Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

a posteriori:	The method of a posteriori entails reaching a conclusion through logical reasoning supported by fact or theory. Inductive reasoning is an example.
a priori:	The method of a priori entails reaching a logical conclusion by assuming or, somewhat intuitively, “knowing” something to be true independent of experience. Contrast with a posteriori.
abatement:	Abatement is a reduction in the rates at which gaseous, liquid, or solid wastes are emitted into the environment. Open the abatement file for more discussion, and see also externalities, negative externalities, Coase theorem, effluent charges, and tradable pollution rights.
ability to pay principle of taxation:	The ability to pay principle is the normative idea that taxes should be based on the financial ability to support government—i.e., that the rich should pay more taxes than the poor. Open the file on the ability to pay for a graph and more discussion. See also progressive tax, and benefit principle of taxation.
absolute advantage:	A country, individual, or firm has an absolute advantage in producing a good if production of the good absorbs fewer resources (or less time, in the case of an individual) than are required in other countries or by other individuals or firms. An early theory credited to Adam Smith based international trade on absolute advantage, but a subsequent theory developed by David Ricardo more completely and correctly focused on relative advantages. Open the file on comparative and absolute advantage for a table and more discussion. See also comparative advantage.
absolute poverty:	People are absolutely impoverished if the minimum amounts of food, clothing and shelter necessary for survival absorb all of their income, and they live a razor’s edge existence. Open the link absolute and relative poverty for more discussion, or see also relative poverty.
absolute price:	The monetary or “nominal” price of anything is also sometimes called its absolute price. The file relative and nominal prices offers more discussion. See also relative price.
absorption problem:	The absorption problem is summarized by the equation: [G–T] = [S–I] + [M–X]. Thus, any federal government budget deficit (G-T) must be offset by an excess of private saving over private investment (S–I) or by an excess of imports over exports (M–X). This equation is a simplification and rearrangement of an accounting identity for Aggregate Expenditures: Y = C + I + G + (X–M) = C + S + T. If the economy is at its productive capacity, then unless a federal deficit is funded by foreigners (M–X), private investment may be “crowded out” because G–T will equal S–I. Open the absorption equation link for more discussion, and the link fiscal policy and the great depression for a discussion of an exception to the crowding-out hypothesis. See also aggregate expenditures, crowding-out, and twin deficit. And contrast with crowding-in.
absorptive capacity:	Absorptive capacity refers to limits to the ability of a society (or a firm) to implement new technologies. For example, societies with low literacy rates tend to be relatively slower to adopt cutting edge technologies than are societies in which most workers are educated. Or a firm’s culture [the informal mechanisms for working that have been developed by the firm’s existing personnel] may foster resistance to the automation of certain operations – “if it ain’t broke, don’t fix it.” In some cases, external consultants may be hired to guide productivity growth, or a firm may rely on a research and development division or a “skunk works” [a group of especially creative superior workers] to develop prototypes for new products, or to implement the proposed technology. The learning curve link illustrates the relationships between production costs, the learning curve, and absorptive capacity—the speed with which a society or organization can adapt to new technology. See also insider-outsider problem and learning curve.
abstraction:	Abstraction [or generalization] is the process of grouping similar phenomena or events into categories, and ignoring differences among them judged unimportant for the purposes of specific analysis. The judgment that these differences are trivial can be quite wrong. Stereotyping, for example, is one type of abstraction. Abstraction is a preliminary step in categorizing concepts or elements of a theory intended to explain the behaviors of a broad set of phenomena. Occam’s razor relies heavily on abstraction to simplify theories or models. See also reductionism.
abundance:	Goods or resources are described as abundant (absolutely) when perceived as neither especially scarce (high quantity) nor especially valuable (relatively low price – and they may even be “free”). For example, in the middle of the Sahara desert, sand is quantitatively abundant and virtually free (at its current location and in its current state). However, much of the theory of international trade focuses on the relative abundance (endowments) of resources. For example, a nation with relatively large amounts of capital per worker (high K/L à low L/K) is described as abundantly endowed with capital or capital abundant, and nations with relatively little capital per worker (low K/L à high L/K) are described as abundantly endowed with labor, or labor abundant. Open the link to Heckscher-Ohlin theory for elaboration.
accelerationist view:	The accelerationist view is a variant of natural rate theory that assumes inflationary expectations to be adaptive, so that attempts by policymakers to reduce unemployment below its natural rate requires ever more rapid rates of monetary growth, with the result the inflation accelerates. This perspective also supports a conclusion that persistent attempts by monetary policymakers to reduce interest rates below their natural rate will also cause accelerating inflation, a theory originated by Knut Wicksell.
accelerator:	The accelerator is a causal relationship between increases in aggregate demand and national output(ΔQ), and the resulting increase in net investment (ΔI). Net investment is a function of the change in output rather than the level of national output. ΔAD à ΔQ à ΔI à AD à ΔQ à ΔI, and the momentum for sustained economic growth builds. Interactions between the accelerator and the Keynesian spending multiplier were first explored by Roy Harrod [1900-1978], an early disciple of Keynesian theory. Open the accelerator file for a figure and more discussion, and see also multiplier-accelerator effect and multiplier effect.
