Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

idiosyncratic risk:	See the synonym specific risk.
idle cash balances:	Idle cash balances are money that is hoarded and tend to reduce aggregate demand and the income velocity of money, especially as hoards of idle cash balances grow during an economic downturn.
illiquid:	An asset is illiquid if significant transaction costs are incurred in trading in the asset, so that a large proportion of value may be absorbed when converting the asset into cash. One way to estimate illiquidity is to consider the proportion of total value you would expect to lose if you bought and then immediately sold an asset. See also liquidity.
illusion of control:	Individuals experience an illusion of control if they can make choices before the outcome of an event despite the irrelevance of such a choice for the outcome. For example, if people are betting on the flip of a coin, people who get to “call” heads or tails tend to expect better outcomes for themselves than if the “call” is made by another party. Similarly, lottery ticket buyers believe their odds of winning to be greater if they pick a number than if “their” number is generated by a computer’s random number generator.
illusion of knowledge effect:	Individuals make poorer decisions because of an illusion of knowledge effect when additional but extraneous information falsely appears relevant for the outcome of an event. For example, suppose a horse racing fan learns how a jockey bet on six horse races and subsequently won all six bets. If this fan then learns how the jockey bet on the next race and consequently echoes the jockey’s bet, an illusion of knowledge effect may be present. The jockey may be a consistent loser who was merely lucky when betting on the six races the fan observed. Echoing the investment portfolio choices of an investor who was lucky in previous periods can similarly yield negative results.
immigration:	The permanent relocation of people into a country. Contrast with emigration, which is permanent relocation out of a country.
immiserizing growth:	Immiserizing growth occurs when demands for products are relatively price inelastic so that technological advances or increased resources yield more output but decreased income. For example, improved technologies in agriculture are likely to reduce farmers’ incomes because the demands for most farm products are both relatively price inelastic and income inelastic. Immiserizing growth on a broader scale can occur in less developed economies if their incomes depend heavily on exports of raw materials or relatively unsophisticated manufactured goods that are relatively price inelastic in demand and the development strategies of these countries rely on increased exports of such items.
impact lag:	The impact lag (or implementation lag) is the period that passes before newly implemented changes in policy have an impact on economic activity; the impact lag of tax policy is short relative to that of monetary policy.
imperfect competition:	A market is imperfectly competitive if either buyers or sellers have some control over price and are not merely price-taking quantity adjusters. Imperfect competition occurs when markets are thin, when there are few potential buyers or few potential sellers, when goods are not homogeneous, or when information is asymmetric. Contrast with pure competition or perfect competition.
implementation lag:	See impact lag and administrative lag:
implicit contract:	An implicit contract (invisible handshake) is an unwritten agreement between groups involved in prolonged transactions, such as an agreement between firms and workers that the firm will continue to provide jobs at stable wages during economic downturns if the employees do not demand huge wage increases in prosperous periods.
implicit costs:	Implicit costs are costs not entailing outlays of funds in the period being analyzed. Implicit costs are usually the opportunity costs of all resources that a firm’s owner or owners make available for production without direct outlays of money. Examples include the values of the entrepreneur’s funds, labor, and land tied up in the firm. Click on the link to profits for a look at how implicit costs are taken into consideration in determining whether or not a firm is profitable. Contrast with explicit costs, which are the funds paid out for resources or intermediate goods during a production period.
import quota:	An import quota quantitatively limits international trade. The imposition of quotas raises the prices of imported goods, tends to stimulate corruption, and causes failure to fully realize potential gains from international trade, thereby reducing the real national incomes of all affected countries. See also tariffs.
import substitution:	Import substitution is a government policy of erecting trade barriers against certain types of imports to raise their prices, thereby encouraging production by domestic producers. Such inward-looking strategies are most common in less developed countries, and almost universally fail to trigger significant industrialization or meaningful economic growth. See also infant industry protection.
imports:	Imports are goods produced in foreign countries and consumed or invested domestically.
imputed income:	Imputed income refers to the value of goods consumed but not purchased in the market. For example, the rental value of owner-occupied housing is an imputed income for the homeowner.
incentive:	An incentive is the benefit expected from engaging in an activity, and encourages certain behavior. For example, wages are incentives to work. Government subsidies are intended as incentives that encourage a behavior or an activity such as education. Lax accounting standards, on the other hand, may incentivise corporate fraud.
income:	Income is a flow of wages, interest, rent, or profit that follows the sale for a period of time of the use of any asset, including labor – the time an individual works. One economic definition identifies income (Y) as the sum of consumption (C) plus saving (S) plus taxes (T). If saving is defined as the change in one’s wealth (ΔW) during a period, then Y= C+ ΔW+T. National income will, in equilibrium, equal the total value of a society’s output. How this output and income will be distributed is addressed in the basic economic question of “for whom?” See also flow variable, stock variable, and wealth.
