw tax-free. The most tax-efficient retirement vehicle.

A dedicated savings bucket for a specific planned future expense. Convert irregular large expenses into predictable monthly costs.

A share of ownership in a company. Stocks represent fractional ownership and potential for capital appreciation.

Income ranges that are taxed at the same rate; you don't pay one rate on all income, but different rates on different income tiers.

A retirement account where contributions are tax-deductible and withdrawals are taxed as ordinary income. Tax-deferred growth.

Debt issued by the U.S. government, backed by the full faith and credit of the United States. The safest bond investment.

A repayment schedule where regular payments over time pay down both interest and principal until the loan is eliminated.

Anything of economic value that you own or control. Learn how assets contribute to net worth and build wealth.

Dedicated cash reserve covering 3–6 months of living expenses. Learn why emergency funds prevent debt accumulation.

Exchange-traded funds—baskets of stocks or bonds that trade like stocks. Low-cost diversified investing for modern portfolios.

The percentage of a fund's assets charged annually for operating costs. A critical factor in long-term investment returns.

Health Savings Account—a tax-advantaged account for medical expenses, with triple tax benefits (deductible, tax-free growth, tax-free withdrawals).

An index fund holds the whole market in one low-cost investment. Here's why it usually beats stock-picking.

Investment funds that passively track stock or bond indices. The simplest path to market returns at minimal cost.

The percentage of a loan charged annually as the cost of borrowing money. Expressed as APR (annual percentage rate).

Initial Public Offering—when a private company becomes public by selling shares to the public. The first day of trading.

An oligopoly is a market run by a handful of large firms whose decisions are tangled together.

The tendency to rely too heavily on the first piece of information when making decisions. Learn how anchoring distorts investment and financial choices.

APR is the yearly cost of borrowing, including fees. Learn how APR works, how it differs from the interest rate, and how to use it to compare loans.

Annual Percentage Yield, the actual return on savings or investments after compounding. Learn how APY differs from APR and why it matters.

The division of your portfolio across asset classes (stocks, bonds, cash). The most important determinant of returns.

A unit of measurement for interest rates and yields, where 100 basis points equals 1%. Learn why basis points matter in financial markets and loan comparisons.

The recurring pattern of expansion and contraction in economic activity. Understanding cycles helps predict downturns and prepare.

Tax on the profit from selling an asset that increased in value. Different rates apply based on holding period.

The net movement of money into and out of accounts. Positive cash flow builds wealth; negative cash flow depletes it.

Interest earned on both the original principal and accumulated interest. The most powerful wealth-building force in investing.

The tendency to seek information confirming existing beliefs while dismissing contradictory evidence. Learn how confirmation bias entraps investors.

Inflation excluding volatile food and energy prices. Shows underlying price pressure.

The percentage of your available credit that you're currently using. High utilization hurts credit scores.

Decrease in the general price level of goods and services. Often more dangerous than inflation, deflation causes economic stagnation.

Spreading investments across different assets to reduce risk. The principle of 'not putting all eggs in one basket.'

Investing a fixed amount regularly regardless of market prices, automatically buying more shares when prices are low. A behavioral fix for market timing…

The average tax rate you pay on all your income. Lower than marginal rate because lower-income dollars are taxed at lower rates.

The value of an asset minus liabilities against it. Learn how equity represents true ownership and wealth.

Government spending and taxation decisions that affect the economy. The primary lever Congress uses to manage economic cycles.

Gross Domestic Product. The total monetary value of all goods and services produced within a country in a period.

The tendency to follow and mimic the financial decisions of a larger group. Learn how herd behavior amplifies bubbles and crashes.

Extreme, rapid inflation where prices rise hundreds or thousands of times in months, destroying savings and currency value. Learn from real hyperinflation…

The increase in the general price level of goods and services over time, reducing purchasing power. Understanding inflation is critical for financial planning.

How quickly and easily an asset can be converted to cash without significantly affecting its price.

The psychological tendency to feel losses more strongly than equivalent gains. Understand how loss aversion drives irrational financial decisions.

The tax rate paid on your last dollar of income. Understanding marginal rate is critical for financial planning.

The total value of a company's outstanding shares. Used to categorize companies by size and compare valuations.

The tendency to treat money differently based on its source or intended use, even though money is fungible. Learn how mental accounting creates financial…

Government actions to control the money supply and interest rates to achieve economic goals like price stability and employment. Learn the difference between…

Monopolistic competition is where most real businesses operate: many sellers, easy entry, but each offering something a little different. Here is how it works.

Total assets minus total liabilities. The single most comprehensive metric of financial health and wealth trajectory.

Monthly jobs added or lost, excluding farm workers. The most market-moving economic release.

The tendency to overestimate one's ability to predict markets and pick winning stocks. Learn why most active traders underperform.

Price-to-Earnings Ratio—the price of a stock divided by annual earnings per share. A key valuation metric.

Personal Consumption Expenditures. The Fed's preferred inflation measure.

An idealized market of countless tiny sellers, an identical product, and zero pricing power. It rarely exists in full, yet it anchors all of economics.

The tendency to disproportionately prefer immediate rewards over future ones. Learn why present bias causes undersaving and excessive debt.

The original amount borrowed. Interest is charged on the principal, and principal decreases as you make payments.

A monetary policy tool where the central bank buys large quantities of government and mortgage securities to inject money into the economy when interest rates…

Returning your portfolio to its target allocation by selling outperformers and buying underperformers. A discipline that improves returns.

The tendency to overweight recent events when predicting the future. Learn how recency bias drives panic selling and speculative bubbles.

Two consecutive quarters of negative GDP growth. The economic contraction phase of business cycles.

Your psychological and financial ability to endure investment losses. The foundation for portfolio allocation decisions.

Scarcity means wants always exceed available resources. It is the starting premise of all economics — and it shapes every choice, from organ transplants to…

Selling shares you don't own with the goal of buying them back at a lower price. Betting on stock prices falling.

Interest paid only on the original principal, not on accumulated interest. The foundation for understanding loan calculations.

Economic stagnation combined with inflation—simultaneous unemployment and rising prices. Learn from the 1970s stagflation crisis.

The mistake of continuing to invest resources in something because of past irrecoverable costs. Learn why past spending is irrelevant to future decisions.

A measure of average price changes for a fixed basket of goods and services. The primary inflation metric.

The interest rate at which banks lend reserve balances overnight. Learn how the Fed controls this rate and its impact on the entire economy.

The central bank of the United States, responsible for monetary policy, regulating banks, and maintaining financial stability. Learn its role in the economy.

The influence that how information is presented has on decision-making. Learn how framing manipulates perception without changing reality.

An index of the 500 largest U.S. companies, used as a benchmark for the overall U.S. stock market.

The percentage of the labor force that is jobless and actively seeking work. Published monthly by the BLS.

A chart plotting bond yields across different maturities. The shape signals economic expectations.

Utility is economics' name for how much a choice satisfies you — a ranking, not a feeling. Here is what it actually measures, and what it deliberately ignores.

Zoning is a government regulation that specifies what types of land use are permitted in specific geographic areas.