accommodation:	Accommodation occurs when an existing firm with market power attempts to merge, acquire, or co-opt a potential competitor that appears likely to enter the market.
accounting costs vs. economic costs:	The real (economic) costs of production usually exceed the accounting (bookkeeping) costs of production because economic costs include both explicit accounting costs and implicit costs – the value of the personal resources the owners of a firm make available (e.g., their labor and capital). Open the file accounting vs. economic costs for a discussion of economic costs and profits. See also explicit costs and implicit costs.
accounting profit:	Accounting or bookkeeping profit is the total revenue of a firm minus its explicit (out-of-pocket) total costs. See the file accounting vs. economic costs for a discussion of economic costs and profits. See also explicit costs and implicit costs.
Ackley’s Law:	Gardner Ackley, the Chairman of the President’s Council of Economic Advisors during 1961-1965, observed that every U.S. president takes credit for every favorable event that occurs during his own administration, and attributes every unfavorable turn of events to the lagged effects of the mistaken policies of his predecessor. This observation has become known as Ackley’s law.
acquired assets:	See infrastructure.
acquisition:	Verb: Acquisition is the absorption of one organization by another, and usually entails one corporation purchasing all assets of another corporation. Noun: Acquisition refers to the assets acquired. Also see merger and takeover.
acquisitive society:	The term acquisitive society was coined by John Kenneth Galbraith to describe a society in which class, status, and power are determined by possession of certain goods or resources that contribute to personal health or wellbeing only indirectly, through positioning in a socioeconomic hierarchy.
activism:	Activism is a term applied to the Keynesian notion that government should adjust Aggregate Demand regularly by changing monetary and fiscal policies to offset shocks to Aggregate Demand or Aggregate Supply. “Fine-tuning” is an extreme version of this approach. See the link to John Maynard Keynes for some information about the thinker who launched “the Keynesian revolution.”
actual money multiplier:	The actual money multiplier (ma) equals the monetary supply (MS) divided by the monetary base (MB): ma = MS / MB. Open banks and money multipliers for more on this concept, and see also potential money multiplier.
actuary:	An actuary uses historical records to predict the likelihood of specific events. Such events include rates of morbidity or mortality over a specific interval for people with certain demographic characteristics, or birth rates for families with given characteristics, or damages to homes in certain areas from tornadoes or hurricanes, or automobile collisions for teenage drivers. Such statistical estimates are then used for such purposes as determining when to build schools or hospitals, or by insurance companies to calculate the premiums that will be charged to cover damages from accidents.
ad hominem fallacy:	The ad hominem fallacy is committed when opponents of a position attack personal characteristics of its advocates. Ad hominem argument is incompatible with logical or scientific approaches to solving problems. For example, the efficacy of activist fiscal policy is not logically undermined by slurs aimed at, say, the political ideology or personal behavior of John Maynard Keynes, who developed models that seem to support active fiscal policies. The scientific efficacy of fiscal policy or lack thereof is properly addressed using logical and empirical analysis. See also fallacy, fallacy of appeals to authority, and post hoc ergo propter hoc fallacy.
ad valorem tax:	An ad valorem tax is a percentage tax levied on the value ($ PQ) of a sale or purchase. Retail sales taxes are examples of ad valorem taxes.
adaptive expectations:	Expectations about the future value of some variable are “adaptive” when extrapolated from (formed as) a weighted average of recent values of that variable. The theory that expectations are adaptive frequently focuses on forecasts of inflation (price level changes) or prices for such assets as stocks or bonds. Adaptive expectations may entail adjustments for both past trends and previous forecasting errors. Contrast with rational expectations and static expectations.
adaptive markets hypothesis:	The adaptive markets hypothesis is a theory that expectations about market conditions are based in somewhat imperfect perceptions of how recent events might affect the future, and with less than perfect rationality. This theory permits possible inefficiencies to exist in financial markets and is an alternative to the neoclassically-based theories of rational expectations and efficient markets, which conclude that asset prices reflect optimal forecasts of market conditions, based on perfectly rational models and instantaneous and full capitalization of all the information available that might be relevant for the price of an asset. See also salience, adaptive expectations, bounded rationality, and behavioral economics. Contrast with efficient markets theories and rational expectations.
adjustable peg:	An adjustable peg system of exchange rates occurs when exchange rates for currencies are “pegged” – exchange rates between the currencies are held constant for long periods, but can be changed when countries recognize that pegged exchange rates are in “fundamental disequilibrium.”
adjustable rate mortgage:	An adjustable rate mortgage (ARM) is a mortgage loan upon which the interest rate charged adjusts as interest rates change across time See also interest rate risk and Fisher effect.
adjusted gross income (AGI):	Adjusted gross income (AGI) is a computation required in completing an Internal Revenue Service (IRS) Form 1040, and equals all income subject to taxation under the individual income tax after subtracting “above-the-line” deductions, such as certain contributions for individual retirement accounts and alimony payments. Personal exemptions and the standard or itemized deductions are subtracted from AGI to determine taxable income.
