Economics terms Flashcards
1
Q
Just Price
A
Non-excessive profit, with no deception, the buyer freely accepting the price.
2
Q
Commodity Money
A
Money with intrinsic value besides its specified worth; gold coins.
3
Q
Fiat Money
A
Money that is simply a token of exchange with no value other than that assigned to it by a government; paper money.
4
Q
Information Asymmetry
A
Lack of information
5
Q
Moral Hazard
A
When people succumb to the temptation not to repay, and default on a loan
6
Q
Bill of Exchange
A
A paper witnessing a buyer’s promise to pay for goods in a specific currency when the goods arrived.
The bill could be immediately sold to raise money.
7
Q
Nominal Prices
A
Money prices which can change with inflation.
8
Q
Real Prices
A
What quantity of a thing (items or time spent working) has to be given up in return for another kind of thing, no matter what the nominal price.
9
Q
Risk
A
Measurable uncertainty which can be added to costs or insured against (risk of bottles exploding)
10
Q
Uncertainty
A
Immeasurable uncertainty, from not being able to see the future
11
Q
Perfect competition
A
- A large number of firms selling to a large number of customers, each a negligible part of the market
- Every firm sells an identical product
- Firms are free to enter or leave the industry at will and can produce goods with perfect ease
12
Q
Ordinal utility
A
A ranking of relative happiness
13
Q
Cardinal utility
A
An absolute measurement of happiness
14
Q
Positive economics
A
Describing how things are
15
Q
Normative economics
A
Prescribing how things should be
16
Q
Pareto efficiency (optimality)
A
A state where each individual trades to improve their own welfare until they reach a compromise or equilibrium, where you can’t make one person better off without hurting the others.
(Not fairness, not requiring equal distribution)
17
Q
Quantity theory of money
A
A doubling of the supply of money will result in a doubling in the value of transactions (prices, not real value)
18
Q
Mercantilism
A
A country’s wealth is gold, exports bring in gold while imports lose gold (a balance of trade), so a country should preserve its stock of gold by restricting imports.
1500-1700’s
19
Q
GDP
A
Gross domestic product:
The total value of all the goods and services exchanged for money within a country in a particular period to arrive at a figure for its national income.
No standard method of calculation. Often correlated with welfare.
20
Q
Joint-stock company
A
Investors inject money into a company in return for becoming joint holders of its trading stock and a right to a proportional share of the profits.
21
Q
Physiocrats
A
1700’s, French
Group that believed that nations gained their economic wealth from their agricultural sector; from the sectors that create real goods and services and move money through the economy.
22
Q
Non-excludability
A
The difficulty of preventing people who don’t pay for goods from using them
23
Q
Non-rivalry
A
One persons consumption of a good does not diminish the ability of others to consume it
24
Q
Classical Economics
A
An early approach to economics developed by Adam Smith and David Ricardo, focusing on the growth of nations and free markets.
25
Homo economicus
“Economic man”
Rational choice theory
Every individual makes decisions to maximize their personal well-being based on a level-headed evaluation of all the facts.
26
Laissez-Faire
“Leave business alone” ish
| Advocation of minimal government because the invisible hand of the market brings order
27
Opportunity Cost
The value of something is determined by what had to be given up in order to get it; non-monetary and experiential
28
Circular flow
Money paid in wages circulates back into the economy when the worker pays for goods, only to be paid back out in wages to repeat the process.
29
Smithian Growth
Growth through efficiencies gained through the division of labor. As markets grow there are more opportunities for specialization of work.
30
Schumpeterian Growth
Innovation can lower prices, even where there appears to be little competition, by providing higher quality products at lower prices, destroying existing firms.
31
Smith’s System of Perfect Liberty
1. It provides the goods that people want.
2. It generates prices that are fair.
3. It provides fair incomes for sustainable circular flow.
32
Diminishing Marginal Returns
A situation in which each extra unit of something produces successively smaller benefits (added workers on a farm)
33
Marginal utility
The change in total utility or satisfaction that results from the consumption of one more unit of a product or service
34
Veblen Goods
Luxury items of conspicuous consumption, which give a person satisfaction at the more they have and the less other people have.
35
Relative Consumption Trap
Production in a rich society squandered on Veblen goods. Such consumption doesn’t give gains in overall well-being.
