Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

M0 monetary base:	See monetary base.
M1 money supply:	The M1 money supply = currency + demand deposits in commercial banks + all interest paying checkable accounts + travelers checks.
M2 money supply:	The M2 money supply = M1 + small short term time deposits.
M3 money supply:	The M3 money supply = M2 + larger long-term deposits (e.g., certificates of deposit [CDs]).
macroadjustments:	Imbalances of trade (the current account of balances of payments) caused by disequilibrium may be cured through “macroadjustments” to Aggregate Demand that change nominal GDP (which equals PQ) or, in the longer run, by adjustments to Aggregate Supply.
macroeconomic equilibrium:	Macroeconomic equilibrium occurs when Aggregate Supply and Aggregate Demand are equal so that the economy is balanced. Then, if Aggregate Supply and Aggregate Demand both grow at equal rates, the growth rate of gross domestic product (GDP) will be constant.
macroeconomics:	Macroeconomics is the branch of economics concerned with aggregate variables such as the levels of total economic activity, unemployment, inflation, the balance of payments, economic growth and development, the money supply, and the federal budget. Contrast with microeconomics. Click on the link for further exploration of the differences between microeconomics and macroeconomics.
majority rule:	In a majority rule voting system, the winning side of a vote must capture 50 percent plus one vote.
Malthus, Thomas Robert	Thomas Robert Malthus [1788-1834] is categorized as a classical economic thinker, not because of the structure of his theories or their foundations, but instead because of the era in which he wrote. He was a contemporary of David Ricardo and they were good friends, despite seldom agreeing with each other. Today, Malthus is remembered primarily for his theory of population, which pessimistically forecast a razor’s edge existence as the natural equilibrium for humankind, and which inspired Darwin’s theory of evolution.
Malthusian theory:	Reverend Thomas Robert Malthus, an early nineteenth century English economist, elaborated the dismal notion that in the long run, all workers are doomed to live at a subsistence level that barely permits survival. Malthusian theory is based on the idea that any favorable circumstance that allowed people to live above a subsistence level would be absorbed quickly by population growth, which would drive per capita income back down to subsistence levels. Malthus failed to anticipate how favorably technology would advance to expand the world’s ability to produce food, nor did he anticipate the growth of family planning.
managed care:	Managed care is the provision of health care at a fixed rate per period (the premium) plus occasional small co-payments when specific medical services (e.g., prescriptions) are provided, primarily by a health maintenance organizations (HMOs) or preferred provider organizations. The patient is usually constrained to care provided by health professionals with whom the HMO or PPO has a contractual agreement.
managed float:	In a managed float, the exchange rate of a country’s currency can “float” up or down in response to market forces, but only within boundaries set by the government. The government is pledged to buy or sell currency to keep the exchange rate within the desired boundaries.
managerial entrenchment:	Corporate executives engage in managerial entrenchment, a specific type of principal-agent problem, when they adopt a strategy that increases the costs to stockholders of replacing these decision makers without compensating benefits to the stockholders. For example, a manager might engaged in managerial entrenchment by investing in a project that requires the special expertise of the manager to merely break even, but which will lose money if the manager is not in charge. This would increase both the level of compensation and the job security of the manager, but stockholders would not gain by the corporation’s investment.
managerial slack:	Managerial slack is inefficiency that derives from weak or absent incentives for diligence by managers. Managerial slack combines with principal-agent problems in a bureaucracy to result in excessive costs, wasteful combinations of resources; malingering and idleness among workers; and a lack of innovation. See also X-inefficiency.
margin requirements:	Margin requirement are a tool of the Federal Reserve System that allows the FED to set the legal minimum percentage down payment required for purchases of stock.
marginal cost = marginal revenue:	The condition that marginal cost = marginal revenue (MC = MR) is a requirement for a firm to maximize profit. In most cases, MR > MC for units prior to the MR = MC level of output, so extra output boosts profit or cuts losses. Higher output levels than the MR = MC level entail MR < MC and would not be produced.
marginal cost:	Marginal cost (MC) is the change in total cost associated with producing an additional unit of output; computed by dividing the change in total cost (∆TC) by the change in output (∆Q): MC = ∆TC ∕ ∆Q = ∆TVC ∕ ∆Q. More formally, marginal cost is the derivative of a total cost (or total variable cost) function.
