Absolute Advantage

The ability of a party to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

Adam Smith

Adam Smith, the Muir portrait

Adam Smith (16 June 1723 – 17 July 1790) was a Scottish economist, philosopher and author. Also known as ''The Father of Economics'' or ''The Father of Capitalism", Smith wrote two classic works, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The Wealth of Nations, is considered his magnum opus and the first modern work of economics.

Adverse selection

A situation where market participation is affected by asymmetric information.


An agent is the person tasked with making decisions on behalf of another entity (the principal). 

Aggregate Demand

The sum total of the demand for all the goods and services in an economy. 

Antitrust Law

laws that regulate the conduct and organization of business corporations, generally to promote competition for the benefit of consumers.


a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide a future benefit. In general, assets can include cash, inventory, supplies, equipment, and buildings. 

Asset Turnover

A measure of how productively a firm is using its assets. The asset turnover ratio takes on key item from the profit and loss statement (sales or revenue), and one key item from the balance sheet (total assets). Asset turnover is computed as total sales or revenue divided by total assets. If for example, a firm has $100,000 in sales and $25,000 in assets, then its asset turnover is 4.0. This means that for each dollar of assets, the firm generates $4 in sales or revenue. Firms generally strive for high asset turnover. Asset turnover is one of the ratios used in the Dupont Model of financial performance. 

Asymmetric Information

When one party to an economic transaction possesses greater material knowledge than the other party.


achievable, or something that can be attained. 


Balance Sheet

Shows the assets, liability, and equity of a business. It is referred to as a balance sheet because the total value of the assets must balance, or equal the liabilities and equity. The basic accounting equation is: A = L+E, where A= assets, L= liabilities, and E= equity. 


A financial institution licensed to receive deposits and make loans. Banks may also provide financial services, such as wealth management, currency exchange, and safe deposit boxes. There are two types of banks: commercial/retail banks and investment banks.

Barrier to Entry

the existence of high start-up costs or other obstacles that prevent new competitors from easily entering an industry or area of business. Barriers to entry can be manmade or naturally occurring. 


The action or system of exchanging goods or services without using money.

Base Money

 The total amount of bank notes and coins circulating in the economy.


Represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.


The promotion of a particular product or company by means of advertising and distinctive design.

Broken Windows Fallacy

The fallacious belief that destruction is good for the economy. The parable of the broken window was introduced by Frédéric Bastiat in his 1850 essay "That Which We See and That Which We Do Not See," to illustrate why destruction, and the money spent to recover from destruction, is not actually a net benefit to society.


The practice of making one's living by engaging in commerce.



In economics, capital is a stock of resources that may be employed in the production of goods and services and the price paid for the use of credit or money, respectively. In classical economics, the three factors of production are land, labor, and capital.

Central Planner

A centrally planned economy is an economy where decisions on what to produce, how to produce and for whom are taken by the government in a centrally managed bureaucracy. In such a society, the government is the "Central Planner."


Coins collectively, or the act or process of coining

Commodity Exchange

The central location where commodities are traded. Commodities traders exchange futures contracts for specific goods, like (for example) gold, wheat, and corn.

Common Law

The part of law that is derived from custom and judicial precedent rather than statutes. Often contrasted with statutory law


The cultural and natural resources accessible to all members of a society, including natural materials such as air, water, and a habitable earth. These resources are held in common, not owned privately.

Communal Property

 Property that is held and managed collectively. This is in contrast to private property which is held and managed privately. 


A group of people living together and sharing possessions and responsibilities. Private property is generally limited in a commune. 

Comparative Advantage

The ability to produce goods and services at a lower opportunity cost than that of trade partners. If  someone  has  a  lower  opportunity  cost of  producing  a  given  service,  that  person  enjoys  a comparative advantage in  the production  of  that  service. 


A number or quantity of something, especially that required to make a group complete. In economics, A complementary good is a good whose use is related to the use of an associated or paired good. Two goods (A and B) are complementary if using more of good A requires the use of more of good B. For example, the demand for one good (printers) generates demand for the other (ink cartridges).

Compound Interest

Interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan.

Consumer Price Index (CPI)

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

Consumer Surplus

The difference between the price that consumers pay and the price that they are willing to pay.


A voluntary, deliberate, and legally binding agreement between two or more competent parties. Contracts help ensure trust between the two parties. 