income approach to estimating GDP:	Gross domestic product (GDP) and national income (NI) as economic concepts are ideally measured as the sum of wages, rents, interest, and profit, plus depreciation. (GDP ≈ NI ≈ w + r + i + π.) The actual accounts used reflect the data available, however, so national income is calculated as the sum of wages, rent, interest, corporate income, and proprietor/partnership income. This description of the process is a gross simplification.
income effect (consumption):	Changes in consumption patterns arising because price changes also change the purchasing power of money incomes. Income effects may be positive, (as they are for normal goods), negative (in cases of inferior goods), or zero. Click on the link for a more in-depth look at income effects.
income effect (labor vs. leisure):	In labor markets, the income effect of a higher wage results in more leisure being demanded because workers will want more leisure time to enjoy their higher income. Leisure is a normal good, and people tend to want more of it as income rises.
income elasticity of demand:	The income elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to changes in real income; computed by dividing the percentage change in the quantity demanded of a good by the percentage change in real income: %∆Qxd∕%∆Y.
income redistribution:	Income redistribution refers to the effects of how a change in circumstance alters the after-tax distribution of income. Most governmental income redistribution programs (“welfare programs”) are nominally intended to alleviate poverty and promote equity.
income redistribution effects:	Income redistribution effects occur when differences in the marginal propensities to consume (mpc) of wage earners vis-à-vis recipients of other forms of income or differences in mpc between members of different social classes (e.g., rich vis-à-vis poor) result in systematic changes in aggregate demand. For example, if wages fall faster than prices do, the shift of real income from workers to other income recipients yields reduced aggregate demand if the mpc of workers is greater than the average mpc of recipients of interest or rent or economic profit. Michael Kalecki cites this income redistribution effect as one aspect of how price flexibility may fail to cause a laissez-faire economy to gravitate towards full employment in orthodox Keynesian models. Similarly, Thomas Robert Malthus argued that differences in consumption tendencies accounted significantly for business cycles, as did Karl Marx, whose model predicted dynamic instability and the ultimate demise of capitalism because income redistribution effects would become ever more significant across time. See also real balance (Pigou) effect, debt-deflation effect, debt burden effect, Mundell-Tobin effect, expected inflation effect, and expected deflation effect.
income statement:	An income statement is an accounting record of the revenues realized, accounting costs incurred, and profits or losses or other net surpluses or deficits during a period by a household, firm, or government agency. Open the file accounting vs. economic costs for a discussion of economic costs and profits. See also accounting costs vs. economic costs, balance sheet, explicit costs, and implicit costs.
income velocity (V) of money:	The income velocity of money (V), calculated as V = PQ ∕ M, is the number of times annually that the average unit of money changes hands during the process of purchasing newly produced GDP (PQ)
incomes policies:	Incomes policies are intended to curb inflation without reducing Aggregate Demand expenditures, and include jawboning, wage and price guidelines, and wage and price controls.
increase in demand:	Graphically, an increase in demand is a rightward shift of the entire demand curve in response to a change in one of the determinants of demand. A drop in price does not cause an increase in demand—the demand curve does not shift. See also increase in quantity demanded, increase in quantity supplied, and increase in supply.
increase in quantity demanded:	An increase in quantity demanded results from a drop in the price of a good, and is reflected in a rightward movement from one point on a given demand curve to another point on that curve, corresponding to a lower price and a greater quantity.
increase in quantity supplied:	An increase in quantity supplied is shown by a movement away from the origin along an existing supply curve, and results from an increase in the price of the good or service.
increase in supply:	Graphically, an increase in supply is a rightward shift of the entire supply curve in response to any change in a determinant of supply other than the good’s or service’s own price. An increase in supply usually is a consequence of some change that reduces production costs. See also increase in quantity supplied.
increasing cost industry:	An industry whose long-run supply curve is an upward sloping line; higher costs per unit are incurred as new firms enter the industry and total production increases.
increasing returns to scale:	A production function exhibits increasing returns to scale if an increase in all inputs by a given proportion yields a more than proportional increase in output. See also decreasing returns to scale and constant returns to scale.
indenture:	An indenture is, broadly, a clause in a contract that specifies the rights of one party and obligations of the other party. Thus, a bond indenture is a clause in a bond that outlines the obligations of the issuing institution and the rights of bond owner, spelling out, for example, details about how much each payment will be and when each payment will be made, as well as any limits on uses of borrowed funds by the borrower, and the liens that will ensure payments due the bond owner. See also call provisions, sinking fund and collateral.