adjustment mechanisms:	Adjustment mechanisms are modes by which markets with shortages or surpluses move towards equilibrium. The most common mechanisms are adjustments to prices or to the amounts produced, and then bought or sold, but quality may also be adjusted in some cases. See also Walrasian (price) and Marshallian (quantity) adjustment.
administered-price inflation:	Administered-price inflation is the mirror image of cost-push inflation and asserts that firms with market power may grant union wage hikes, for example, to rationalize raising output prices. Firms may fear that without such “cost-push” justifications, price hikes may foment adverse publicity, antitrust actions, new government regulations, or other threats to their market power.
administration lag:	The administration lag is the period that passes before discretionary policy changes can be implemented. Monetary policy can be implemented quickly through the FED’s Federal Open Market Committee. Fiscal policies tend to entail long administration lags because discretionary changes in taxes or government expenditures require changing the law. See also recognition lag and impact lag.
administrative costs of regulation:	The administrative costs of regulation include the salaries of government workers, inspectors, office supplies, etc. See also compliance costs of regulation. Open the file for direct costs of regulation for more discussion.
administrative costs of taxation:	The burden of taxes unavoidably exceed net government revenues because of such administrative costs of taxation as printing of forms and the operating expenses of the Internal Revenue Service. See also distortion costs of taxation and compliance costs of taxation.
advanced industrialized countries:	Advanced industrialized countries tend to possess abundant economic capital, an educated populace that on average enjoys a relatively high standard of living, and to be technologically advanced, with well-developed markets for goods and resources. Most advanced industrialized countries are in the Western or Northern hemispheres and include the United States, Britain and Japan.
adverse selection:	Adverse selection occurs when a party to a contract is deceived prior to reaching an agreement about the quantities or qualities it could expect from a transaction. See also asymmetric information, lemons market, principal-agent problem, and moral hazard.
advertising:	Advertising is the costly attempt by a firm or economic agent to convey information or images that will induce a desired response, such as purchases, from the targeted customer, whether that be a consumer in a household or purchasing agent in a firm. Advertising is an important tool for firms attempting to differentiate their products. See also informative advertising and persuasive advertising.
affirmative action:	Affirmative action refers to sets of policies that provide favorable legal treatment (legal discrimination) based on gender, race, or ethnicity in an attempt to compensate for disadvantages to individuals based on past discrimination.
affluenza:	The word “affluenza” is a term critics of “rampant materialism” derived by combining the words affluence and influenza. Overconsumption and constant striving to secure ever larger piles of material goods is alleged to be both personally unfulfilling and socially destructive, with symptoms that include stress, waste, and excessive debt.
AFL-CIO:	The AFL-CIO is a federation of 64 labor unions, and was formed in 1955 when the American Federation of Labor, which had previously comprised only craft unions, merged with the Congress of Industrial Organizations, which had focused primarily on industrial unions.
ageism:	Ageism is occupational, economic, or personal discrimination based on the age of an individual.
Agency for International Development:	The Agency for International Development [AID] is an American-based organization that administers billions of dollars in aid each year to underdeveloped or developing foreign countries. Related organizations: World Bank.
agency costs:	Agency costs are incurred when an agent’s behavior is contrary to the principal’s expectations because their interests differ. For example, a firm’s CEO may gain by making decisions contrary to the interests of shareholders. This was a common occurrence prior to the discovery in the early 200s of widespread accounting fraud in the books of such giant corporations as Enron, Global Crossing, and HealthSouth.
agency shop agreements:	An agency shop agreement requires non-union workers at a firm to pay the equivalent of union dues to the union that represents similar workers at the firm. This is intended to require all workers covered by a union contract to share in the costs of collective bargaining, and prevents non-union members from free riding. See also union shop and closed shop, and right-to-work laws.
agent:	Economists use the term “agent” in two ways: [1] An “economic agent” may refer to any entity (individual, household, firm, or governmental organization) that makes economic decisions, or that performs economic activities, such as producing or buying or selling. [2] Economists use the legal term “agent” to refer to an entity (e.g., an employee) with a legal obligation to perform on behalf of a principal (e.g., an employer). See also principal-agent problem.
aggregate:	An aggregate is the total (often, economy-wide) value of any variable (e.g., gross domestic product or the rate of unemployment). Economic aggregates are referenced primarily in macroeconomics.
aggregate demand curve:	The aggregate demand curve depicts a negative relationship between the general price level (P) and the quantity demanded (Q) of total national output. Open the aggregate demand curve file for more information.
aggregate expenditures:	Aggregate expenditures are the sum of consumption [C], gross private domestic private investment [I], government purchases [G], and net exports [X-M = exports minus imports]. Thus, AE = C + I + G + [X-M]. In equilibrium, Aggregate Expenditures (Y) equals Aggregate Production (C + S + T), so that Y = C + I + G + (X-M) = C + S + T.
aggregate expenditures curve:	The aggregate expenditures curve is a positive relationship between Aggregate Expenditures and income. This function, sometimes known as a Keynesian cross diagram, is positively sloped because additional income induces additional spending. Open the aggregate expenditures curve file for more information.
aggregate supply curve:	The aggregate supply curve depicts a positive relationship between real national output (Q) and the absolute price level (P). Open the aggregate supply curve file for more information.
aggregation:	Aggregation is the process of summing variables to yield an aggregate variable. For example, the idea that apples and oranges can’t be compared is partially refuted when the total dollar sales figures for apples and oranges are summed and become a part of an aggregate farm income variable. Demand, supply, and expenditures on gross domestic product are often aggregated. Aggregation also covers individual markets forming a larger national market.