Fiscal policy is said to be "contractionary" when the spending plan results in a surplus. 


The process of working together towards the same end. 


The misuse of power in the form of money or authority to achieve certain goals in illegal, dishonest or unfair ways.


An amount that has to be paid or spent to buy or obtain something. 

Creative Destruction

A process through which something new brings about the demise of whatever existed before it. The standard example is the buggy-whip manufacturers who went out of business as automobiles overtook the horse and buggy.


Relating to, involving, or being a crime.

Crony Capitalism

An economic system characterized by close, mutually advantageous relationships between business leaders and government officials.

Customer Engagement

The depth of the relationship a customer has with a brand.


Deadweight Loss

Also known as excess burden or allocative inefficiency. A loss of economic efficiency that can occur when the free market equilibrium for a good or a service is not achieved.


An amount of money owed by a person, firm, or government to a lender.


In tax policy, a deficit occurs when spending exceeds tax revenue. 


The economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a good or service will decrease the quantity demanded, and vice versa.

Demand Schedule

The relationship between quantity demanded and own price, holding all other factors constant. The demand schedule is a way to show the relationship between quantity demanded and own price. 

Discouraged Worker

People who disengage from the labor market, either by not working, or by not actively seeking employment. Discouraged workers are not counted as unemployed, nor are they counted as employed. 

Division of Labor

The assignment of different parts of a manufacturing process or task to different people in order to improve efficiency. Under this regime each worker becomes an expert in one isolated area of production, thus increasing his efficiency. The fact that laborers do not have to switch tasks during the day further saves time and money. Adam Smith was one of the first people to write about the division of labor. 


A term used to distinguish the home country of concern from foreign, international, or global markets. 


Economic Indicator

Indicators that tell us what the economy is up to, and what direction it is likely to take in the future. The unemployment rate is an example of an economic indicator. 

Economic Profit

The difference between the revenue received from the sale of an output and the costs of all inputs used and any opportunity costs


The study or systematic investigation of the principles of human action.


The wealth and resources of a country or region, especially in terms of the production and consumption of goods and services


A way of thinking that serves entrepreneurs in the processes of opportunity identification and new venture creation. Effectuation includes a set of decision-making principles expert entrepreneurs are observed to employ in situations of uncertainty.


In economics, efficiency implies an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency. When an economy is economically efficient, any changes made to assist one entity would harm another. In terms of production, goods are produced at their lowest possible cost, as are the variable inputs of production.


A person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so


The activity of setting up a business or businesses, taking on financial risks in the hope of profit.


The state in which quantity supplied and quantity demanded are equal.

Equilibrium Price

The market price when markets are in a state of equilibrium. This means that equilibrium price is the market price where the quantity of goods supplied is equal to the quantity of goods demanded.

Equilibrium Quantity

The quantity supplied when markets are in a state of equilibrium. This means that equilibrium quantity is the quantity supplied where the quantity of goods supplied is equal to the quantity of goods demanded.


What is left after debt is subtracted from assets. 


Moral principles that govern a person's behavior or the conducting of an activity. Also, the branch of knowledge that deals with moral principles.


Fiscal policy is "expansionary" when the spending plan results in a deficit. 


A strong belief that something will happen or be the case in the future. Similarly, a belief that someone will or should achieve something.


The act of a country shipping goods and services out of the port of a country. In international trade, an export refers to the selling of goods and services produced in the home country to other markets (other countries).


Federal Reserve

Also commonly known as "The Fed", the Federal Reserve is the central bank of the United States. The Fed regulates the U.S. monetary and financial system. 


The system of political organization prevailing in Europe from the 9th to about the 15th centuries, having as its basis the relation of lord to vassal with all land held in fee, and as chief characteristics homage, the service of tenants under arms and in court, wardship, and forfeiture.

Fiduciary Responsibility

The legal term describing the relationship between two parties that obligates one to act solely in the interest of the other. The party designated as the fiduciary owes the legal duty to a principal, and strict care must be taken to ensure no conflict of interest arises between the fiduciary and his principal.

Financial Leverage

The ratio of total assets divided by equity. When a firm has no liabilities (debt), then its financial leverage is 1.0, because all the assets are accounted for as equity. Stated alternatively, for each $1 of equity the firm has, the firm also has $1 of assets. A financial leverage of 1.0 means the firm is not financially leveraged at all, or it does not use debt to finance assets. 

