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A measure of the responsiveness of one variable to changes in another. Economists have identified four main types. * price elasticity measures how much the quantity of supply of a good, or demand for it, changes if its price changes. If the percentage change in quantity is more than the percentage change in price, the good is price elastic; if it is less, the good is inelastic. * income elasticity of demand measures how the quantity demanded changes when income increases. * Cross-elasticity shows how the demand for one good (say, coffee) changes when the price of another good (say, tea) changes. If they are substitute goods (tea and coffee) the cross-elasticity will be positive: an increase in the price of tea will increase demand for coffee. If they are complementary goods (tea and teapots) the cross-elasticity will be negative. If they are unrelated (tea and oil) the cross-elasticity will be zero. * Elasticity of substitution describes how easily one input in the production process, such as labor, can be substituted for another, such as machinery.
Industry:Economy
The exact meaning of socialism is much debated, but in theory it includes some collective ownership of the means of production and a strong emphasis on equality, of some sort.
Industry:Economy
An important concept in game theory, a Nash equilibrium occurs when each player is pursuing their best possible strategy in the full knowledge of the strategies of all other players. Once a Nash equilibrium is reached, nobody has any incentive to change their strategy. It is named after John Nash, a mathematician and Nobel prize-winning economist.
Industry:Economy
You can’t beat the market. The efficient market hypothesis says that the price of a financial asset reflects all the information available and responds only to unexpected news. Thus prices can be regarded as optimal estimates of true investment value at all times. It is impossible for investors to predict whether the price will move up or down (future price movements are likely to follow a random walk), so on average an investor is unlikely to beat the market. This belief underpins ¬arbitrage pricing theory, the capital asset pricing model and concepts such as beta. The hypothesis had few critics among financial economists during the 1960s and 1970s, but it has come under increasing attack since then. The fact that financial prices were far more volatile than appeared to be justified by new information, and that financial bubbles sometimes formed, led economists to question the theory. Behavioral economics has challenged one of the main sources of market efficiency, the idea that all investors are fully rational homo economicus. Some economists have noted the fact that information gathering is a costly process, so it is unlikely that all available information will be reflected in prices. Others have pointed to the fact that arbitrage can become more costly, and thus less likely, the further away from fundamentals prices move. The efficient market hypothesis is now one of the most controversial and well-studied propositions in economics, although no consensus has been reached on which markets, if any, are efficient. However, even if the ideal does not exist, the efficient market hypothesis is useful in judging the relative efficiency of one market compared with another.
Industry:Economy
A currency that is expected to drop in value relative to other currencies.
Industry:Economy
Shorthand for the way in which a change in spending produces an even larger change in income. For instance, suppose a government loosens fiscal policy, increasing net public spending by pumping an extra $10 billion into education. This has an immediate effect by increasing the income of teachers and of people who sell educational supplies or build or maintain schools. These people will in turn spend some of their extra money, putting more cash into the pockets of others, who spend some of it, and so on. In theory, this process could continue indefinitely, in which case the multiplier would have an infinite value. In practice, most people save some of their extra income rather than spend it. How much they spend will depend on their marginal propensity to consume. The value of the multiplier can be calculated by this formula:
multiplier = 1 / (1 – marginal propensity to consume)
If the marginal propensity to consume is 0. 5 (50 cents of an extra dollar), the multiplier is 2. In practice, it is often hard to measure the multiplier effect, or to predict how it will respond to, say, changes in monetary policy or fiscal policy.
Industry:Economy
Wages that are set at above the market clearing rate so as to encourage workers to increase their productivity.
Industry:Economy
The value of research services that brokerage companies provide “free” to investment managers in exchange for the investment managers’ business. Economists disagree on whether or not such hidden payments are economically inefficient.
Industry:Economy
Equal treatment, at least, in international trade. If country A grants country B the status of most-favored nation, it means that B’s exports will face tariff that are no higher (and also no lower) than those applied to any other country that A calls a most-favored nation. This will be the most favorable tariff treatment available to imports. Most-favored nation treatment is one of the most important building blocks of the international trading system. The World Trade Organization requires member countries to accord the most favorable tariff and regulatory treatment given to the product of any one member to the “like products” of all other members. Before the general agreement on tariffs and trade, there was often a most-favored nation clause in bilateral trade agreements, which helped the world move towards free trade. In the 1930s, however, there was a backlash against this, and most-favored nations were treated less favorably. This shift pushed the world economy towards division into regional trade areas. In the United States, most-favored nation status has to be re-ratified periodically by Congress.
Industry:Economy
Getting the most out of the resources used. For a particular sort of efficiency often favored by economists, see Pareto efficient.
Industry:Economy
