terminology Flashcards
What is arbitrage?
Arbitrage is the (simultaneous) purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies.
What is the difference between perfect and imperfect substitutes?
They have different indifference curves. Perfect substitutes will have linear (and parallel) indifference curves, e.g. f(K,L)=aK+bL. Whereas imperfect substitutes will have concave (non-linear) indifference curves., e.g f(K,L)=K+\sqrt{L}
What is what are perfect complements?
Indifference curves for perfect complements form a 90º elbows of the curves.
What does the marginal rate of substitution tell you?
MRS is the slope of an indifference curve (in absolute value) at which rate one thing is substitutable to another. It tells you the rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility. At equilibrium consumption levels (assuming no externalities), marginal rates of substitution are identical.
What is the difference between bonds and stocks?
A bond is a form of loan or IOU (from debt wold). A stock is a stake in a company (from its equities). It’s the two main classes of assets. In general, stocks are considered riskier and more volatile than bonds. However, there are many different kinds of stocks and bonds, with varying levels of volatility, risk and return.
What’s the difference between real GDP and nominal (value)
In economics, real value is relative to other commodities or goods. It is adjusted for inflation, enabling comparison of quantities as if prices had not changed. Changes in real terms therefore exclude the effect of inflation. In contrast with real value, nominal value is not adjusted for inflation, and so increases in nominal value reflect the effect of inflation.