Fiscal Policy

Policy relating to government revenue and expenditures.

Formal Freedom

Formal freedom can be thought of as "freedom-from." That is to say, freedom from being interfered with. This can be juxtaposed against "freedom-to," which is the freedom to do something.  A law saying Person A cannot buy a home is a law that infringes on A's formal freedom. 

Fractional Reserve Banking

A system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending.


GDP Deflator

A measure of the level of prices of all new, domestically produced, final goods and services in an economy in a year.

Goods-Dominant Logic

One way of analyzing commercial activity. Humans took the land and other natural resources and applied labor or human capital to transform natural resources into manufactured products. 

Gross Domestic Product (GDP)

A broad measure of economic activity that is commonly used to gauge the economic performance of a whole country or region, and to make international comparisons. 

Gross National Product (GNP)

A similar economic indicator as GDP. GNP  sums  all  production  owned  by  citizens  of  a  country,  whether  they  are  inside  or  outside  of  that country’s  borders.

Gross Profit

Is equal to subtracting the cost of the goods sold (CGS), from the revenue of the firm. 



The quality or state of consisting of dissimilar or diverse elements. 


The quality or state of being of a similar kind or of having a uniform structure or composition throughout.



purchases of good or services by a domestic economy from a foreign economy.

Inalienable Right

A kind of property right which can never be bought or sold. 


A thing that motivates or encourages one to do something.

Inferior Good

A good whose demand decreases when consumer income rises, unlike normal goods, for which the opposite is observed.


A sustained increase in the average prices of all goods and services. 


An  institution  is  a  framework  for  interacting.  Norms,  laws,  and customs  evolve  to help people  know  what  to expect from  each other.


Unable to be touched or grasped; not having physical presence.


The quality of being honest and having strong moral principles; moral uprightness.


a stake, share, or involvement in an undertaking, especially a financial one.



In economics, labor is the general body of wage earners. In a more special and technical sense, however, labour means any valuable service rendered by a human agent in the production of wealth, other than accumulating and providing capital or assuming the risks that are a normal part of business undertakings. In classical economics, the three factors of production are land, labor, and capital.

Labor Force

The number of people eligible for work. This includes both the number of people who are employed, and the people who are looking for work. 


In economics, land is the resource that encompasses the natural resources used in production. In classical economics, the three factors of production are land, labor, and capital.


The system of rules which a particular country or community recognizes as regulating the actions of its members and which it may enforce by the imposition of penalties.


What the firm owes to others. Debt is also another term used for liability. The entities that are owed could be individuals, suppliers, banks, bondholders, the government, or any entity that is owed financial resources. 


Refers to how quickly an asset can be converted to cash. The most liquid assets are called current assets, which means that they can be converted into cash or cash equivalents within a year. 

Long Run

A conceptual time period which will vary depending on the business or industry in question. In the long run, there are no fixed factors of production. In other words, every factor is variable. For example, there are no binding contracts, no set suppliers, no production capacities of a specific factory. There are no constraints on changing the output level by changing the capital stock, workforce or even entering or exiting an industry. 



A branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole

Marginal Value

The value gained from either consuming or producing one additional unit of a good or service.

Market Power

The ability of a firm (or group of firms) to influence the price of a good, either by setting the quantity traded or by setting the price. 


The economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism. Mercantilism is a national economic policy that is designed to maximize the exports, and minimize the imports, of a nation.

Monetary Policy

Consists of management of money supply and interest rates, aimed at achieving macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity.


A current medium of exchange in the form of coins and banknotes; coins and banknotes collectively.


A market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition.


a market condition in which there is only one buyer. A single buyer dominates a monopsonized market while an individual seller controls a monopolized market.

Mutual Gain

In trade, mutual gain refers to the knowledge that each individual will be better off after an exchange.


Negative Externality

Also known as an external cost, a negative externality is the cost of a transaction paid by third parties who were not consulted, and whose interests weren't accounted for. 


The practice of favoring relatives or friends, especially by giving them jobs.

Net Profit

Is  equal  to sales  or  revenue,  minus  cost  of  producing goods  or  providing  services  (CGS),  and  minus general  selling and  administrative  (SGA)  costs.