Aid to Families with Dependent Children:	The Aid to Families with Dependent Children (AFDC) program was implemented in the 1960s and intended to alleviate poverty. The original AFDC payment structure often provided recipients with strong disincentives not to work. Much of AFDC was abandoned when welfare was “reformed” in the 1990s. See also welfare and workfare.
alienation:	Alienation refers to the emotional distance between individuals, or between an individual or group of individuals and an event. Karl Marx attributed alienation to a tendency for capitalistic development to cause workers to lose control over their work and their lives because capitalism treats workers as replaceable resources [means], and not as ends in themselves. Employment in a capitalistic system is alienating, in this view, because workers do not sell their output to users. Instead, workers sell their output to capitalists for wages. The division of labor is often perceived as contributing substantially to alienation in an industrialized society.
Allais paradox:	Research by Nobel Prize winner Maurice Allais revealed that many people are, as predicted by standard economic theory, risk averse when confronted with choices that differ in risk but involving potential gains, but they paradoxically are often risk loving (loss averse) when confronted with similar choices but involving potential losses that similarly differ in risk. This finding is known as the Allais paradox. See also reflection effect, risk averse, risk neutral, loss averse, risk loving, and prospect theory.
allocative benefits of unemployment:	Frictional unemployment yields allocative benefits through better matches of workers and jobs. Finding a new job tends to be easier if not working full-time. Idle labor pools allow firms to screen more potential employees than if unemployment were zero. Lower transaction costs enhance economic efficiency. Unemployment prompts some workers to return to school or acquire skills through apprenticeships, thus investing in human capital. See also unemployment, transaction costs, and human capital.
allocative efficiency:	Allocative efficiency requires the pattern of national output to mirror what people want and are willing and able to buy. Although this concept is hinted at in the writings of the Greek philosopher Hesiod, it was made explicit and mathematical by the Italian economist and sociologist Vilfredo Pareto. See also Pareto efficiency, productive efficiency, and distributive efficiency. Click on the link for more information on the components of economic efficiency.
allocative inefficiency:	Allocative inefficiency is any failure of an economy to produce the mix of goods consumers want relatively most, given the alternatives available and the existing distribution of income and wealth. Allocative efficiency in financial markets requires savings to flow into the most desirable combination of feasible investments – those which will permit production of the combination of goods and services consumers value most. This normally means the most profitable set of investments if the economy is reasonably competitive. See also productive (technical) efficiency, misallocation, and distributive efficiency.
allocative mechanisms:	Alternative mechanisms are the ways people can use to determine how inputs will be allocated among competing ends and how incomes and production will be distributed. Examples of mechanisms include allocation or distribution in accord with tradition, or brute force, or merit, or need, or random selection, or queuing (first-come-first served). Government and the market system are among the most commonly used allocative mechanisms. Click on the link on market failures vs. political failures for a closer look on some of the allocative failures of the market system as compared to those of the governmental one. Also, click on the link on allocative mechanisms for a closer look at each of the systems listed above.
alternative cost:	See opportunity cost.
altruism:	Altruism is charitable giving without expectation of personal gain of one’s own time or wealth to improve the wellbeing of other people perceived as in need of assistance. Related to philanthropy.
American depository receipt:	An American depository receipt (ADR) is a receipt for a share of a foreign stock that enables trading on US stock exchanges. The original documents do not need to change hands because the transfer of the receipt for a share completes a transaction.
American institutionalism:	American institutionalism is a school of thought that rejects the assumptions that people possess unbounded rationality and foresight, and that individuals single-mindedly maximize their “jollies.” This rejection of marginalism and conventional economic assumptions began with the iconoclastic Thorstein Veblen. The perspective of institutionalism is that economic behavior is shaped by the history, structures, patterns, norms and routines within specific organizational environments or populations. Institutionalists tend to emphasize cultural and sociological aspects of behavior (e.g., symbolic displays, signaling, and pecking-order interdependencies) moreso than do conventional economists. See also new institutionalism.
