Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

dark matter:	The term “dark matter” has recently been borrowed from cosmologists by economists who apply the label to aggregated differences in the returns on foreign assets owned by U.S. investors relative to the much lower returns realized by foreign investors who own U.S.-based assets. Most foreign investors have financed purchases of U.S. assets with funds they acquired because the current account of the U.S. balance of payments is persistently in deficit. Among other explanations for “dark matter,” these economists theorize that foreign investments by U.S. firms tend to be in such profitable areas as off-shore manufacturing and fast food franchising, while foreigners seek security by buying such safe but low-yield assets as U.S. Treasury bonds. Their controversial theory concludes that U.S. imbalances of trade are the consequence of flawed and misleading accounting , and are inconsequential in any event. See absorption problem for elaboration.
day trader:	A day trader is a financial investor who buys based on very recent changes in the price of a stock, and sells quickly, normally on the same day. The theory underpinning day trading is not spelled out in a systematic fashion that depends on human behavior. Instead, various theories of day trading are based on various fuzzy specifications about how very short term movements in stock prices are predictive of almost immediately subsequent changes because other traders are presumed to systematically overcorrect or undercorrect for price changes based in changed fundamental values. In any event, day trading is extremely inconsistent with fundamental analysis or analysis from the perspectives of behavioral finance. Day trading entails significant transaction costs because of churn. Lucky day traders typically attribute their success to astuteness or skill, and day traders who are unlucky soon find other activities to occupy their time.
deadweight loss:	Deadweight losses are losses of potential consumer or producer surplus caused by market imperfections (e.g., monopoly power or externalities) or distortions introduced by inefficient taxes, laws, or regulations. See also welfare loss triangle.
deadwood:	Deadwood is a term used pejoratively to describe an individual or organization perceived as unproductive.
death tax:	The term death tax is a politically-charged pejorative reference to inheritance taxes. See also inheritance tax.
debasement:	Debasement is a reduction in the amounts of gold or silver in coins that serve as commodity money. When commodity money was common, government mints often “stretched” relatively pure gold and silver coins by melting them down and adding generous portions of nickel, copper, zinc, or lead before restamping coins. Open the Gresham’s law link for more discussion.
debenture:	A debenture is a promissory note or bond backed solely by the credit history of a corporation. Debentures differ from secured (collateralized) bonds because they are not secured by a lien on a physical asset.
debt:	Debt is the broad term applied to what an individual or organization owes to an external party, and includes bonds and bank loans. Debts are sometimes termed liabilities. See also national debt and debt-equity ratio.
debt aversion effect:	The debt aversion effect refers to the reluctance of some people to borrow even though they have investment opportunities with expected rates of return that are significantly higher than the interest rates on available loans. Because of mental accounting, people who are debt averse also tend to pay down long term debt [e.g., mortgages] instead of paying down short-term debt with much higher interest charges [e.g., credit card balances].
debt capital:	Debt capital is the financial capital acquired by selling corporate bonds. Debt capital, along with the funds secured by selling stock, or from retained earnings or commercial loans, enables firms to finance the acquisition of new machinery or buildings.
debt rollover:	Debt rollover occurs if, when a bond issue comes due, the debt is refinanced.
debt servicing:	Making scheduled payments on external loans is referred to as debt servicing.
debt-burden effect:	The debt burden effect is a variant of the debt-deflation effect and addresses the possibility that aggregate demand will decrease consequent to deflation because reductions in the price level increase real debt-equity ratios for leveraged firms and increase the likelihood of bankruptcy. Deflation increases the debt-equity ratios of firms because real debt increases, but the expected nominal net income stream that underpins the equity of a firm’s owners declines. The resulting greater likelihood of business failure reinforces both pessimistic “animal spirits” (any cautious instincts of business decisionmakers) and the reluctance of lenders to make or renew loans to such leveraged firms. This effect is emphasized by such post-Keynesians as Hyman Minsky. See also real balance (Pigou) effect, debt-deflation effect, Mundell-Tobin effect, income redistribution effect, expected inflation effect, and expected deflation effect.