36
Pigouvian Tax
Tax the polluter so that the full costs of pollution are factored into the polluters decisions. A business would only pollute if buys were prepared to pay for the damage. (Carbon taxes etc)
37
Sustaining innovations
Maintain the ongoing system and are often technological improvements.
38
Disruptive innovations
They upset the market and really get things moving, changing the market through product innovation.
39
Econometrics
Mathematical analysis of economic data
40
Involuntary unemployment
A situation where workers in an industry were willing to provide more labor at the current wage level than was being demanded
41
Real wages
The level of wages relative to the prices of goods and services being offered.
These rise in low employment periods, creating a vicious cycle of high cost and low profit.
42
Keynesian idea
Solution to involuntary unemployment was for governments to spend more in the economy so that overall demand for products would rise, leading to more hiring, price rises, and fall of real wages, returning the economy to full employment.
43
Expected utility
The calculation of considered possible outcomes of an action, their potential returns weighed against their probability
44
Risk
The outcome of an action is not known, but it’s possible to determine the probability of various possible outcomes, allowing for mathematical assessment of risk which can be insured against.
45
Uncertainty
A situation where the probability of outcomes isn’t known so the various possible outcomes can’t be compared in terms of expected utility, and can’t be measured mathematically.
46
Keynesian Multiplier
If a government invests in large projects during a recession, employment will rise by more than the number of workers employed directly. National income will be boosted by more than the amount of government spending.
47
Ricardian equivalence
Theory that people understand a governments budget constraints and continue to spend in the same way regardless of its decision to tax or borrow because they know these will ultimately cost the same.
48
Malthusian Trap
Higher living standards are always choked off by population growth.
49
Currency devaluation
A devaluation in the exchange rate lowers the value of the domestic currency in relation to all other countries. It can assist the domestic economy by making exports less expensive, enabling exporters to more easily compete in the foreign markets, and raises the costs of imports.
50
Linkage
Interconnections between industries.
Forward linkages help other industries grow by increasing supply of their product. (Paint helping cars)
Backward linkages help other industries by increasing demand for their product (chemicals are required to make paint)
51
Big push
Poor countries need simultaneous investments in infrastructure and industry, and only governments can make this level of investment. If they do so, the countries will grow.
Sometimes worked, often led to bloated, corrupt government and industry.
52
Structural adjustment programs
Attempts by the IMF to inject market principles into African and Easter European economies, failed in different ways than the big push methods.
53
Market-friendly approach
A blend of big push and marked-focuses approaches which sees the state and markets as complimentary
54
Utility
A measure of satisfaction
55
Expected utility theory
Assumes that people are rational when faced with choices where there are no guaranteed outcomes. They weigh the utility of each possible outcome by the probability it will occur, then choose the option with the greatest utility.
Mathematical approach.
56
Independence axiom
People will dispassionately look at the likelihood of outcomes and their utilities, viewing each choice independently, ignoring any factors that are common to each option.
57
Allais paradox
Maurice Allais contended that expected utility theory (based on the independence axiom) is rarely, if ever, true
58
Stagflation
Inflation and unemployment increasing together
59
Monetarism
Monetary policy has a valuable role to play in managing the economy; money affects output in the short run and prices only in the long run. Governments should ensure that money increases by a constant amount 2-5% annually. Also small government-minded.
60
Natural rate of unemployment
The proportion of the working population that is unemployed workers temporarily in the process of looking for jobs.
61
Permanent income
People’s stable, long-term earnings, which they feel confident to consume
62
Transitory income
Non-permanent income, which can be negative or positive and which does not affect people’s consumption
63
Friedman’s demand for money
Demand increases with the general level of prices, is influenced by people’s real wealth and returns, and is influenced by economic uncertainty
64
Phillips Curve
A Keynesian theory about the correlation between unemployment and inflation; as unemployment goes down, inflation goes up, and vice versa.
Theory lost power after stagflation and Friedman criticized it for not taking into account people’s expectations of inflation with govt. spending, and that govt. spending had only resulted in inflation.
65
Life-cycle hypothesis
Modigliani’s idea that rational individuals don’t consume blindly, but look to the future and develop expectations about how much they need to save toward old age. When they’re older, they use up their savings, trying to keep consumption constant, smoothing its path over time.
66
Permanent income hypothesis
Friedman’s theory that people smooth their consumption over time around their permanent income (an expectation of future earnings based mostly on current wealth). Any extra income is transitory and will be saved.