American option:	An option is a financial document that gives its owner the right to buy (call) or sell (put) some asset at a specified price on or before a specified date. An American option allows the purchase or sale anytime before the expiration date – the time the option lapses. See also call option, option and contrast with European option.
amortization:	Amortization is the process by which regular [monthly or some other fixed period] payments on a debt (from credit, or a loan, or a mortgage) gradually reduces the balance of debt owed. An amortization schedule shows the remaining balance of a debt as payments occur.
analytic determinism:	See determinism. Contrast with hysterisis, path dependence, and historicism.
analytical graphs:	An analytical graph is used to illustrate complex relationships among two or more variables. Most analytical graphs address functional relationships in which the variables considered are assumed to be causally related. Contrast with descriptive graphs.
anarchism:	Anarchism is the political philosophy that government should be eliminated, leaving people largely free to do as they pleased. Anarchists believe that social harmony would evolve naturally through cooperative efforts. Most philosophical anarchists recognize the importance of private property rights and, hence, completely disavow social ownership. Compare with communism, socialism, and capitalism.
anchoring:	Anchoring is a concept drawn from cognitive psychology and refers to the human tendency to “anchor” our estimates of the values of variables to reference points, even though such reference points may have little or no relevance for the decision being contemplated. For example, an individual might base expectations of inflation on recent changes in the price of gasoline, even though other prices might be much more stable and much more important for measuring changes in the cost of living.
ancillary firms:	An ancillary firm supplies services and intermediate goods to another company or companies, and not directly to users.
animal spirits:	John Maynard Keynes explained the volatile expectations of investors and consequent volatility of investment as resulting from “animal spirits” – a herdlike mentality. See Keynesian beauty contest for more discussion, and efficient markets and present value for contrast.
announcement effect:	Research by some behavioral finance theorists suggests that an announcement effect may cause markets to overreact [excessive price adjustments] to the release of new information that affects the net income streams expected from certain assets. See also availability bias.
annual percentage rate:	The annual percentage rate (APR) is the “truthful” interest rate charged on a loan, as compounded annually. The APR includes lender’s fees such as closing costs and discount points and can therefore be higher than the so-called “simple” interest rate. Federal “Truth in Lending” laws require disclosure of the APR in all loan contracts. See also annual percentage yield (APY).
annual percentage yield:	The annual percentage yield (APY) is the accurate effective interest rate paid, assuming continuous (every instant in time) compounding. For example, if you are paying 1.5% interest monthly on unpaid balances on a credit card, the average percentage rate (APR) on the unpaid balances is 18% [1.5% x 12]. However, because of continuous compounding (interest on interest), the APY is roughly 19.7%.
annual reports:	An annual report is a document that the Securities and Exchange Commission requires all publicly-held corporations to publish and distribute to stockholders each year, and among other things, describes corporate officers, corporate prospects, realized income and costs [an income statement], and assets and liabilities [a balance sheet].
annuity:	An annuity is a contractual obligation to pay a fixed amount (which may be indexed for changes in the cost of living) per period for a set number of periods, or until the death of the recipient. An annuity with an indefinite payment horizon is called a perpetuity. Social Security, private pension plans, and whole life insurance policies commonly pay annuities after the beneficiary reaches a certain age or condition. See also perpetuity.
anomaly:	Anomalies are exceptions to standard expectations about events or behavior. In economics, the term anomaly increasingly refers to behavior not in accord with conventional economic theory. For example, people who habitually set their clocks or watches ahead a few minutes are exhibiting anomalous behavior, because economic analysis assumes that rational people never intentionally try to fool themselves. Open the prospect theory link for more discussion, or see behavioral economics or mental accounting. See also standard economic theory.
anthropology:	The study of similarities and differences in the socio-cultural and biological behaviors of human populations in all periods and in all parts of the world.
anticipated inflation:	See expected rate of inflation.
anti-foreign bias:	Anti-foreign bias is a tendency for people to favor domestic interests over global ones, often at the expense of overall efficiency. Expressions of antagonism directed at immigrants and aversion to free trade are examples of anti-foreign bias, which appears related to the tendency Adam Smith noted when he observed that people are much more concerned about people or things close to them (relatives) than about people are things at a distance (e.g., unrelated foreigners). This dislike of things less well known may be related to a widespread aversion to risk and uncertainty.
anti-globalization:	Anti-globalization is a political movement opposed to expansions of world trade. These opponents of globalization tend to view imports into developed countries as threats to the jobs of relatively low-skilled workers. Many anti-globalists are also concerned that low-wage workers in less developed countries are exploited by the growth of capitalist enterprises in economies previously focused primarily on primitive agriculture. See also “race to the bottom” for an exposition of this view.
anti-government bias:	Anti-government bias is the tendency of some people to oppose government action or collective action because certain goods and services government provides benefit other people but not the individual contemplating the government action, or the individual feels entitled to certain benefits of collective action, but resents being taxed to pay for such benefits.
anti-market bias:	Anti-market bias is the tendency to oppose market solutions to economic problems based on the idea that self-interested behavior seldom if ever serves the public interest per Adam Smith’s theory of the invisible hand.
