Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

objectivism:	Objectivism is a philosophy often associated with laissez faire capitalism and rugged individualism, and is also known as Randian objectivism because it was elaborated by the novelist Ayn Rand. Objectivism holds that the sole moral purpose of one's life is to achieve personal happiness, which Rand purports to require only the pursuit of rational self interest. Rand characterized the "virtue of selfishness" as the polar opposite of altruism.
obligation:	An obligation is legally binding commitment to pay certain amounts at specified times. Government obligations, however, may take the form of legally required outlays, immediately or in the future.
obsolescence:	Obsolescence occurs when goods or resources decline in value because of changes in the social and economic environment rather than changes in value caused by physical deterioration. For example, the best cell phones of a decade ago would not be as valuable today, even if “brand new,” because of technological improvements that have made more modern cell phones more powerful multi-purpose instruments available at much lower costs than previously.
Occam’s razor:	Occam’s razor, also known as the “principle of parsimony,” suggests that the simplest workable theories are also the best and most useful. (Sometimes spelled Ockham, after William of Ockham.)
occupational crowding:	Occupational crowding occurs when women and members of other disadvantaged groups are forced into low-wage occupations.
occupational discrimination:	Occupational discrimination is the exclusion of members of certain groups (usually by sex, race, or ethnicity) from particular occupations.
occupational licensing:	Occupational licensing is a requirement that a worker receive government certification before being employed in certain occupations. Workers without such licenses can be jailed or fined. The fields of law or medicine, for example, require licensing. Occupational licensing may be efficient in fields in which clients or employers are vulnerable to problems of asymmetric information, but some licensing is sometimes condemned as an inappropriate barrier to entry into an occupation.
Occupational Safety and Health Administration:	The Occupational Safety and Health Administration is a federal agency that regulates workplace safety and health.
offer curve:	An offer curve is a curve connecting the maximum amounts of a good or resource that a given buyer or seller is willing to exchange for given quantities of another good or resource. In international trade, the willingness to import or export a good at alternative relative prices is illustrated with an offer curve.
Office of Thrift Supervision:	The Office of Thrift Supervision (OTS) is a branch of the U.S. Treasury that regulates all federal and most state savings banks and savings & loan associations. The Office of Thrift Supervision succeeded the Federal Home Loan Bank Board, which Congress shut down following the near-collapse of the saving and loan system in the 1980s.
offset policy:	An offset policy is a market-based approach to pollution abatement. The offset policy allows a new firm to enter an overpolluted area by inducing other firms to reduce emissions. Environmental quality must show a net improvement, and the new firm must meet all individual standards imposed on existing firms. Offset policies stimulate markets for tradable pollution rights. Open the abatement file for more discussion, and see also externalities, negative externalities, Coase theorem, effluent charges, and tradable pollution rights. See also the link on U.S. Environmental Policy.
off shore banking:	An offshore bank is a bank located outside the country of residence of the depositor; typically in a low tax area (sometimes called a tax haven) that provides financial and legal advantages to depositors. These advantages include privacy or secrecy, relatively little legal regulation or taxation, easy access to deposits, and protection against local political or financial instability.
off-shoring:	A domestic firm is engaged in off-shoring when it reduces production costs by outsourcing to foreign suppliers or establishes production facilities across international borders.
Okun’s law:	Okun’s law is the assertion that output tends to grow relatively more rapidly than employment as an economy begins to recover from a recession. This statistically observed effect may be attributable to the fact that during an economic downturn, low level employees who are actually doing “hands-on” work tend to be laid off moreso than office workers and supervisors. Consequently, output rises more than proportionally when the “hands-on” workers are reemployed. This “law” is attributed to Arthur Okun (1928-80), who headed the Council of Economic Advisors during President Lyndon Johnson’s administration.
Olduvai theory:	Olduvai theory is an apocalyptic prediction that energy production levels will, by 2030, fall to the energy production levels of 1930, thereby inducing the end of the “Industrial Civilization.” See also Hubbert’s pimple.
oligarchy:	In an oligarchy, autocratic rules are made by members of an entrenched elite group.
oligopoly:	An oligopoly is a market in which several large firms control most of an industry’s output. The few firms that comprise the industry must each consider other firms’ reactions before setting its policies; mutually interdependent behavior is the unique characteristic of oligopoly; the importance of predictability leads to cooperation between firms.
oligopsony:	An oligopsony is a market in which several large entities control so much of the purchasing in a market that they can negotiate significant cost reductions relative to outsiders. For example, HMOs and other health insurers, including Medicare and Medicaid, have been so successful in negotiating discounts for standard drugs and medical care that uninsured non-indigent individuals are about the only people who pay full retail prices for reasonably standard medical care.