67
Moral hazard
Situations where individuals may not be honest. Where one party cannot observe the behavior of the other, there may be incentive for the less-observed party not to deliver on all clauses of the contract, unknown to the other.
Risky behavior by insured individuals, lazy employees, “too big to fail”
68
Fundamental theorems of welfare economics
1. Any pure free market economy in equilibrium is Pareto efficient, a weak ethical criterion.
2. There are many Pareto-efficient allocations of resources, but to achieve a equatable allocation an initial redistribution of individual endowments needs to be made before trading begins. Implies that govts. Can redistribute resources through taxes etc.
69
Voting paradox
It’s possible for a majority of voters to prefer A over B, and B over C, but also C over A (going by thirds of the voters).
70
Social choice theory
In order to evaluate the economic well-being of a society, the values of its individual members have to be taken into account. To make collective decisions about the welfare and social state of a society, there must be a fair and efficient system of voting.
71
Arrow’s paradox (general possibility theorem)
A voting system that truly reflects the preferences of the electorate is impossible. He proposed fairness criteria for an ideal voting system.
72
Easterlin Paradox
Surveys showed that the link between GDP and welfare wasn’t as robust as people thought; happiness increases with income until passing subsistence levels, when it slows or stops.
Challenged somewhat, because losing incomes does negatively affect well-being.
73
Hedonic treadmill
People adapt rapidly to their current levels of well-being, maintaining this regardless of events. With rises in income the adapt to the new level of material security, treating it as normal and so being no happier than they were before.
74
Theory of the second best
Some market imperfections can be permanent and government intervention might worsen the effects of existing imperfections, pulling the market further from the ideal. When imperfections can’t be removed, the other markets will work around it as efficiently as possible.
Monopoly with pollution v competition with much more pollution
75
Social market economy
Economic model developed in Germany in 1950’s, characterized by a mixed economy in which private enterprise is encouraged, but govt intervened in the economy to ensure social justice.
76
Convergence
Poor countries’ Increased growth and better living standards, catching up to rich countries
77
Globalization
The integration of markets
78
Market integration
The fusing of many markets into one, where a commodity has a single price
79
Global market integration
Price differences between nations are eliminated as all markets become one
80
Rodrik’s Trilemma
People want globalization to have democracy, independent nation-states, and deep economic integration. Rodris says pick two.
81
Hard budget constraint
In a competitive market a firm’s revenues must at leas cover their costs or they will face financial losses. This disciplines firms to economize on inputs and sell output in a way that maximizes profit.
82
Soft budget constraint
Firms cushioned by the state to prevent bankruptcy, which do not have to cover costs with revenues, and often demand excessive amounts of inputs relative to production levels, resulting in shortages for consumers.
83
Forced substitution
The necessity of having to purchase the next best available good, given a shortage.
84
Game theory
The study of strategic decision making by interacting individuals or firms.
85
Nash Equilibrim
The state of equilibrium in games (where the players make independent decisions non-cooperative in situations w/o communication) where neither player wants to change their behavior. Their best strategy is based on their opponents also selecting their best strategy.
86
Prisoner’s Dilemma
Two prisoners, if they agree to stay silent get a brief sentence, if one stays silent and the other betrays then one goes free and the other gets a severe sentence, and if both betray they both get a medium sentence. The Nash equilibrium is to betray, though it doesn’t maximize welfare for the group.
87
Sub-game perfection
In multi-staged games there should be an equilibrium at each stage (sub-game) of the overall game.
88
Bounded rationality
The choosing of more intuitively appealing solutions to games that may not be sub-game perfect.
89
Dependency theory
Resources and wealth flow Fromm poor countries to rich countries in such a way that the poor countries are unable to develop.
90
Terms of trade
The amount of imports a nation can buy with a given amount of exports
91
Adaptive expectations
Assumes people form expectations of the future based solely on what happened before; if event A led to event B it will do so again.
92
Rational expectations
People don’t simply guess at prices by looking at previous ones, but attempt to forecast future prices based on the information available, using a correct model of the economy.
This makes government intervention in the economy ineffectual
93
Lucas critique
If individuals’ expectations do adjust with policy, this means that the whole structure of the economy alters with changes in policy. The effects of policy are not always those that are intended.