debt-deflation effect:	The debt-deflation effect is the decline in aggregate consumer demand that occurs when a declining price level increases the real value of the liabilities of debtors and, simultaneously and symmetrically, the real value of the assets of creditors. Traditional Keynesians posited that the marginal propensities to consume (mpc) of debtors typically exceeds the mpc of creditors. Thus, when the price level falls, the reallocation of real wealth from debtors to creditors reduces the aggregate marginal propensity to consume. Consequently, price level declines may intensify cyclical unemployment in a recession because lower prices shrink consumption demand and consequently, aggregate demand. See also real balance (Pigou) effect, debt-burden effect, Mundell-Tobin effect, income redistribution effect, expected inflation effect, and expected deflation effect.
debt-equity ratio:	The debt-equity ratio is the external debt owed by a firm divided by the equity (net worth) of the firm. Debt equity ratios are measures of financial leverage. See also leverage.
debt repudiation:	Debt repudiation is enactment of a law or executive decree that cancels the foreign debt of a government or special interest group, and is tantamount to a declaration of bankruptcy. Debt repudiation is used reluctantly because of the consequent reduction in access to credit markets.
debtor:	A debtor is an individual or organization or nation that owes funds or is otherwise obligated to an external party.
decentralized decision making:	In a decentralized system of organization, the power to make decisions is diffused, and tends to be made by the unit of the organization that is affected directly (bottom-up as opposed to top-down). In a decentralized economy, most decisions about what to produce, when and how to produce, and who gets to use output are determined in markets. See also centralization and central planning.
decentralized socialism:	Decentralized socialism is an economic system characterized by social ownership of resources, but which relies on markets to resolve the economic problem by setting equilibrium prices and quantities.
deciles:	An individual statistical observation (e.g., SAT scores) is commonly characterized as in the first, second, third, …, tenth decile when the statistical distribution is divided into tenths.
decision fatigue:	Decision fatigue refers to the tendency for the quality of decisions to erode after an individual has made numerous choices, or becomes increasingly exhausted. The rationality of decisions diminishes, and germane information the decisionmaker already possesses is decreasingly perceived as relevant for the decision at hand.
decision tree:	A decision tree is a structure specifying possible alternatives (or alternative sequences) and the expected consequences (costs and benefits) of alternative choices.
decrease in demand:	A decrease in demand entails the entire demand curve shifting downward and to the left, and occurs only if one or more of the nonprice determinants of demand change. Less will be purchased at each possible price.
decrease in quantity demanded:	A decrease in quantity demanded results from an increase in the price of the good, and is a leftward movement from one point on a given demand curve to a point that reflects a higher price and a lower quantity.
decrease in quantity supplied:	A decrease in quantity supplied is shown by a movement towards the origin along an existing supply curve, and results from a decline in the price of the good or service.
decrease in supply:	The entire supply curve shifts to the left; occurs only if one of the nonprice determinants of supply changes so that less will be available at each possible price.
decreasing cost industry:	A decreasing cost industry is an industry for which the long‑run supply curve is negatively sloped, reflecting declines in per unit costs as total production in the entire industry increases.
decreasing returns to scale:	A production function exhibits decreasing returns to scale if increases in all inputs by a given proportion yield a less-than-proportional increase in output. See also the principle of increasing costs and click on the link on decreasing returns to scale for further examination into this phenomenon.
deductible:	A deductible is the amount that a patient must pay before health insurance begins to cover any health care costs. The higher that the deductible, the more powerfully market forces curb price hikes for minor medical care. See also coinsurance.
deductive reasoning:	Deductive reasoning proceeds logically from well defined sets of a priori general principles to the specific case or example being analyzed, in contrast to inductive reasoning, which begins with specifics and then extrapolates them into generalizations. See also Austrian economics and syllogism, and contrast with inductive reasoning.
deep market:	A deep market is a well organized market in which there many potential buyers and sellers who engage in frequent transactions and the total monetary volume of transactions is relatively large. See also competition, atomistic markets, pure competition, and perfect competition.
default:	A default is the failure to make timely payments in accord with the terms of a loan. Also used as a verb.
default risk:	Default risk is the risk to a lender that a borrower will default on a loan
defensive medicine:	Defensive medicine is a strategy by medical providers intended to minimize the probability of costly malpractice lawsuits a: For example, doctors may order relatively unnecessary and expensive tests to ensure that they rule out even very unlikely conditions that, if undetected might lead to a lawsuit. Defensive medicine results in medical care for which the marginal social costs (e.g., insurance costs or government subsidies in addition to the charges to the patient) far outweigh the expected marginal benefits to the patient.
