Naked Economics Vocab

Adverse Selection

Adverse Selection

refers to a market process in which undesired results occur when buyers and sellers have asymmetric information (access to different information); the "bad" products or services are more likely to be selected.

Economics of Discrimination

discrimination based on economic factors.

Monopolistic Competition/Oligopoly

a market form in which a market or industry is dominated by a small number of sellers

Laissez faire economics

an economic environment in which transactions between private parties are free from government restrictions, tariffs, and subsidies, with only enough regulations to protect property rights.

Invisible Hand of the Economy

a metaphor to describe the self-regulating behavior of the marketplace.

Externalities

a cost or benefit that results from an activity or transaction and that affects an otherwise uninvolved party who did not choose to incur that cost or benefit

Cost/Benefit Analysis

a systematic process for calculating and comparing benefits and costs of a project, decision or government policy

Human Capital

the stock of competencies, knowledge, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value.

Market price

the economic price for which a good or service is offered in the marketplace.

Free Rider problem

refers to someone who benefits from resources, goods, or services without paying for the cost of the benefit.

Law of Unintended Consequences

A positive, unexpected benefit.
A negative, unexpected detriment occurring in addition to the desired effect of the policy
A perverse effect contrary to what was originally intended (when an intended solution makes a problem worse)

Taxation & Laffer curve

this curve shows the relationship between tax rates and tax revenue collected by governments.

Diversification

reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of its constituent.

Benefits of trade

(1)Supporting more productive, higher paying jobs in our export sectors, (2)Expanding the variety of products for purchase by consumers and business, (3)Encouraging investment and more rapid economic growth, (4) allowing countries to specialize in producing things in which they have an advantage to make.

Tariffs

a tax on imports or exports

FOMC

The Federal Open Market Committee (FOMC) is the group that makes the monetary decisions. They determine whether interest rates need to go up, down, or stay the same. They do things like lowering the cost of borrowing to stimulate the economy.

Comparative Advantage

refers to a country's ability to produce a particular good with a lower opportunity cost than another country.

Market Allocation

agreements in which competitors divide markets among themselves.

Utility

representation of sets of goods that bring some satisfaction to people who are in possession.

Opportunity Cost

what you give up to get something in return.

Profit Motive

the reason for a business's existence is to turn a profit. The profit motive functions on the theory that individuals tend to pursue what is in their own best interests. Accordingly, businesses seek to benefit themselves and/or their shareholders by maximizing profits.

Barriers to Entry

are obstacles that make it difficult to enter a given market.

Command Economy

publicly owned property, central authority makes decisions about production and consumption.

Behavioral Economics

study the effects of social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation.

Game theory & Prisoner's Dilemma

Game Theory: a study of strategic decision making.
Prisoner's Dilemma: a canonical example of a game analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interests to do so.

Trade & Quotas

a limit on the quantity of a good that can be produced abroad and sold domestically

Deadweight Loss

a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal.

Government solutions to externalities

1. Civil Tort law
2. Criminalization
3. Government provision
4. Subsidies intended to redress economic injustices or imbalances.

Redistribution

he transfer of income, wealth or property from some individuals to others caused by a social mechanism such as taxation, monetary policies, welfare, charity, divorce or tort law

Equity vs. Efficiency

Efficiency: is concerned with the optimal production and allocation of resources given existing factors of production
Equity: is concerned with how resources are distributed throughout society.

Asymmetry of Information

the study of decisions in transactions where one party has more or better information than the other.

Equality of information

make sure everyone has access to the same information relating to the markets, no secret info to benefit just one company/group.

Branding

companies spend enormous sums of money to build an identity for the products

Perfect Competition

describes markets such that no participants are large enough to have the market power to set the price of a similar product.

Signaling

the idea that one party credibly conveys some information about itself to another party.

Scarcity

resources are limited/finite

Standard of Living

to the level of wealth, comfort, material goods and necessities available to a certain socioeconomic class in a certain geographic area.

Rule of 72

is a method for estimating an investment's doubling time. The rule number ( e.g., 72 ) is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling.

Zero sum game

a mathematical representation of a situation in which a participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s).

Efficient Market theory

asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.

Investment guidelines

The investment guidelines help us identify the businesses that have the highest potential to succeed commercially, while also generating a positive social impact.

Incentives for interest groups

A well-organized group can wage a coordinated campaign that incorporates many different tactics. Organization can also make up for size: A well-organized small group often has a bigger impact than a large poorly organized one.

Consumer/Producer Surplus & Taxes

Many times, the equilibrium price is lower than the highest price some folks are willing to pay. For all consumers, this is called consumer surplus. Similarly, the price might be higher than the minimum price at which some are willing to produce. For all the producers, this is called producer surplus.

Price Floors

Price Floors are minimum prices set by the government for certain commodities and services that it believes are being sold in an unfair market with too low of a price and thus their producers deserve some assistance.

Trade

If there was no international trade, all countries would have to meet its own needs. Developed nations export staple goods/resources but undeveloped nations have cheap man power.

Globalization

globalization refers to processes that increase world-wide exchanges of national and cultural resources. Advances in transportation and telecommunications infrastructure, including the rise of the telegraph and its posterity the Internet, are major factors in globalization, generating further interdependence of economic and cultural activities.

Economic interdependence

a consequence of specialization, or the division of labor, and is almost universal. The participants in an economic system are dependent on others for the products they cannot produce efficiently for themselves.

Absolute Advantage

refers to a country's ability to produce a certain good more efficiently than another country.

Losers from trade

Intuitively, here's the logic. Imagine that America exports stuff that is produced mainly by college-educated workers, while those industries that compete with imports mainly employ less-educated workers. Now suppose the price of imports falls. Then in order for import-competing industries to cope, the wages of less-educated workers have to fall — in fact, they have to fall more than the price of imports, because other costs of import-competing production, namely the wages of highly educated workers, will actually rise. So if import prices fall, say, 10 percent, wages of less-educated workers will fall, say, 15 percent.

Protectionism

the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas etc. to allow for "fair competition"

Trade raises real income

Lowering trade barriers allows trade to increase, which adds to incomes — national incomes and personal incomes. But some adjustment is necessary.

Cultural Homogenization

Cultural homogenization is the blending of different cultural practices into one cultural practice that does not allow easy identification of the characteristics of many cultures. It means over the years, peoples of two or more cultures have interacted and intermingles in such a manner as to lose their individual cultural identities and merged into a one uniform culture than does not show any trace of diversity of different cultures among the people.

Sweatshops

bad factory working environments often found in third world countries.

Property Rights

are a theoretical construct in economics for determining how a resource is used, and who owns that resource. (1) right to use the good, (2) right to earn income, (3) right to transfer good to others, (4) right to enforce property rights.

demand

consumer desire/willingness to pay for a good.

monetary policy

the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability

Price Ceilings

Price Ceilings are maximum prices set by the government for particular goods and services that they believe are being sold at too high of a price and thus consumers need some help purchasing them.

Federal Reserve

Fed Reserve controls the money supply and therefore the credit tap for the economy. Fed regulates commercial banks, supports the banking infrastructure, and generally makes the plumbing of the financial system work.

pricing decisions

the process of determining what a company will receive in exchange for its products

price discrimination

exists when sales of identical goods or services are transacted at different prices from the same provider.

market economy

individuals own private property and manage according to interest.

Law of Unintended Disincentives

a financial disadvantage, that tends to discourage people from doing something.