Economic Challenges Glossary | Quizlet

Business Cycle

The naturally varying cycle of economic growth, which can rise or fall over time, measured as the growth of real GDP. (Thinkers: Schumpeter and Fisher)

Consumption

The act of consuming a good or service with the aim of satisfying human wants. (Thinkers Smith and Marshall)

Custom system

A system in which society is organized around tradition and habits. Custom introduces elements of regularity, predictability and conformity into social relationships.

Factor of production

an input that is used in the production of goods or service include labour, land and capital. The price of labour is wage, the price of land is rent, and the price of capital is the interest rate, which is equal to the opportunity cost of using capital. In more modern theories entrepreneurship or 'human capital' is added as a fourth factor of production.

Fiscal policy

The use of taxation and expenditure policies by the government to regulate and stimulate economic activity. (Thinkers Keynes)

Inflation

The rate at which prices in a market rise and the purchasing power falls. (Thinkers Fisher)

Market system

The third way of organizing economic society, besides custom and command. The market system is a decentralized economic system in which firms and consumers pursue their own material objectives and prices are determined by demand and supply of a country's individual citizens and businesses respectively. Government interference is minimal and the government does not engage in central planning. (Thinkers Smith, Marshall and Hayek)

Markets

institutions in which individuals exchange goods and services usually using money as a medium of exchange. Markets can be distinguished according to the goods or services traded in them (e.g., financial markets, housing markets, labor markets), according to their scope (e.g., regional, national, international markets), or according to their structure (e.g., competitive markets, oligopolistic markets, monopolistic markets).

Ceteris Paribus

A standard assumption in positive economics that is usually translated as 'all else being equal'. In measuring the effect of one variable on another, all other variables are kept constant. (Thinkers Marshall)

Command system

A system in which the government or state decides the quantity, types and prices of the goods being produced. It is usually considered one of the main characteristics of a communist economy, in which the central planner replaces the price mechanism of the market system.

Monetary policy

The set of actions and regulations by the central bank used to control and maintain the size and growth rate of the money supply, the cost and availability of credit and the composition of national debt. (Thinker Friedmann)

Paradigm

The orthodox framework containing the assumptions, ways of thinking, and methodology underlying (economic) theories that are most commonly accepted by members of a scientific community. (Thinkers Kuhn and Popper)

Production

The act of creating or manufacturing a certain good or service, for which factors of production are used. Forms the basis of the supply curve in the Marshallian framework. (Thinkers Marshall)

Scarcity

The insufficiency or shortness in availability of time, resources, skills and goods, due to the unlimited wants of mankind. Scarcity is the ultimate problem underlying economics and drives actors to allocate resources efficiently.

School of thought

A particular set of ideas held by a specific group.

Chrematistiké

Economic activity with the goal of sheer profit making, which was considered unnatural and hence unjust. (Thinkers Aristotle)

Division of Labour

The separation of tasks in the supply chain which allows for specialization and therefore increased quality and quantity of production. (Xenophon, Smith and Marx)

Exchange value

The quantitative aspect of value of a good or service. It indicates what (quantity of) other commodities it will exchange for, if traded. (Thinkers Xenophon and Marx)

Feudalism

The medieval system in which people were given land and protection by people of a higher social class in exchange for their loyalty and service.

Just Price Doctrine

A doctrine advanced as response to the ethical debate surrounding usury in the Middle Ages. For Aquinas the just price is the current price, which depends on location, time and risk of transport. Willingness to pay should not influence the price and profit making is only virtuous if there is a just price in exchange. (Thinkers Aristotle and Aquinas)

Manorial system

Economic system preceding the market system, in which local lords were centres of political, military, economic and social power.

Normative economics

the branch of economics that expresses value judgments about economic fairness, the goals of public policy or what the outcomes of economic activity should be. (Thinkers Sen)

Oikonomia

Household management, which was the only virtuous form of economic activity in the eyes of Aristotle. (Thinkers Aristotle)

Philosopher king

The ideal ruler of the state in the eyes of Plato. The philosopher king pursues true knowledge and has access to Plato's 'idea-world'. (Thinkers Plato)

Positive economics

the branch of economics that concerns the description and explanation of verifiable economic phenomena. (Marshall and Friedman)

Telos

The purpose of things. According to Aristotle usury was against the telos of money, as the purpose of money is facilitating exchange. (Aristotle)

Use value

Subjective, qualitative value of a good or service(Xenophon and Marx)

Usury

Lending of money against interest(Aristotle and Aquinas)