deficit:	A budget deficit exists when government revenue is less than its outlays, and may be financed by the federal government a: (a) by having the Treasury issue bonds, which entails an increase in government debt, or (b) by printing new money (monetary base), whereby the central bank purchases the Treasury bonds. The budget equation for the federal government can be summarized as G = T + ΔB + ΔMB. In the United States, whether the budget deficit (G-T) is covered by net new national debt (Δ in Treasury bonds) or by printing monetary base (ΔMB) is determined by the open market operations of the Federal Reserve System. See also absorption problem, crowding out, fiscal policy, monetary policy, open market operations, and budget surplus.
deflating:	Using a price index to adjust monetary values for changes that occur to the price level over time; dividing the nominal values of a time series for a variable by (1% of) the price level during the period in which the nominal variable occurs.
deflation:	Reductions in the average level of prices are referred to as deflation.
deflationary gap:	See recessionary gap.
deflationary growth	Deflationary growth occurs if Aggregate Supply increases at a faster rate than Aggregate Demand, thereby exerting downward pressure on prices.
demand:	Demand reflects the amounts of a good that people are willing and able to buy, given the prices and choices available to them. Click on the link for a further exploration on demand.
demand curve:	A demand curve connects the maximum quantities of a good an individual or group are willing and able to buy at various prices, or the maximum prices they are willing and able to pay for various possible quantities of a good. Click on the link for a further look into both individual and market demand curves.
demand deposits:	Demand deposits are funds kept in a financial institution that by law must be available immediately in response to the depositor’s request. Checking accounts are examples.
demand function:	A representation of how the amount of a good or resource that people want to buy is affected by certain determinants. A market demand function, for example, can be expressed as Qd = f(P, Pref, Pog, Y, N, T, E), where QD = the amount people want to purchase per period; P = price of the good, Pref = tastes and preferences; Pog = prices of related goods; Y = income; T = a proxy for taxes, subsidies, or government regulations governing use; and E = expectations about, e.g., future prices or availability.
demand price:	The highest price that buyers are willing and able to pay for a specific amount of a good or resource. Also known as subjective price. See also supply price.
demand schedule:	A demand schedule is a table reflecting the maximum quantities of a given good or resource that buyers are willing and able to purchase per period at various market prices.
demand, law of:	The quantity demanded of an economic good varies inversely with its price. Click on the link for more on the law of demand.
demand-pull inflation:	Demand-pull inflation (sometimes called demand-side inflation) refers to hikes in the price level that originate from growth of Aggregate Demand; caused by excessively rapid increases in the growth rate of the nominal money supply or upward shifts in autonomous real expenditures; demand‑pull inflation generates a counterclockwise adjustment path of inflation versus real output.
demerit good:	A “demerit” good [or merit bad] is a good or service available for purchase on the market that some “outside analyst” or dominant group regards as intrinsically unhealthy, degrading, or socially damaging for other people to consume, regardless of the consumers’ own desires, preferences or values. See also merit good and merit bad.
demographic effects:	Demographic effects are the effects emanating from changes in population characteristics (e.g., the age structure, birth rates, education, marital status, or mobility between locations) on such things as the rates of saving, investment, and economic growth, the composition of demands for goods and services, and the supply of labor.
demography:	Demography is the study of variations in population caused by such events as famine, conflicts, diseases, or changes in social, cultural, and economic activities, and how changes in the age and size of the population in turn affect social, cultural, and economic activities.
Department of Energy:	The federal Department of Energy is responsible for overseeing national energy policies of the United States.
dependence effect:	The dependence effect is John Kenneth Galbraith’s notion that much of consumer demand derives from our responses to advertising and marketing that causes us to demand goods that are largely irrelevant to our wellbeing or happiness.
dependency ratio:	The dependency ratio is computed as the number of people deemed dependents (ex: children, retirees, or the extremely disabled) divided by number of healthy people of working age.
dependency theory:	Dependency theory is the perspective that the terms of trade of less developed countries are artificially low in part because they exporting raw materials and food and fiber at low prices while importing sophisticated high-priced industrial products produced by firms with market power. Dependency theory also characterizes low per capita incomes in less developed countries as resulting from exploitation by multinational firms that relocate to other poor countries whenever domestic wage rates begin rising, a process described as the race to the bottom.