independence assumption:	The independence assumption is a foundation for neoclassical microeconomic theory [standard economic theory, or SET] and hypothesizes that individuals will not value an item more or less merely because they own or do not own the item. The research of behavioral economists strongly indicates that individuals tend to value goods more when they own them than when they do not, even when the item has been so recently acquired that the owner has no experience with the usefulness or other salient properties of the item.
independent variable:	In a simple functional relationship (e.g., Y = f(X)), any independent variable X is assumed to cause changes in the dependent variable Y, but the independent variable is assumed unaffected by changes in the dependent variable. See implicit function for an elaboration of more complex functions.
index fund:	An index fund is a mutual fund that is highly diversified because its portfolio of assets includes, for example, all the stocks traded on the New York stock Exchange, or all the stocks in the Dow Jones Industrial average, or all the 500 stocks in the Standard and Poor’s index.
index numbers:	Index numbers are summary measures indicating the relative values of a variable across time. The base period is treated as 100, and each period is reported as the sum of 100 plus the percentage change since the base period. More formally, an index number is calculated as (value of variable for current period × 100) / (value of variable in base period).
indexation:	Indexation is a contractual clause requiring automatic adjustments of monetary payments to compensate for inflation.
indicative planning:	France, whose economy is primarily capitalistic, relied during 1960-1980 or so, on indicative planning, which entails trying to coordinate economic activity by setting production targets for major industries. More recently, France has relied increasingly on market mechanisms to guide economic activity.
indifference curve:	A line connecting the various combinations of two goods that yield the same total utility for a consumer. The consumer is indifferent among the various bundles of goods along an indifference curve. See also preference function, cardinal measurement, and ordinal measurement. Click on the link to see some indifference curve graphs and for a deeper explanation on the topic.
indifference map:	An indifference map is the collection of all of an individual’s indifference curves.
indirect business taxes:	Various taxes that are viewed by business firms as costs of production. These taxes are not part of National Income since they are not resource payments. Examples include sales and excise taxes.
indirect costs of regulation:	The indirect costs of regulation are undesirable changes in behavior in response to regulations and resemble the excess burdens of taxation. The cost of extra recordkeeping for the purposes of complying with tax laws is an example, as are the distortions associated with such activities as loophole mining.
indirect tax:	An indirect tax is collected on a thing or service, and not a particular person or organization or such agents’ incomes or wealth. The U.S. Constitution originally forbade direct taxes, and the assumption was that indirect taxes would be forward-shifted, so that the tax burden was ultimately borne primarily by consumers.
individual demand curve:	A graph of the amounts of a good or resource a buyer will purchase at alternative given prices, or the prices the individual is willing to pay for alternative given amounts of the good or resource.
induced employment:	Induced employment is employment that would not exist but for government programs. People who were employed during the Great Depression by such programs as the Civilian Conservation Corps and the Works Project Administration were the beneficiaries of induced employment. In some ways, the jobs created by government projects that are intended as expansionary fiscal policies are also forms of induced employment.
induced expenditures:	In a Keynesian model, induced expenditures are any expenditures that depend on income. Contrast with autonomous expenditures.
induced unemployment:	Induced unemployment is unemployment that results from legislation or government regulation. Any government policy that reduces employment below that which would clear an unregulated labor market creates a “wedge” that induces unemployment, since more people would be working absent such regulation. Examples of such policies are unemployment compensation programs, Occupational Safety and Health Administration regulations, minimum-wage laws, and child labor laws.
inductive reasoning:	Inductive reasoning is a logical process of developing theories by starting from specific empirically observable facts or examples, and then generalizing from these specific instances to overarching principles. Contrast with deductive reasoning.
industrial espionage:	Industrial espionage is the act of attempting to discover the trade secrets of a rival firm, and is performed for commercial reasons to gain some sort of competitive advantage. This differs from espionage for national security reasons. Industrial espionage is most common in industries experiencing rapid rates of technological advance. See also reverse engineering.
industrial policy:	Government uses subsidies, tax breaks, and protection from foreign competition to support “target industries” that have high productivity, strong “linkages”, or future importance.
industrial union:	An industrial union is a labor organization that represents all the workers in an industry such as mining or automobile assembly workers, in contrast to craft unions, which represent workers with very specific skills and crafts, such as electricians, plumbers, or printers. The Congress of Industrial Organizations was a confederacy of industrial unions before it merged, in 1955, with the American Federation of Labor, which comprised a broad spectrum of craft unions. The resulting organization is the AFL-CIO.
industry:	An industry comprises all the firms that compete in some product market.