Bullionism

An economic theory that defines a country's wealth by the amount of precious metals it owns. (Jean Baptiste Colbert)

Capital

one of the three production factors, used to increase the productivity of labour of workers. (Ricardo and Marx)

Diamond-water paradox

The paradox, also known as the Paradox of Value, that water is generally more useful and versatile in terms of survival but worth a lot less than a diamond concerning market value. (Smith and Samuelson)

Impartial spectator

The part of you that can detach and observe what the rest of you is doing, which is considered the guardian of correct moral behaviour according to Adam Smith. It is one of the main concept used in his 'Theory of Moral Sentiments'. (Smith)

Invisible Hand

Metaphor for the market system, which solves the economic problem without intervention from custom and command. The unobservable force that drives supply and demand to an equilibrium in a free market with multiple actors. (Smith)

Labour theory of value

theory of the Classical Economists, that states that the price of a good or service is determined by the amount of labour needed to produce it instead of the utility someone acquires from it. (Smith, Ricardo and Marx)

Law of population

The theory, invented by Thomas Malthus, that states that the population grows at a geometric rate (or exponentially), while the world's food supply grows at an arithmetic rate (or an equal proportioned rate). The law is concerned flawed due to fact that it did not take into account factors such as the development of technology, disease, war etc. (Malthus)

Market Price

The current (short-run) price at which a product or service is sold/bought in a market. The market price is a nominal price, meaning the value is not adjusted for inflation. (Smith)

Mercantilism

The economic policy/system of a country that focuses on the accumulation of wealth, or more specifically precious metals, through maximizing exports and limiting imports via tariffs and quotas. It was mainly utilised between the 16th and 18th century. Mercantilists saw international trade as a zero-sum game, which means that gains in wealth from one country are at the expense of the other. (Jean-Baptiste Colbert and Thomas Mun)

Natural Price

The price to which goods and services seem to gravitate naturally in the long run(Smtih)

Physiocracy

Economic school of thought during the second half of the 18th century, which mainly resided in France. The Physiocrats thought that the entire wealth of a nation derived solely from land agriculture, also known as the Gift of Nature. (Francois Quesnay)

Price-specie flow mechanism

Famous critique, invented by David Hume, against the use of Mercantilism as main economic policy. The price-specie flow mechanism states that countries with positive trade balances are effectively importing gold (money) in exchange for their exports while those with negative trade balances are exporting gold in exchange for imports. The increase in gold in countries with positive trade balances causes inflation, which makes prices rise and in turn makes imports more competitive. Conversely, the decrease in gold in countries with negative trade balances causes deflation, which makes price fall and exports more competitive internationally. This causes the balance of trade to shift in both countries. Thus, Hume argued that a trade balance is relatively unimportant because it tends to balance itself out in the long term. (Hume)

Real price

The nominal price adjusted for the inflation rate. The real price gives a more realistic picture of economic purchasing power. (Smith)

Trade balance

The difference between a country's exports and its imports over a certain amount of time. (Hume)

Comparative advantage

Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors. Comparative advantage is contrasted with absolute advantage. Absolute advantage refers to the ability to produce more or better goods and services than somebody else. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume. (Ricardo)

Corn laws

Mercantilist tariffs placed on the import of corn in the UK between 1815 and 1846, designed to protect the British agricultural sector. When the prices reach a floor level, imports are banished. (Ricardo and Maltus)

Felicific Calculus

Methodology invented by Jeremy Bentham to calculate pleasure and pain, which is considered one of the main precursors of cost-benefit analysis. It bases its calculations on the factors of intensity, duration, propinquity and many more. (Bentham)

General Glut

A general glut exists when there is excess supply in all markets. That is, there is a general shortage of demand to consume the total production. Jean-Baptiste Say argued that general gluts could not occur because supply creates its own demand, a result known as Say's Law. Malthus famously rejected Say's Law. (Jean Baptiste Say and Malthus)

Industrial Revolution

A collective name for the extreme social, political and economic changes that occurred during the 18th and 19th century. The Industrial Revolution is characterized by the replacement of hand tools and inefficient manual labour by power tools and large mechanized concentrated production in city establishments. Production efficiency went up by an extreme amount and the technological invention, such as the steam engine and the locomotive, changed the way society was structured concerning its social classes, population density and traditions. (Ricardo, Mill and Marx)