dependent variable:	The value of a dependent variable is contingent upon the value of other variables, which are called independent variables. If variables are determined interdependently, then the function is an implicit function. For example, a very simple demand function for a specific good can be written as Qd = f(P), or an equally valid demand function addressing the same good can be written as P = g(Q).
depletable:	A resource or commodity is considered depletable if it can be used up or consumed completely with no chance for re-use. Petroleum, for example, is a depletable resource, and an apple is also depletable because it can be eaten completely, and cannot be used thereafter.
depletion allowance:	Lobbying by oil companies yielded depletion allowances that provided significant incentives for rapid extraction of petroleum reserves. In calculating their tax liabilities, oil companies were permitted to reduce their taxable incomes by roughly 27.5 percent of their total revenues from the sale of petroleum. Depletion allowances were eliminated as a tax loophole in the late 1970s.
depreciation:	Depreciation is the loss in value of a piece of capital because of wear-and-tear encountered in production during a period, or because of obsolescence. The amount of capital used up during a period. Depreciation is a cost of production. Accountants compute depreciation very roughly and primarily for tax purposes in a measure economists call the capital consumption allowance.
depreciation of a currency:	A decrease in the value of one currency measured in terms of its exchange rates with other currencies. See also exchange rate risk.
depression:	A depression is sharp and sustained decline in business activity that is considered more severe than a recession. Output plummeted during 1929-1933, and unemployment rates rose from roughly 4% to a high estimated at 25%. The United States suffered from the Great Depression from 1929 until the onset of World War II.
deregulation:	Deregulation is the rescinding of laws governing business practices.
derivatives:	Derivatives are financial securities with value linked to, or derived from, other financial securities.
derived demand:	The demand for a resource that exists because of its productivity; resource demands are derived from demands for output.
descriptive graphs:	A descriptive graph is an illustration of data intended to identify how the values of variables change across time, or are subdivided, or how variables are related in some fashion that is not necessarily causal. Bar graphs, line graphs, or flow charts are examples of descriptive graphs that can imaginatively portray to readers of newspapers, corporate annual reports, textbooks, … such variables as proportional distributions of income, time series for data, or the proportions of sales accounted for by different items.
determinant:	A variable that influences or affects another variable.
determinant of demand:	Any influence on the demand for a good. Determinants of demand include a: (a) the price of the good, (b) tastes and preferences, (c) prices of related goods, (d) income, (e) expectations about prices and availability, (f) numbers of buyers in the market, and (g) such government policies as taxes or subsidies and laws or regulations.
determinant of supply:	Any influence on the supply of the good. Determinants of supply include a: (a) the price of the good, (b) technology, (c) prices of related goods, (d) resource prices, (e) expectations about prices, (f) numbers of sellers in the market, and (g) government subsidies, taxes, and regulations.
determinate:	A system of equations is said to be determinate if the equations yield a solution.
determinism:	Determinism is the philosophy that all past, present, and future phenomena are completely explicable through scientific laws. The core models of most of “modern” science are deterministic. In this view, everything,, including human choices, is predetermined by the physical and chemical interactions of matter and energy, and the perception that we are “free to choose” is an illusion. See also dialectical materialism. Contrast with hysterisis, path dependence, and historicism.
devaluation of a currency:	A currency experiences devaluation when exchange rates are either “pegged,” or fixed under a gold standard, and government decide to reduce the exchange rate of one currency for another, or under a gold standard, a government decrease the gold content of its currency. Devaluation is similar to but not synonymous with depreciation of a currency.
developed countries:	Developed countries are the wealthiest nations on earth, and include most of western Europe, the United States, Canada, Japan, Australia, and New Zealand.
developing countries:	Developing countries are countries on the path from agriculture to industrialization, and include China, Mexico, and South Korea, although the categorization of countries between less developed and developing is both somewhat arbitrary and fluid. See also less developed countries and trap of underdevelopment.
development:	Economic development entails qualitative changes in an economic system; and occurs when there are improvements in either the quality of life or the quality of goods, or both.
dialectical materialism:	Dialectical materialism is the underpinning for Karl Marx’s explanations of historical change. According to orthodox Marxism, all massive social and cultural changes are determined by contradictions that exist in the ways that societies produce, exchange, distribute, and consume goods. For the most part, these contradictions are perceived as embedded in conflicts that exist between the different classes in society. Marx merged the dialectical method of Georg Hegel with the materialism of Ludwig Feurbach to develop this philosophy.