Omnibus Budget Reconciliation Act:	At the urging of President Clinton and Secretary of the Treasury Robert Rubin, the Omnibus Budget Reconciliation Act (1993) was enacted to reduce the budget deficit significantly by both bringing in more revenues (through a more progressive tax system) and cutting government spending. By 2000, government spending relative to GDP has shrunk to roughly 18.5%, budget deficits had been eliminated, and the US national debt was being reduced. These trends reversed during 2001-2004. See also Rubinomics.
one price, law of:	The strong version of the law of one price (sometimes known as global monetarism) is a theory that assumes free and frictionless trade, and asserts that the relative prices of goods and resources will be identical in every market everywhere. A weak version of the law of one price asserts that goods in any country will be equal in price to the price in all other countries after adjustments for exchange rates, necessary transactions costs, and artificial barriers (e.g., tariffs or quotas) that hinder trade. Arbitrage eliminates price differentials. See also arbitrage, efficient markets, purchasing power parity, and rational expectations.
OPEC:	See Organization of Petroleum Exporting Countries.
open economy:	A nation has an open economy if it engages in international trade. See also autarky and closed economy.
open market operations:	Open market operations are the buying and selling of U.S. Treasury bonds by the Federal Reserve System. Open market operations determine the size of the money supply by altering the amounts of monetary base, and consequently, the amounts of reserves in the banking system. The excess reserves banks acquire when they sell bonds to the FED are loaned, and each new loan made is newly created money.
open position:	An economic agent has taken an open position if it promises to deliver a specific amount of a specific asset (e.g., foreign exchange) on a specific date, but does not currently own the asset, i.e., the position is not “covered.” See also cover, short sell, and naked short sell.
open shop:	An open shop is a firm that employs workers without considering union membership. States with “Right-to-Work” laws require all places of employment to be open shops. See also right to work laws and contrast with agency shop, closed shop, and union shop.
open-sourcing:	Open-Sourcing, or the open-source movement, is a method of sharing ideas, information, and technological innovations over the internet that is characterized by the collaboration of a large number of people. The open-source movement can be divided into two main varieties: the intellectual commons movement, and the free software movement.
ophelimité:	Ophelimité is a term proposed by Vilfredo Pareto to replace the word “utility”, which Pareto viewed as ambiguous.
opportunity cost:	The opportunity cost of any good or activity is the value of the next best alternative foregone, and is also known as alternative costs or economic cost. Opportunity costs include both implicit costs and explicit costs. Click on the link for more information on opportunity costs.
opportunity cost of money:	Keynesians view the true price of money as the interest rate, since the closest alternatives to money as an asset are stocks, bonds, and other assets that pay interest. Monetarists argue, instead, that the true price of money is the purchasing power of money since money is a substitute for all other goods and assets, and can be calculated as the reciprocal of the absolute level of average nominal prices.
opportunity set:	The opportunity set is a “budget” (broadly construed) and is the aggregate of all the choices from which an individual may choose, as bounded by the constraints of income, interest rates, wealth, information, time, health, environment, genetic endowments, and laws and regulations.
optimal pollution:	Optimal pollution requires the marginal social benefit of abating pollution to equal the marginal cost of abatement (MSB=MSC). Click on the link to explore whether zero pollution really is the optimal amount.
optimal scarcity:	Optimal scarcity means that any commodity used as money cannot be too common, nor can it be counterfeited easily. Historically, the commodities that best combine the characteristics for use as money are rare metals, especially gold and silver.
optimal tariff:	A tariff is an optimal tariff if, per the mechanics of profit maximization by a monopoly, it enables exploitation of the market power of a country that is a significant buyer or seller of a good in world markets, thereby improving the country’s national welfare. This improvement in national welfare only takes place if the gain in terms of trade exceeds the losses that stem from the smaller volume of trade. More generally, a system of taxes or tariffs would be mathematically optimal if it corrected perfectly for externalities and perfectly exploited market power, thereby yielding Kaldor-Hicks improvements in the Paretian efficiency of a country.