Iron Law of Wages

Theory, popular amongst the Classical Economists, that when wages increase, workers will have more children. This has two effects: there is pressure on the food supply, which lowers the standard of living. And there is more labor in the economy, which lowers wages. From the law the Classical Economists concluded that the natural price of labor is equal to the subsistence wage. (Ricardo and Malthus)

Marginal land

The last piece of land that is being cultivated in the agricultural process. According to Ricardo's theory of rent, no rent is charged on the marginal land. (Ricardo)

Poor Laws

Legislation regulating poverty relief in the UK, which was completely redesigned in the 1830's with the Poor Law Amendment Act. The Poor Laws were heavily influenced by the insights of Malthus' Iron Law of Wages. Poverty was a result of population pressure and all poverty relief would defeat its purpose, as population pressure would only increase. (Ricardo and Malthus)

Positive checks

Circumstances that increase the number of deaths. (Malthus)

Preventative checks

Circumstances that decrease the number of births. (Malthus)

Recession

A sequence of two or more business quarters of economic decline.

Ricardo's Theory of Rent

Theory that determines the economic advantage obtained by the use of land for production. It states that the rent for a piece of land should be the difference in production output between that piece of land and marginal land of the same size. (Ricardo)

Stationary State

The state of the economy in which there is no economic growth anymore. Considered negative by Ricardo and Malthus, Mill saw the stationary state as a way to end the rat-race of industrial life. (Mill and Ricardo)

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Utilitarianism

Ethical theory that takes the ultimate good to be the greatest happiness of the greatest number and defines the rightness of actions in terms of their contribution to the general happiness. (Bentham and Mill)

Alienation

The process of being separated from your own individual 'self' due to living in a society with established social classes. One is distanced from his or her humanity due to being a mechanistic part of the society and more specifically the production process. Workers are deprived from their right to think due to having to execute a simple repetitive task for the production of a good with capital owned by the bourgeoisie. (Marx)

Capitalism

Most common mode of economic organization in our time. Capitalism relies on the market system for its economic order. The capitalist, the owner of the firm is the residual claimant of the fruits of production after workers are being paid their wage. Marx considered Capitalism a necessary precursor of Socialism and Communism. (Marx)

Class struggle

The conflict of interests concerning the proletariat and the bourgeoisie in a capitalist society, which according to Marx would finally lead to an uprising of the proletariat and the seizing of the means of production, thereby ending Capitalism. (Marx and Engels)

Commodity

A good produced with the sole intention to be sold on the market. It is considered the opposite of a private good.

Communism

The economic system, advocated for by Karl Marx, in which the means of production and resources are owned by the 'common'. Production is planned by a central planning agency and the market is controlled by the government. Resources are plentiful till the extent that any citizens can take or use resources according to his or her needs. Marx considers this the final stage of the six modes of production that society has to go through and the most beneficial form of society for the entire population. (Marx and Engels)

Dialectic materialism

Marx' philosophy, based on Hegel's Dialectism (development of ideas as a loop of thesis, antithesis, synthesis), in which every economic society is built as an economic base of workers and a superstructure of non-economic activity and thought (ideas, laws, ethos). Superstructures cannot be selected randomly and rebellion takes place due to the invention of new technology and production processes that render the traditional production processes obsolete. The clash of rigid superstructure and dynamic base leads to class struggle and revolution. (Marx)

Exploitation

The process of creating surplus value by the capitalist at the expense of the worker. (Marx)

Proletariat

Marxian term to describe the working class as a collective. (Marx)

Socialism

An economic system that would occur as a transitional stage between capitalism and communism. Means of production are owned by the government, but income and consumer goods are private. Production is centrally planned. (Marx and Lange)

Surplus value

Surplus value refers to the value remaining when the cost of maintaining the worker (his subsistence cost) has been subtracted from the total value of the product he produces. (Marx)

Consumer Surplus

The consumer surplus is a measure of the benefit of the consumer from a transaction, which is analyzed through calculating the difference between what consumers are willing to pay for a good or service and what they are actually paying, i.e. the market price. (Marshall)

Producer Surplus

The producer surplus is the difference between the market price a producer receives and the cost of production needed to produce the good. (Marshall)

Social Surplus

The sum of the producer- and consumer surpluses is known as the social surplus, sometimes also called the economic surplus. It is considered as a good measure of welfare. (Marshall)

General Equilibrium Theory

Economic theory that tries to analyze the emergence of an equilibrium of supply and demand over multiple interacting markets. (Walras)

Gossen's First Law

Economic law that states there is decreasing marginal utility of consumption. (Gossen)