Antitrust Division:	The Antitrust Division of the US Department of Justice attempts to promote competition by enforcing federal antitrust laws. See also Federal Trade Commission.
antitrust laws:	Antitrust laws are intended to prevent abuses of monopoly power. See also Sherman Antitrust Act (1890), Clayton Antitrust Act (1914), Federal Trade Commission Act (1914), Robinson-Patman Act (1936), Celler-Kefauver Antimerger Act (1950), and Hart-Scott-Rodino Act.
applied research:	Applied research is intended to develop or refine certain products or processes, in contrast to pure research, which is intended to advance scientific understanding about the nature and interactions of natural phenomena.
appreciation:	The amount of any increase in the value of an asset is often termed appreciation.
appreciation of a currency:	Appreciation of a currency occurs when the exchange rate (price) of a currency increases as measured by its exchange rates with other currencies.
appropriate technology:	Appropriate technology is technology that facilitates the efficient use of the specific resources with which an entity or nation is endowed. See also comparative advantage.
appropriation bill:	An appropriation bill is a law that specifies the amounts of specific types of expenditures authorized by the legislature and which the Treasury may legally pay out over a specific period of time, which is normally one year
apriorism:	Apriorism (from the Latin a priori – knowable on a basis other than experience) is reliance solely on deductive rather than inductive logic. Austrian economics relies heavily on deductive rather than inductive logic, and Austrian economists often use the term praxeoly as a synonym for apriorism. See also deductive reasoning, syllogism, and inductive reasoning.
arbitrage:	Arbitrage is the risklessly profitable process of buying a good at a lower price in one market and selling the same good at a higher price in another market. This requires relative price differentials between markets to exceed the transaction costs incurred with intermarket transfers of goods, resources, or financial securities. Arbitrage forces relative prices of identical items toward equality in all markets. See also speculation.
arbitrage pricing theory:	Arbitrage pricing theory is a model of extremely vigorous competition for predictable gains that results in the evaporation of predictable profit opportunities, and is closely related to the law of one price and the theories of rational expectations and efficient markets.
arbitrageur:	An individual or firm engaged in arbitrage.
arbitration:	Arbitration is a process for resolving disputes by accepting as final the judgment of impartial individuals, and reduces the likelihood of costly and prolonged litigation. Arbitration may be compelled by law (e.g., the Taft-Hartley Act), as in the case of labor disputes involving production deemed “vital to the national interest”, but arbitration is more typically a process agreed to by the disputants. See also collective bargaining and mediation.
arc elasticity:	The calculation of arc elasticity avoids the problem of ambiguity about bases inherent in measures of point elasticity by taking the means of the variables being assessed for their relative responsiveness. For example, the arc formula for the price elasticity of demand (or supply) is calculated as: [(Q1-Q2) ∕ ((Q1+Q2) ∕ 2)] ∕ [(P1-P2) ∕ (P1+P2) ∕ 2)] See also elasticity, point elasticity, mid-point bases, and simplified arc formula for elasticity.
architectonics:	Architectonics is the term Leon Walras applied to his system of mathematical equations that painstakingly detailed the economic conditions for simultaneous equilibrium in every market.
arm’s length transaction:	An arm’s length transaction occurs when all agents who are considering a potential contract have no interest in the well-being of any competing party relative to the well-being of any other competing party. Contrast with favoritism, self-dealing and nepotism.
Arrovian uncertainty:	Some analysts identify Arrovian uncertainty as the union of deterministically calculable precise risk, as when cards are dealt or dice are rolled, and actuarial or fuzzy risk, in which reasonably accurate predictions are based on numerous experiences of similar events or experiments. For example, insurance firms can predict with reasonable accuracy the remaining life expectancy of 25-year-old male school teachers who live in Des Moines, Iowa and who do not smoke. Thus, Arrovian uncertainty involves what Frank Knight characterized as insurable risk, and contrasts with what is now called Knightian uncertainty. See the link for risk and uncertainty for more discussion.
Arrow’s theorem:	See voting paradox, or open the voting paradox link for more discussion.
artificial barriers to entry:	Artificial barriers to trade are barriers not caused by natural forces (e.g., technology) which limit the ability of external firms that are potential competitors from entering a market. Government or existing firms erect these barriers to exclude competition. Examples include patents and copyrights, or the threat of price wars. See also legal barriers to entry and natural barriers to entry.
ask price:	The ask price, also known as the offer price, is the lowest price a seller will accept.
asset demand for money:	People may hold money as an asset if they: (a) perceive money as riskless relative to alternative assets, (b) confront transaction costs in acquiring other assets that exceed their expected rates of return, or (c) expect the prices of alternative assets to fall in the near future. Example: You might hold more money in cash or bank deposits if you expect the prices of stocks or bonds to fall. See also liquidity preference and liquidity trap.
assets:	Households’ assets or firms’ assets are the valuable properties (e.g., real estate or economic or financial capital) they own. See also financial assets.
assistance in kind:	Assistance in kind (sometimes called payments in kind or merely in kind) entails transfers from the government to those on public assistance of certain goods or services instead of cash. Subsidized education, public housing, Medicaid, and food stamp programs are all examples of assistance in kind.
assumable loan:	An assumable loan is loan that can be transferred to another party with the same principal and interest payments with little administrative hassle. Mortgage loans that were assumable were widely available prior to the 1970s, when fluctuations in interest rates curtailed the willingness of lenders to make such loans. See also mortgage and interest rate risk.
asymmetric information:	Information is asymmetric when different people have different levels of knowledge. This is especially important in a bargaining situation. Example: A car dealer may know more about mechanical problems with a used car than would a potential customer. Click on the link for prisoner’s dilemma for an illustrative example of asymmetric information in action. See also the link on asymmetric information to see information on fee-for-service vs. supplier-induced demand (SID) as two different payment charging systems to be found in situations where asymmetric information exists.