marginal factor cost:	See marginal resource cost.
marginal efficiency of capital:	The marginal efficiency of capital (mec) is the term John Maynard Keynes used to refer to what is now more commonly known as the expected rate of return on investment. See expected rate of return.
marginal physical product of labor:	The marginal physical product of labor (MPPL) is the additional output produced by an additional unit of labor; computed by dividing the change in total output (∆Q) by the change in labor (∆L): ∆Q ∕ ∆L. Marginal physical products can also be calculated for capital (∆Q∕∆K). See also average physical product of labor and open the file APPL and MPPL curves for more discussion.
marginal productivity theory of income distribution:	The marginal productivity theory of income distribution concludes that competitive markets will result in income [Y] being distributed to resource [R] owners in proportion to the values of the marginal productivities of the resources they own. [VMPR = P × MPPR and Y = VMPR×R]. See also Clark-Wicksteed theorem.
marginal propensity to consume:	The marginal propensity to consume (MPC) is the change in consumer spending that follows a small change in disposable income (MPC = ∆C ∕ ∆Yd.). [More formally, the marginal propensity to consume is the first derivative of a Keynesian consumption function.] Note that the marginal propensity to consume + the marginal propensity to save = 1 in a simple Keynesian model.
marginal propensity to save:	The marginal propensity to save (MPS) is the change in saving brought about by a small change in disposable income (MPS = ∆S ∕ ∆Yd.). More formally, the marginal propensity to save is the first derivative of a Keynesian saving function.
marginal rate of substitution:	The marginal rate of substitution is the ratio at which people are indifferent about trading good B for good A, or vise-versa. The marginal rate of substitution is the slope of an indifference curve. See also preference function.
marginal rate of transformation:	The marginal rate of transformation (MRT) is the absolute value of the slope of a production possibilities frontier, and reflects the relative opportunity costs of producing alternative goods.
marginal resource cost:	Marginal resource cost (MRC) is also known as marginal factor cost, and is the additional cost incurred in purchasing the services of an additional unit of a productive input. MRC is computed by dividing the change in total cost of production (∆TC) by the change in input (∆N): that is, ∆TC ∕ ∆N; also computed by dividing the change in total variable costs of production (∆TVC) by the change in input (∆N): that is, ∆TVC ∕ ∆N.
marginal revenue product:	Marginal revenue product (MRP) is thee additional total revenue generated by an added unit of a variable input. MRP is computed by dividing the change in total revenue (∆TR) by the change in input (∆N): that is ∆TR ∕ ∆N; or by multiplying marginal revenue by the marginal physical product of a resource: that is, MR × MPPn.
marginal revenue:	Marginal revenue (MR) is the additional revenue associated with selling an additional unit of output, and is computed by dividing the change in total revenue by the change in output: MR = ∆TR ∕ ∆Q. More formally, marginal revenue is the derivative of a total revenue function.
marginal social benefits:	Marginal social benefits (MSB) are the sum of decision-makers’ marginal private benefits from an activity, plus the marginal external benefits, if any, from consuming additional units of commodities or services.
marginal social costs:	Marginal social costs (MSC) are the sum of decision-makers’ marginal private costs plus any marginal external costs generated from an activity.
marginal tax rate:	The marginal tax rate is the percentage tax collected from an extra dollar of the taxable base. For example, if the tax base is income (or sales), then the marginal tax rate is the amount of tax per each extra dollar of income (or sales).
marginal unit of a variable:	The marginal unit of a variable is the extra or incremental unit of that variable. Open the at the margin file for more discussion.
marginal utility:	Marginal utility (MU) is the added utility or satisfaction derived by a consumer from the consumption of an additional unit of a good. Click on the paradox of value link to read about a comparison between total and marginal utilities. Also, check the link on marginal utility for more information on maximizing and balancing marginal utilities.
marginalism:	Marginalism is the idea that decisions are based on the effects of small changes from a current situation. Open the at the margin file for more discussion.
marginalist revolution:	The marginalist revolution began with the use of calculus in economic analysis, first pioneered in France by A. Jules É. Dupuit and A. A. Cournot, and then popularized by Carl Menger in Austria, Leon Walras in France, and William Stanley Jevons in England. Most specialists in the history of economic thought view the dawn of the marginalist revolution as marking the end of classical economic analysis (Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill), and the emergence of neoclassical economic theory as the dominant economic paradigm.