94
Expected utility
The amount of expected satisfaction
95
Ellsberg paradox/ ambiguity aversion
People make reasoned choices when given some info, from which they can estimate probability and risk. If a future outcome seems ambiguous and make decisions based on different rules that don’t include probability.
96
Eurozone
Established 1999 with 11EU countries. No country was to have national debt more than 60% of its GDP and annual deficit was not to exceed 3% of GDP. No mechanism for risk-sharing or fiscal (tax) transfers across countries, leading to Eurocrisis b/c of imbalance and debts in southern EU countries.
97
Entitlements
The bundle of goods and services that individuals have access to
98
Famine
An example of entitlement failure; occurring when families’ entitlements fall below the minimum amount needed to survive. This may happen if the price of food rises or wages fall.
99
Forward
A derivative contract which specifies the price and future date for delivery of a commodity. This allows producers to kick their customers into a price in the future.
100
Hedge
A derivative aimed to reduce risk and insure against the future.
101
Derivative
A contract written not directly for a commodity itself but for some attribute associated with it; they do not involve payment for actual assets or commodities, but only for the right to buy those products in the future, allowing people to deal in huge quantities.
102
Option
The right but not the commitment to trade an underlying asset at a certain point in the future
103
CDO
Collaterized debt obligations
Financial instruments that raise money by issuing their own bonds before investing that money in a mixture of assets such as loans.
Subprime mortgages led to 2008 collapse.
104
Loss averse
People are willing to take risks to avoid losses, where they would not be willing to take risks to gain something.
105
Risk averse
People are risk averse when facing gains, but not when facing losses.
106
Prospect theory
Behavioral economics
| We hate to lose more than we like to gain and we interpret losses and gains in terms of context.
107
Endowment effect
People tend to place a higher value on an object when they own it (and don’t want to lose it) than before they own it when it is only a potential gain.
108
Laffer curve
A bell-shaped curve to show that somewhere between the extremes of no tax and 100 percent tax there is a point at which a government will maximize revenue. Where the peak on the curve is is disputed.
109
Supply-side
The part of the economy that makes and sells things
110
Demand side
The part of the economy that buys goods
111
Supply-side economics
The idea that the best way to make the economy grow is to improve conditions for the supply side, freeing companies from regulations, and cutting subsidies and high-rate taxes.
112
Efficient market hypothesis
All investors have access to the same publicly available information as their rivals, so the prices of stocks fully reflect all the knowledge available. No one can know what new information will be released, so it should be almost impossible for investors to make a profit without insider trading.
This theory doesn’t account for irrationality and here instinct.
113
Asymmetric information
An imbalance of information; for instance, buyers and sellers may have more or less information about the product than each other.
114
Adverse selection
When buyers know more about their own insurance risks than their insurers, who are unable to identify and avoid them.
115
Akerlof’s theory
Uncertainty caused by limited information can cause markets to fail; the possibility of buying a lemon makes a buyer reluctant to pay a high price for a user car, meaning that the sellers have to sell cars at lower prices, and more lemons are sold.
116
Central bank
An institution that manages a country’s currency, alters money supply, and sets interest rates. It may also act as a lender of last resort to banks.
117
Capital
Money and physical assets (machines and infrastructure) used to produce an income.
118
Social capital
Social networks at work, in the community, and in leisure time, which are important to economic performance because they affect the productivity of individuals and groups by improving skills, advancing careers, and encouraging cooperation and information sharing.
119
English auction
Used in British art houses, bidding goes up until only one bidder is left.
120
Dutch auction
The price drops until it reaches a price someone will pay.
121
First-price auction
Bidder submit sealed bids and the highest bidder wins.
122
Shading
When bidders bid less than their valuation to avoid overpaying
123
The winner’s curse
An item goes to the bidder who overvalued it the most
124
Minsky moment
The point at which unsustainable speculation turns into crisis.
125
The financial instability hypothesis
The longer an economy remains stable, the greater people’s confidence in the future, and the riskier their borrowing. Debt grows as asset prices rise, and after prices peak and start to fall, borrowers default, lending collapses, and the economy goes into recession. Stable economies contain the seeds of instability.
126
Efficiency wages
Employers choose to pay over the market value because they get more from their employees that way; maximizing morale, competition for employment, and minimizing turnover and shirking
127
Menu costs
The cost to a firm of making price changes, such as printing new price lists