asymmetric payoff:	In an asymmetric payoff, the payoffs from cooperation for at least one party are higher than the payoffs to some other players. See also game theory and prisoner’s dilemma.
asymmetric paternalism:	Asymmetric paternalism exists when authorities empowered to make decisions for other people establish different rules for different groups of people based on assumptions that members of some groups benefit more from paternalistic policies than would members of other groups. For example, women in the military are statistically shielded from direct involvement in combat operations because they are not permitted to pursue a combat-oriented military occupational specialty (MOS). The consequence, however, is a “glass ceiling” that severely limits the ability of female officers to be promoted to the highest possible ranks.
asymmetric shock:	An asymmetric shock is an unanticipated event that affects some sectors of an economy much more than it affects other sectors. For example, Hurricane Katrina was an asymmetric shock to the US economy as it destroyed much of the infrastructure of the gulf coast region of the United States in 2005, and hit petroleum refining and distribution especially hard, unexpectedly driving up the price of oil.
asymmetric wage-price reaction functions:	Models of the Keynesian theory that wages and prices are “stickier” downwards than upward. Wages are normally assumed to adjust to shocks (disruptions to a market that yield shortages or surpluses) less rapidly than prices do. Abba Lerner is credited with a graphical model of wage-price asymmetries. Open asymmetric wage-price reactions for a graph and more discussion. See also sticky wages and prices, efficiency wages.
atomistic competition:	Atomistic competition informally refers to markets with sufficient numbers of potential buyers and sellers that none can significantly influence prices and all are effectively quantity adjusters. See also perfect competition and pure competition.
attachment bias:	See endowment effect. Attachment bias is also a synonym for divestiture aversion or selling aversion.
attribute framing effect:	Attribute framing effects occur when evaluations of a choice are more favorable when presented in positive terms than in negative terms. Consider Problem 1, for example, a choice between A and B. Choice A entails certainty that a glass of juice will be half empty, while choice B entails 50% odds that the glass will be full and 50% odds that the glass will empty. Now consider Problem 2. Choice C entails a 50% chance that the glass will be empty and a 50% chance that the glass will be full, while choice D yields certainty that the glass of juice will be half full. Problems 1 and 2 are logically identical, but an attribute framing effect is exhibited if some people select B in Problem 1, but D in Problem 2. See also prospect theory.
attributes:	The utility-relevant characteristics of goods are known as attributes, and underpin people’s tastes and preferences. Goods with similar attributes are often substitute goods. For example, rice and potatoes are both starchy sources of carbohydrates and tend to be substitutes, while chocolate and ice cream have attributes that make them complements.
attribution bias:	Attribution bias is the tendency of people, especially investors or gamblers, or to be overconfident because they attribute good things that happen to them to superior reasoning and sound judgment, but blame bad luck for any misfortunes that befall them. See also illusion of control effect and illusion of knowledge.
auction:	An auction is a system of buying or selling a good or offering a contract to secure the performance of services (e.g., construction of a building) through a bidding process. An auction conducted at the behest of a seller is intended to yield higher bids, while an auction conducted for a buyer (e.g., a government agency that wishes to have work performed) is intended to yield lower bids. Auctions tend to be more common when the market is not wide and transactions in the specific good or the service to be performed are relatively infrequent. See also English auction, Dutch auction, and second-price auction.
audit:	An audit is an examination by a professional of an organization’s operations, often by evaluating the organization’s accounting records. Audits are in part intended to make information transparent (more symmetric) so that parties external to the organization have as much relevant information available as do insiders, so most audits are external, meaning that auditors are not direct employees of the audited organization. See also asymmetric information and transparency.
Austrian economics:	Austrian economics is a school of economic thought that relies heavily on deductive logic instead of inductive reasoning. The “Austrians” tend to be somewhat libertarian in outlook, favoring capitalism and opposing socialism. Moreso than most mainstream economists, Austrians emphasize subjective approaches to value – the demand side rather than the supply side. The founder of Austrian economics was Carl Menger (1840-1921), who was also among the pioneers who helped launch the marginalist revolution in economic theory. Other notable Austrian economists include Eugen von Böhm-Bawerk, Friedrich von Wieser, Joseph Schumpeter, Ludwig von Mises, Nobel Prize winner Friedrich Hayek, and Oskar Morgenstern (who, with Jon von Neumann, launched modern game theory).
autarky:	Autarky is the situation in which an individual, group, or country does not trade with outsiders.
autocorrelated residuals:	Autocorrelated residuals create inefficiencies in estimators and the forecasts of time-series regressions, although such estimators or forecasts may be unbiased and consistent. Autocorrelation arises in time series data when the residuals at various points in time are correlated. The Durbin-Watson test identifies first-order autocorrelation, meaning correlation between residuals at time t and t+1, and the Breusch-Godfrey test identifies higher-order autocorrelation, between time t and any time that is later by a constant, r.
automated clearinghouse:	An automated clearinghouse consummates standardized financial transactions electronically, and does not require physical transfers of documents. For example, the Federal Reserve System operates an automated clearinghouse that clears checks written on one bank and deposited in another.