In economics, "nominal" means an unadjusted rate. It can also mean a change in value. 

Normal Good

Any good for which demand increases when income increases.

Noxious Market

A market in things that should not be for sale. 


Objective Value

The intrinsic value of a good or service. Objective values should be able to be measured by objective measures. 

Open Market Operations

The Federal Reserve purchases and sells U.S. Treasury securities on the open market in order to regulate the supply of money that is on deposit in U.S. banks, and therefore available to loan out to businesses and consumers. It purchases Treasury securities to increase the supply of money and sells them to reduce the supply of money. By using this system of open market purchasing, the Federal Reserve can produce the target federal funds rate it has set. It calls this process its open market operations.

Opportunity Cost

The value of the next-highest-valued alternative use of that resource. Example: If you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cannot spend the money on something else.



A quantity or amount of something, especially as dealt with in one commercial transaction. To divide something into parcels is to divide it into discrete sections.

Pecuniary Externality

An externality that affects someones welfare only by affecting the price of what they are trying to sell. 

Perfect Competition

the situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers. 

Positive Externality

 A benefit that is enjoyed by a third-party as a result of an economic transaction.

Prescriptive (Procedural) Knowledge

Applied knowledge which deals with how things work in practice to solve human problems. Sometimes this is referred to as technology or "technique."

Price Ceiling

The highest legal price a commodity can be sold at. Price ceilings are used by the government to prevent prices from being too high.

Price Floor

The lowest legal price a commodity can be sold at. Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage.

Price Level

An overall measurement of the prices of goods and services in an economy at a particular time. 


An entity, such as a firm, with a monopoly that gives it the power to influence the price it charges as the good it produces does not have perfect substitutes.


A person or company that has no control to dictate prices for a good or service. A price-taking firm can only decide how much of a good to supply to the market at the going price. 


The person or entity who hires an agent to make decision on their behalf. 


The principal-agent problem occurs when a principal creates an environment in which an agent's incentives don't align with those of the principal.

Private Property

 Property that is held and managed privately.


The process of transferring an enterprise or industry from the public sector to the private sector. The public sector is the part of the economic system that is run by government agencies.

Producer Surplus

The gain obtained by sellers because they can sell at a market price that is higher than their willingness to sell.

Production Possibilities Frontier (PPF)

a curve which shows various combinations of the amounts of two goods which can be produced within the given resources and technology. It is a graphical representation showing all the possible options of output for two products that can be produced using all factors of production, where the given resources are fully and efficiently utilized per unit time. The PPF is a collection of points that shows the relationship between maximum possible production outcomes given a fixed set of resources over a period of time. 


A financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something.

Profit and Loss Statement

 a summary for a period of time of all of the sales or revenue of a firm, its expenses, and the resulting profit (or loss). The time period is at the discretion of the firm, but most firms have monthly, quarterly, and annual profit and loss statements. Once again there is a basic equation that captures the profit and loss statement. This is: P = S – CGS – SGA – T

Where P = profit or loss, S = sales or revenue, CGS = cost of goods and services sold, SGA = selling and general administrative expenses, and  T = taxes

Profit Margin

The amount by which revenue from sales exceeds costs in a business.

Property Rights

Property rights are theoretical socially-enforced constructs in economics for determining how a resource or economic good is used and owned. Resources can be owned by (and hence be the property of) individuals, associations, collectives, or governments.

Propositional Knowledge

The abstract knowledge that informs us how things work in the natural or physical world, and also how people and groups of people behave in social settings. 


the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations.

Public Choice Theory

The idea that the people who run governments, courts, and legislatures are the same kind of people as those who run businesses or households. Some people want money. Some want power. But everyone who spends a lifetime competing for power wants to use it for something. 


Quantity Demanded

A term used in economics to describe the total amount of goods or services demanded at any given point in time. It depends on the price of a good or service in the marketplace, regardless of whether that market is in equilibrium.

Quantity Supplied

The quantity of a commodity that producers are willing to sell at a particular price at a particular point of time.



A real value is one which has been adjusted for inflation, enabling comparison of quantities as if the prices of goods had not changed on average.

Rent Seeking

Occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity. Typically, it revolves around government-funded social services and social service programs.