market basket:	A market basket is a collection of goods intended to represent the average goods purchased by the average members of some defined group. Calculating and indexing the changes in the total prices required for purchase of a market baskets is one technique used to estimate inflation.
market capitalization:	The market capitalization of a corporation is defined as the price per share of stock times the number of shares of stock outstanding and is approximates the value of the firm to its stockholders or potential owners.
market clearing:	Market clearing refers to the condition that the quantities supplied and demanded in a market are equal. See equilibrium price and equilibrium quantity.
market concentration ratio:	See concentration ratio.
market demand curve:	A market demand curve is a graphic representation totaling all individual demand curves, and is derived for most common goods by horizontally summing all individual demand curves.
market economies:	Market economies are systems that rely on market interaction of supplies and demands to resolve the economic problem; the price system is used to coordinate the diverse plans of consumers and producers.
market equilibrium:	Market equilibrium occurs when neither shortages nor surpluses exist because at the prevailing price/quantity combination, quantities supplied and demanded are equal. Graphically, this is the point where the demand and supply curves intersect.
market failure:	Market failure occurs when economic problems as resolved by private decision-makers are inefficient, unstable, or viewed as inequitable. A sector of the economy exhibits a market failure when prices do not accurately reflect the true social cost of producing a good. Allocative market failures occur when the price system yields inefficient results, and emerge from (a) the exercise of market (monopoly) power, (b) externalities, (c) public goods subject to nonexclusion and non-rivalry, and (d) asymmetric information – when one party to a transaction has relevant information not possessed by the other bargaining party.
market fundamentalism:	Market fundamentalism is a theory that the relative price of any financial asset reflects the present value of the income stream expected from ownership of the asset, discounted appropriately for the asset’s specific risk, maturity, and tax consequences. See also efficient markets and present value.
market order:	A market order is an instruction issued by a financial investor to a broker to either buy or sell a security.
market period:	A market period is an analytical interval too short to allow changes in decisions about amounts of output, so that only prices may be varied. This concept was developed by Alfred Marshall, and is sometimes called the immediate period.
market power:	A seller possesses market (monopoly) power if the seller can force prices up by restricting output. A buyer possesses market (monopsony) power when the buyer can reduce prices by limiting its purchases.
market price:	The market price is the price confronted in the market whether we buy or not.
market risk:	Market risk is the risk to an investor that the entire financial market may plummet, in which case perfect diversification yields the average of the decline in prices across the entire market. The possibility of a stock market crash is an example of market risk. Diversification may reduce specific risk, which is the risk that a particular asset will decline in value, but not market risk. Market risk is also known as systemic risk or systematic risk. See also specific risk.
market share:	Market share is the percentage of an industry’s total dollar sales received by a single firm.
market structure:	The number and relative sizes of firms in a given industry. See also structure-conduct-performance paradigm.
market supply curve:	A market supply curve is a figure derived by horizontally summing all individual supply curves.
market system:	See capitalism, free enterprise system.
markets:	Markets are social mechanisms that enable buyers and sellers to strike bargains and make exchanges of goods and resources.
mark-up pricing:	Some firms seem to mark costs up by a fixed percentage to set their prices, a procedure known as mark-up pricing. Contrast with competitive or marginal cost = marginal revenue pricing, and see also cost-plus pricing and cost-push inflation.
mark-up pricing:	Mark-up pricing is a pricing strategy in which the price charged is a selected percentage greater than average production costs. Mark-up pricing will maximize profit only if the percentage mark-up selected yields conformity to the MR=MC rule. See also contribution pricing.
Marshall, Alfred:	See Alfred Marshall [1842-1924].
Marshallian adjustment mechanism:	Alfred Marshall theorized that economic agents adjust quantities (rather than prices) to clear competitive markets that are out of equilibrium. Disequilibrium exists if, at the current quantity being sold, the supply price differs from the demand price so that a market experiences a surplus or a shortage. In a Marshallian adjustment, the quantity supplied will adjust until demand and supply prices are equal. Quantity increases in response to a shortage, and decreases in response to surpluses. Contrast with the Walrasian adjustment mechanism, which posits that the market price will fall if the quantity supplied exceeds the quantity demanded, and that the market price will rise if the quantity demanded exceeds the quantity supplied.
