Economics glossary

59 terms in plain English, no textbook fog. Every concept here connects to an interactive model you can actually move.

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adverse selection: Bad types crowding out good ones when quality is hidden before a deal, the lemons problem.
aggregate demand: Total planned spending on an economy's output at each price level, consumption, investment, government, and net exports.
arbitrage: Riskless profit from price differences, whose pursuit eliminates those very differences.

beta: An asset's sensitivity to market-wide swings, the only risk that earns a premium in the CAPM.

capital mobility: How freely financial capital crosses borders chasing returns.
comparative advantage: Being able to produce something at a lower opportunity cost than others, the true basis for trade.
consumer surplus: The gap between what buyers would have paid and what they actually paid.
crowding out: When government borrowing raises interest rates and squeezes out private investment.

deadweight loss: Value that simply vanishes when a market is pushed away from its efficient quantity, trades worth making that don't happen.
depreciation: The wearing out of capital over time, or, for currencies, a fall in value against others.
diminishing returns: Each extra unit of an input adds less output than the one before, holding other inputs fixed.
discounting: Converting future values into today's terms, because a dollar later is worth less than a dollar now.
dominant strategy: A choice that's best no matter what opponents do.

elasticity: How strongly one variable responds to another, usually quantity's percentage response to a price change.
equilibrium: The point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change.
exchange rate: The price of one currency in terms of another.
expectations: Beliefs about the future that shape behavior today, the hinge variable of modern macroeconomics.
externality: A cost or benefit that lands on someone outside the transaction, pollution's harm, vaccination's protection.

fiscal policy: Government spending and tax decisions used to influence the macroeconomy.
fixed cost: A cost that doesn't vary with output, like rent, it moves average cost but never marginal cost.

inflation: A sustained rise in the overall price level, eroding money's purchasing power.

liquidity trap: When interest rates are so low that extra money is simply hoarded, blunting monetary policy.
loss aversion: The finding that losses hurt roughly twice as much as equal gains feel good.
LRAS: Long-run aggregate supply: the economy's potential output, fixed by resources and technology, independent of the price level.

marginal cost: The cost of producing one more unit.
marginal product: The extra output from one more unit of an input, holding others fixed.
marginal revenue: The extra revenue from selling one more unit, below price for any firm that must cut price to sell more.
market power: The ability to profitably hold price above marginal cost.
monetary policy: Central-bank control of interest rates or the money supply to steer inflation and output.
monopsony: A market with a single dominant buyer, for labor, one employer with the power to set wages below competitive levels.
moral hazard: Behavior changing for the worse once someone else bears the risk, hidden actions after a deal.
MPC: Marginal propensity to consume: the fraction of an extra dollar of income that gets spent rather than saved.
multiplier: The amount total output changes per dollar of initial spending change, powered by respending: 1/(1−MPC) in the simplest case.

NAIRU: The unemployment rate at which inflation neither accelerates nor decelerates, the economy's sustainable floor.
Nash equilibrium: A strategy profile where no player can gain by changing their choice alone.
natural rate: The unemployment level set by structural forces (matching, turnover, institutions) rather than the business cycle.
nominal: Measured in current dollars, unadjusted for inflation.

opportunity cost: What you give up to get something, the value of the next-best alternative you didn't choose.
output gap: The distance between actual output and potential output; positive gaps overheat, negative gaps mean slack.

Pigouvian tax: A tax set equal to the external harm of an activity, forcing the market to price the damage it causes.
potential output: The output an economy can sustain with normal use of its resources, where it returns once prices fully adjust.
present value: What a future payment is worth today after discounting.
price taker: A participant too small to influence the market price, it can only choose quantity.
producer surplus: The gap between the price sellers receive and the minimum they would have accepted.

rational expectations: The assumption that people forecast using all available information, so policy can't systematically fool them.
real: Adjusted for inflation, measured in actual purchasing power.
reference point: The benchmark (often the status quo) against which outcomes are felt as gains or losses.
risk premium: The extra expected return demanded for bearing risk instead of holding the safe asset.

seigniorage: Government revenue from printing money, an implicit tax paid through inflation.
SRAS: Short-run aggregate supply: what firms produce at each price level while wages and input costs are still sticky.
stagflation: The ugly combination of falling output and rising prices, the signature of a negative supply shock.
steady state: The resting point of a growth model, where capital per worker stops changing because investment exactly covers depreciation and dilution.
sticky prices: Prices and wages that adjust slowly, giving demand shocks real short-run effects.
subsidy: A government payment per unit that lowers effective production costs and expands output.
sunk cost: A cost already paid and unrecoverable, irrelevant to any rational forward-looking decision.

tariff: A tax on imports, raising their domestic price.
terms of trade: The rate at which exports exchange for imports.
TFP: Total factor productivity: the output growth unexplained by capital and labor, technology, in the broadest sense.

velocity: How many times a unit of money changes hands per period, the V in MV = PY.

Reading definitions is step one. Seeing the curves move is what makes them stick.