The beliefs or opinions that are generally held about someone or something. 

Reserve Requirements

The amount of cash that banks must have, in their vaults or at the closest Federal Reserve bank, in line with deposits made by their customers. Set by the Fed's board of governors, reserve requirements are one of the main tools of monetary policy.

Resource Integration

Using or combining resources in a way that enables them to be offered in a new and valuable way. 


A stock or supply of money, materials, staff, and other assets that can be drawn on by a person or organization in order to function effectively.


The state or fact of having a duty to deal with something or of having control over someone.

Return on Assets

Takes the net profit (after taxes) from the profit and loss statement, and divides it into the total assets from the balance sheet. A firm with $25,000 in total assets and $3000 in net profits (after taxes) would have a return on assets (ROA) of $3000/$25000 or 12 percent. For each dollar of assets, the firm earns 12 cents in profit (after taxes). Return on Assets is one of the ratios used in the Dupont Model of financial performance. 

Return on Equity

Also known as ROE, return on equity is computed by taking net profit (after taxes) and dividing it by the total equity. Consider a firm with $3000 in net profit after taxes, and $12,500 in equity. It would have a ROE of $3,000/$12,500 or 24 percent. Return on Equity is one of the ratios used in the Dupont Model of financial performance. 


the income that a firm receives from the sale of a good or service to its customers. Revenue is calculated by multiplying the price (p) of the good by the quantity produced and sold (q).

Rule of Law

the restriction of the arbitrary exercise of power by subordinating it to well-defined and established laws.



Refers to the basic economic problem, the gap between limited – that is, scarce – resources and theoretically limitless wants.


In one sense, being self-sufficient means needing no outside help in satisfying one's basic needs. However, very few people could ever come close to producing enough to to meet their own needs. In another sense, people are self-sufficient when they have earned the goods they need to sustain themselves.

Service-Dominant Logic

One way of analyzing commercial activity. In contrast to goods-dominant logic, service-dominant logic is the belief that wealth occurred from the exchange of knowledge and skills rather than goods. 

Short Run

A conceptual time period, the length of which varies depending on the business or industry. The short run can be contrasted against the long run. In the short run, there are some factors of production that are variable, and some that are fixed. In the short run, a firm may be constrained from entering or exiting an industry. 


a condition where the quantity demanded is greater than the quantity supplied at the market price.


The method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency.

Spontaneous Order

The order that results spontaneously from human actions, not from human design. 


Ownership shares of a company or of a commodity such as corn, gold, or wheat. 

Stock Exchange

A place or electronic market where owners of businesses get together to buy and sell their shares of stock.

Subjective Value

The idea that the value of a good is not determined by any inherent property of the good, but instead value is determined by the importance an acting individual places on a good for the achievement of his desired ends


a benefit given to an individual, business, or institution, usually by the government. The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy


A person or thing acting or serving in place of another. In economics, substitute goods or substitutes are at least two products that could be used for the same purpose by the same consumers. If the price of one of the products rises or falls, then demand for the substitute goods or substitute good (if there is just one other) is likely to increase or decline. 


Describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.

Supply Schedule

The relationship between quantity supplied and own price, holding all other factors constant. 


The value generated by trading. The amount of surplus generated in a market depends on the quantity traded, and who is trading. 



A thing that is perceptible by touch.


A tax or duty to be paid on a particular class of imports or exports.


A means by which governments finance their expenditure by imposing charges on citizens and corporate entities. Governments use taxation to encourage or discourage certain economic decisions.

The United States Constitution

The supreme law of the United States of America. Part of what the Constitution does is limit the powers of the various branches of government. 


The economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties.

Tragedy of the Commons

A situation in a shared-resource system where individual users, acting independently according to their own self-interest, behave contrary to the common good of all users, by depleting or spoiling that resource through their collective action.

Transaction Cost

The cost associated with exchange of goods or services and incurred in overcoming market imperfections. 


The  willingness  to  make  oneself  vulnerable  to another  person.


Unemployment Rate

The ratio of the number of unemployed individuals by all individuals currently in the labor force. 



An estimate the usefulness, importance, or monetary worth of something.

Value Proposition

A promise of some benefit associated with a market offering. 


Zero-sum game

Relating to or denoting a situation in which whatever is gained by one side is lost by the other.