Marx, Karl:	The German philosopher Karl Marx (1818-83) is best known for being the founder of modern communism. His best known works are The Communist Manifesto (coauthored with Friedrich Engels in 1848), and the three volumes of Das Kapital (1867-1894) in which Marx critiqued the nature of capitalism, theorized about the historical stages of economic development, and predicted the decline and fall of capitalism. See also this biographical sketch of Karl Marx and this summary of his theory of economic development.
Marxism:	Marxism is the political and economic philosophy of Karl Marx. Marxism regards capitalism as an unjust economic system where the working class is exploited by the capitalists and characterizes communism as the economic system that will inevitably supersede capitalism. See the biographical sketch Karl Marx for more information.
matching pennies:	This is a type of zero-sum game in game theory in which two players apply mixed strategies by randomly choosing between two possible moves. Both players must flip their pennies to either heads or tails before simultaneously revealing their choice to each other. If both players’ moves match i.e. both make the same choice (heads or tails) then one of the players wins (+1 for one, -1 for the other); however, if their moves don’t match, then the other player wins (-1 for one, +1 for the other). Thus, this is a zero-sum game, as one player’s gain precisely equals the other player’s loss. Moreover, this game has a mixed-strategy Nash equilibrium as both players choose heads or tails at random, and lack any incentives to change their strategies. See also game theory, mixed strategies, Nash equilibrium, and zero-sum game.
materialism:	In philosophy, materialism refers to a perspective that physical and chemical laws perfectly determine the course of events, both in the past and into the future. See also determinism and Laplacean demon.
materialistic:	Social philosophers often use the term materialistic to describe the behavior of people who consume vast amounts of goods and services and seem insatiable in their acquisition of material wealth.
maturity:	The maturity of a bond or other obligated payment is the due date of the final payment that retires all obligations for payment.
maximizing behavior:	Maximizing behavior occurs when Homo sapiens strive to maximize pleasure and to minimize pain. Many economic models assume that individuals almost automatically make efficient calculations at the margin that can be expected to yield optimal outcomes. See also marginalism.
maximum maximorum:	See bliss point. See also optimum optimorum.
measure of economic welfare	The measure of (net) economic welfare (MEW) was an early attempt to adjust gross domestic product data by deducting from GDP items that do not contribute to economic welfare and adding items that do, but which are not counted in GDP. The MEW, developed by, among others, James Tobin (a Nobel Prize winner) was a 1960s precursor of the United Nations’ Human Development Index (HDI), and the Genuine Progress Indicator (GPI) published by the non-profit agency Redefining Progress.
measure of value:	The use of money as a measure of value (also known as unit of account) is the function performed by money as a common denominator through which the relative prices of goods are stated. This reduces the information costs associated with exchange.
mechanism design theory:	Mechanism design theory is a modern structureà conduct à performance [SCP] paradigm. Mechanism design theory involves building models of how differences in the information available to various potential transactors and differences in their incentives [structure] yield specific types of institutional mechanisms [conduct, in the form of, e.g., structured negotiations or auctions or markets], thereby yielding stable or unstable equilibria and attendant efficiencies or inefficiencies [performance]. For more information, read this structureà conductà performance link, and see also game theory.
median voter model:	The median voter model suggests that the median voter must be captured to achieve a majority of the vote, and attempts to explain why political parties and candidates tend to be so similar, and why two parties tend to dominate electoral processes.
mediation:	Mediation is the process of attempting to resolve disputes by having a neutral third-party evaluate the positions of the disputants and provide advice. Like arbitration, mediation can help avoid protracted and costly litigation, but unlike arbitration, the disputants are not compelled to accept the analysis or advice of a mediator. See also arbitration.
Medicaid:	Medicaid is a federal program that mandates shared state and federal funding for health care for the poor.
Medicare:	Medicare is a federal government plan that subsidizes medical insurance for disabled workers and most Americans over 65 years of age.
medium of exchange:	Money functions as a medium of exchange when money is exchanged for goods or resources. In a barter economy, goods or resources are exchanged directly for other goods or resources. The use of money as a medium of exchange is the most important service that money provides because it finesses the double coincidence of wants required for transactions to occur