Gossen's Second Law

The law that states that the ratio of marginal utility/price needs to be the same for all goods at the utility maximizing level. The law is considered a core concept in the modern theory of consumer behaviour. (Gossen and Menger)

Marginal Utility

The extra utility derived from the last unit of consumption. (Jevons)

Marginalist Theory of Value

Value theory stating that value is determined at the margin of consumption and production. The value to the consumer of the last unit of consumption is equal to the cost of the last unit of production. (Jevons and Menger)

Partial Equilibrium Theory

The analysis of the relationship of a limited number of variables in one market, while the rest of the variables is kept constant in the analysis (ceteris paribus assumption). It is often considered the opposite approach to general equilibrium theory. (Marshall)

Process of tâtonnement

A metaphor for the workings of the market: the Walrasian auctioneer shouts out a price and all participants in an imaginary auction send in their demand and supply at the given price. The Walrasian auctioneer then changes the price and repeats the process until demand equals supply. (Walras)

Saleableness

Also known as liquidity, saleableness is the degree to which an object or service is easily sold to other actors. The most saleable good is money. (Menger)

Spontaneous order

Order that comes from the undesigned actions of man, it is a key concept in Libertarian theory. (Menger, von Mises and Hayek)

Walrasian auctioneer

Metaphor for the price adjustment mechanisms in the market. Key element of the process of tâtonnement. (Walras)

Conspicuous consumption

The concept, invented by Veblen, describing the purchase of certain goods and services to display one's wealth (and social class). (Veblen)

Human Capital

The term that refers to the stock or supply of knowledge, habits, social and personal attributes embodied in the capability to produce labour and hence economic value. (Becker)

Institutions

Set of rules, norms, habits and behaviors that can be seen as an indispensable part of society. (Veblen)

Institutional School

School of thought that views markets as a result of the complex interaction of economic, political, cultural and social institutions. (Veblen and Becker)

Nudging

Influencing economic decision making without legislative coercion or financial repercussions. It is considered as one of the main innovative concepts in the discipline of behavioral economics. (Thaler)

Organisations

Structured units of people that are managed and guided towards pursuing collective goals. (Arrow and SImon)

Animal spirits

The instincts and emotions that underlie irrational human behaviour. (Keynes)

Austerity

Collective name for policies aimed at cutting government spending with the goal to decrease government debt. (Keynes)

Automatic stabiliser

Self-activating policies and programs that reduce fluctuations in the economy.

Boom/Bust

Natural deviations from the long-run equilibrium in the economy. Booms and busts together form business cycles.

Debt-quota

Amount of debt as proportion of a country's GDP.

Great Depression

Heralded by the stock market crash known as Black Tuesday in 1929, the Great Depression was a global economic depression in the 1930s, in which global GDP fell by 15% and the unemployment rate in the US climbed up to 25%. According to Keynes the Great Depression was induced by austerity of the US government, however Friedman argued that it was caused by a monetary contraction. (Keynes and Friedman)

Keynesian Multiplier

Government spending brings about positive externalities that cause an increase of GDP larger than the original spending. The size of this positive effect is represented by the Keynesian Multiplier. (Keynes)

Macroeconomics

Field in economics that analyzes movements in the overall economy, trends in prices, output and unemployment. Macroeconomics also investigates the effectiveness of government policy (both budgetary and monetary policy). (Fisher, Keynes and Friedman)

Marginal Propensity to Consume

The marginal propensity to consume measures how large of a proportion an individual would spend rather than save when his income increases. The marginal propensity to consume lies between 0 and 1. (Keynes)

Cantillon effect

An increase in the supply of money has localized effects on inflation. Thus, as new money ripples through the economy, different goods experience price changes at different moments. (Cantillon)

Creative Destruction

Technical innovation that induces the destruction of the old economic structure, and (temporarily) allows for economic profit. Schumpeter believed that in the long run creative destruction would result in the end of capitalism. (Schumpeter)

Debt deflation

Deflation causes the real value of debt to rise. Therefore governments have to cut spending further, consumers default on their loans and banks turn insolvent. Thus, deflation causes recessions. According to Fisher debt deflation was the main cause of the Great Depression. (Fischer)

Kitchin Cycle

Economic cycle of 3 to 5 years caused by inventory fluctuations( Fisher and Schumpeter)

Juglar Cycle

cycle of 7 to 11 years caused by fluctuations in investment in fixed capital. (Fisher and Schumpeter)

Kondratieff cycle

Economic cycle of 45 to 60 years caused by long-run technological innovation (Fisher and Schumpeter)