Category: Glossary

Definition A monetary theory (postulated by Milton Friedman) that states that in order to control inflation in the long run, central banks should grow the money supply by a set amount (“k-percent”) each year. Example Usually, the “k variable” is set depending on GDP-growth (between 1-4%). By setting “k” slightly above GDP […]

Definition The degree to which an asset can be converted into the common medium of exchange of an economy without affecting its valuation. Example An example of a highly liquid asset could be publicly traded shares of a company. Those can be bought or sold at a moment’s notice. A […]

Definition The study of small economic units (households, firms, specific markets, etc.), their decision-making, and their interactions in the market.  Example Some of he topics that are covered in microeconomics include: consumer behavior (decision making, utility maximization), profit maximization of firms, supply and demand (for individual markets), externalities, and labor markets. […]

Definition A Monopoly is a market situation where a sinlgle firm (or individual) is the sole producer and seller of a product or service for an entire market.  Monopolies can arise because of specific resources, government regulations, costs of procution, or deliberate actions. They are characterized through a lack of competition, which […]

Definition A market situation where a single firm (or individual) is the sole producer and seller of a good or service for an entire market, because it faces lower costs of production than two or more producers would. Example In many countries, the railway system is operated by a natural […]

Definition The negative effects of economic activities that originate during the production process on unrelated third parties. Example The most common example of a negative production externality is the pollution caused by a firm during the production of their goods. Pollution affects the entire population, however as long as companies are […]

Definition The positive effects of economic activities on unrelated third parties that originate during the production process. Example An example of a positive production externality could be an orchard placed next to a beehive. The bees will find pollen for producing honey and will at the same time pollinate the […]

Definition A hypothesis that argues that changes in prices are influenced by changes in the size of the money supply. Example When money supply in an economy increases, prices tend to rise as well. If people have more money, they can afford to consume more goods and services. Because of […]

Definition A period of declining economic output, generally identified by negative economic growth in two successive quarters. Example If the gross domestic product (GDP) of a country declines for two consecutive quarters (two three month periods) for whatever reasons, the economy of this country is said to be in a […]

Definition The basic economic problem of having people with virtually unlimited wants in an environment of limited resources. Example One of the best examples of scarcity is the gasoline shortage in the 1970’s. Because of the oil crisis, many people decided to build up stocks of gasoline. As a result, […]