industry interest theory of regulation:	Regulation of industry serves not the public interest, but instead serves the particular interests of the regulated industries.
inefficiency:	Economic inefficiency is present when it is possible by changing the current state of affairs to improve the welfare of at least one party without reducing the wellbeing of any other party. Inefficiencies that emerge as a consequence of individual decisionmaking are termed market failures, which may arise from private actions or negotiations do not achieve allocative efficiency, productive (technical) efficiency, or distributive efficiency. Inefficiencies that emerge because of systematic flaws in political processes are called political failure. Contrast with efficiency and see also the market failure versus political failure link for more discussion.
inequity:	Inequity is a normative concept that applies when a situation is perceived to be unfair. Many critics view the market system as inequitable because income and wealth are distributed in accord with the ownership of productive resources, which may be very unequally distributed merely because of birth, institutional vagaries, historical circumstances or pure luck, and not because of merit or other allocative systems perceived as fairer.
infant industry argument for protection:	The infant industry argument for protection in the form of trade barriers is the notion advanced first by Alexander Hamilton that emerging industries need to be protected from more efficient and established foreign competitors.
inferior good:	A good for which the income elasticity of demand is negative; the demand for this type of economic good varies inversely with real income; technically, a good for which the income effect of a price change is negative. The demand for an inferior good (e.g., lye soap, beans, used tires, or thrift-store clothing) is negatively related to income. However, what is an inferior good for one family (e.g., a beat-up used car) may even be a luxury good for another, poorer family.
inflation:	Inflation is the upward movement of the absolute price level, and a consequent decrease in the purchasing power of a currency. [Some analysts define inflation as a sustained upward movement of average prices, but the modifier “sustained” creates ambiguity. If average prices rise for fifty years and then cease rising, has inflation occurred? If average prices rise for fifty weeks and then cease rising, has inflation occurred? How about average prices that rise for fifty days?]
inflation illusion:	Inflation illusion occurs when people fail to revise their expectations about changes in the price level and are fooled because they expect the rate of inflation to remain constant, or they assume that the current price level will prevail for the foreseeable future.
inflation risk:	Inflation risk is the risk to a lender that the value of a financial asset (e.g., a bond or mortgage) will be reduced because of inflation.
inflation targeting:	Inflation targeting is a strategy by central bankers of aiming monetary tools to directly control changes in the price level instead of aiming at such intermediate targets as the rate of growth of the money supply.
inflationary bias:	Economic mores and customs, the structures of private institutions, or government policies yield an inflationary bias when they make inflation more likely to occur. For example, asymmetric adjustments of wages and prices lend an inflationary bias to an economy, and expectations of inflation do as well. If most people expect inflation, policymakers find it difficult to enact anti-inflationary policies because a likely short-term consequence is a recession.
inflationary expectations:	Inflationary expectations refer to the expectations of economic agents about the speed and direction of changes in the price level. See also adaptive expectations, static expectations, and rational expectations.
inflationary gap:	The amount in a Keynesian cross model by which autonomous expenditures exceed those necessary for full employment income or output.
inflationary spiral:	An inflationary spiral is a process in which price increases precipitate wage increases, which are then used to justify further price increases and wage increases, ad infinitum. See also hysterisis.
inflection point:	An inflection point is a point in a continuous function where the second derivative changes sign.
informal sector:	The informal sector is synonymous with the underground economy, and is most commonly applied to unrecorded (and untaxed) activities in less developed countries.
informative advertising:	Informative advertising entails providing accurate information to consumers so that good economic choices can be made at lowered transaction costs, and is not a socially inefficient use waste of resources. See also persuasive advertising.
infrastructure:	The infrastructure of a society includes such foundations for production as the financial, legal, and educational systems, transportation and communications networks, and the sophistication of commodity, and resource markets. A country’s infrastructure is sometimes called its acquired assets, to distinguish these assets from natural resources.
inheritance tax:	An inheritance tax is a tax imposed on inherited wealth. Inheritance taxes are sometimes known as estate taxes, and condemned by opponents as “death taxes.” See also gift taxes.
initial public offering:	An initial public offering (IPO) is a recently-formed corporation’s first attempt to sell stock to the general public. Initial public offerings are often facilitated by the activities of an investment banker that arranges sales of stock for the principals of the corporation.
injections:	Injections are autonomous spending (autonomous consumption, investment, exports, or government purchases) that then, in the Keynesian models, are subject to the multiplier principle to create even greater total spending and income.
in-kind transfers:	In-kind transfers as mechanisms for redistributing income or wealth are provided, not as cash, but rather as, e.g., food stamps, educational grants, or housing allowances.
innovation:	Innovation is the development and implementation of new technology, or the marketing of new or impr