automated teller machines:	Automatic teller machines (ATMs) are computerized terminals through which customers of financial institutions can make deposits, withdrawals, or other transfers of funds.
automatic (built-in) stabilizers:	Automatic stabilizers are government tax and spending mechanisms that automatically drive the federal budget towards deficit when the economy slumps or towards a surplus when inflationary pressures build. Automatic stabilizers dampen fluctuations in aggregate demand. For example, when the economy starts dipping into a recession, income falls and government tax revenues decline, while the government increases its outlays for unemployment compensation. The reduced tax burden leaves more income in the hands of consumers and investors, and the ‘"automatic’ increases in government outlays also helps partially offset declines in aggregate demand that accompany (or cause) a recession.
automation:	The term automation refers to technological advances that replace human labor with machinery. Example: Robots on auto assembly lines have reduced employment in the auto industry.
autonomous:	Autonomous is used as a crude synonym for “independent” in the Keynesian-cross model. The term autonomous is used as a modifier to identify those parts of injections of Aggregate Expenditures [consumption, investment, government spending, or exports] or withdrawals from Aggregate Expenditures [saving, taxes, or imports] that are not affected by income.
autonomous consumption:	In the simplest Keynesian-cross model, part of consumption is assumed autonomous [unrelated to income] and the part of consumption that is positively related to current income is termed induced consumption. Autonomous consumption is exogenous [determined outside the Keynesian model], and depends on such variables as previous savings, inheritance, indebtedness, expected wealth, and demographic factors [e.g., family size and age structure].
autonomous expenditure:	Autonomous spending is aggregate spending unrelated to income. Investment, government purchases, net exports, and part of consumer spending are all treated as autonomous in very simple Keynesian cross models.
autonomous saving:	Consumption plus saving equals income in the simplest Keynesian-cross model. Thus, autonomous consumption necessitates an identical amount of dissaving, which is negative autonomous saving. The ability of agents to dissave reflects their previous savings and their access to credit.
autonomous spending multiplier:	The autonomous spending multiplier is the number which, when multiplied by the sum of all autonomous spending, yields equilibrium income. In simple linear Keynesian models, this multiplier equals the reciprocal of the marginal propensity to save. Open the link Keynesian multipliers for more discussion.
availability bias:	People whose decisions reflect availability bias tend to heavily weight more recent information in their decisions. This bias is closely related to anchoring, and helps explain why financial markets may tend to overreact to announcements that affect the expected net income streams associated with assets.
average fixed cost:	Average fixed cost (AFC) equals total fixed cost (TFC) per unit of output (Q) = TFC ∕ Q. The AFC curve graphs as a rectangular hyperbola. [Open the AFC figure link for more discussion.]
average physical product of labor:	The average physical product of labor (APPL) is production per worker and equals total output (Q) divided by labor (L), or Q ∕ L. Average physical products for other resources (e.g., capital or land) are calculated in parallel ways. Average physical products can also be calculated for capital (Q∕K) or land (Q∕N). The APPL is sometimes called average labor productivity. Open the file APPL and MPPL curves for more discussion.
average propensity to consume:	The average propensity to consume (APC) equals consumption (C) as a proportion of disposable income Yd. Thus, apc = C ∕ Yd. The APC is sometimes an important consideration in Keynesian models.
average propensity to save:	The average propensity to save (APS) is saving (S) as a proportion of disposable income Yd. Thus, APS = S ∕ Yd. The sum of the average propensity to consume and the average propensity to save necessarily equals 1. [apc + aps = 1.]
average revenue:	Average revenue is a firm’s revenue per unit of output, and is computed as total revenue (TR) divided by output: TR ∕ Q. Average revenue is synonymous with price if the price is constant, as is the case in markets that are purely or perfectly competitive.
average revenue product:	Average revenue product is a firm’s revenue per unit of an input, and is computed by dividing a given total revenue (TR) by the amounts of given resources (e.g., workers (L)) generating this revenue (e.g., TR ∕ L).
average tax rate:	The average tax rate (T/Y) is the ratio of taxes (T) to income (Y). See also marginal tax rate.
average total cost:	Average total cost (ATC) is the total cost incurred per unit of output, and is calculated as TC ∕ Q, or ATC = AVC + AFC. Average total cost is often termed average cost or unit cost. See the link average total cost for more discussion.
average variable cost:	Average variable cost (AVC) is the variable cost per unit of output, and equals TVC ∕ Q. See also variable costs.
avertive expenditures:	Avertive expenditures are intended to reduce the incidence and intensity of negative externalities. For example, avertive spending includes funding through public health organizations for inoculations to prevent epidemics of flu or childhood diseases.
axiom:	An axiom is an assumption or statement that is thought self-evident without requiring proof. For example, axioms are the givens in mathematics. In some cases, an axiom is deemed true by definition.
axis:	An axis is one of the intersecting 90° lines used to measure how variables are related in a Cartesian coordinate system. The x-axis in a two-dimensional Cartesian coordinate system measures the variable laid out horizontally and the Y-axis measures the variable laid out vertically. The plural of axis is axes. See the Cartesian coordinate system figure for more discussion.