optimal tax structures:	An optimal tax structure would yield relative prices that equated marginal social benefits and marginal social costs, and would otherwise generate tax while creating only income effects, not substitution effects. See also tax neutrality.
optimization:	Optimization is the process of maximizing any constrained function. Most economists assume that human decisions entail optimization wherein a goal [e.g., satisfaction or profit] is maximized subject to the opportunity set – constraints on the opportunities available [e.g., an individual’s budget, the competitive environment facing a firm, and limited information and time are all constraints.] Optimization for the individual (satisfaction or utility) or firm (profit) occurs requires the marginal personal benefits and the marginal personal costs to be equated (MB=MC). Optimization for the society at large requires the marginal social benefits and marginal social costs of every activity to be equated (MSB=MSC). If MB ≠ MSB or if MC ≠ MSC, then private decisionmaking results in a market failure. See also law of equal marginal advantage.
optimum optimorum:	The optimum optimorum is the most advantageous of all locally available choices. This term is used when choosing the global optimum across a group of locally optimal points. For example, locally (on a given day) the most satisfying use of eight hours may appear to be loafing, but globally (across a longer period) that day might have been better spent studying or working. The optimum optimorum is the best choice from the longer perspective.
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 (the striking 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. A European option may be exercised only on the date specified in the option contract. Options may be used to reduce risk, or to increase risk through leverage. Example: A firm is due to be paid in euros in two months can hedge against exchange rate risk by selling euro future put options short. Or an investor may absorb risk in the hope of leveraged profit by selling a call option for an asset not yet owned. See also American option, European option, put, call, hedge, short, and long.
ordinal measurement:	A variable is ordinally measurable if ranking is possible for values of the variable. For example, a gold medal reflects superior performance to a silver or bronze medal in the Olympics, or you may prefer French toast to waffles, and waffles to oat bran muffins. All variables that are cardinally measurable are also ordinally measurable, although the reverse may not be true. Open the cardinal vs. ordinal file for more discussion, or see also cardinal measurement.
organic growth:	Organic growth refers to the increase in revenues or total profits when a corporation increases its size and influence through investments funded by retained earnings, rather than mergers or acquisitions. Contrast with inorganic growth.
Organization of Petroleum Exporting Countries:	The Organization of Petroleum Exporting Countries (OPEC) is a cartel organized among eleven nations. OPEC members produce most of the world’s oil and control most of the world’s oil exports. See also cartel.
orthogonal:	Orthogonal is a mathematical adjective for lines, vectors, or matrices which are “perpendicular” [at right angles]. The inner (dot) product of orthogonal vectors equals zero. Only square matrices can be orthogonal, and an additional requirement is that the matrix times itself must be an identity matrix with ones along its diagonal and zeros everywhere else. In economics, orthogonal is used, for example, when speaking of projectors. In the vernacular, a tangential or irrelevant comment or argument is sometimes described as orthogonal.
outlay:	An outlay is a specific payment by government for a purchase or transfer payment. The term government outlays refers to the sum of all such payments during a given period.
output gap:	The term output gap is a synonym for GDP gap.
outputs:	Outputs are the results of production by which materials are transformed in form, place, time, or possession to become more valuable.
outsider:	[1] An outsider is an individual who lacks power within an organization or market, or who is not privy to certain information that is proprietary to the organization. [2] In a dual labor market model, an outsider is a worker in the secondary sector who earns lower wages in a less desirable job. See also asymmetric information, and contrast with insider and transparency.
outsourcing:	The term outsourcing refers to attempts by a firm to reduce costs by contracting with another firm to do work previously done internally, within the firm. Outsourcing across international borders has been increasing dramatically in recent years, and has become a thorny political issue.
overconfidence:	Selective memory and hindsight bias contribute to a human tendency to be, on average, overconfident, which means that on average, individuals perceive themselves as more likely than is the average person to succeed as investors, for example, or to correctly solve a complicated problem or to correctly analyze a complex situation.
overfull employment:	According to natural rate theory, overfull employment occurs if frictional unemployment is artificially driven down by unexpected increases in the price level caused by excessive Aggregate Demand. Automatic pressures ultimately reduce output back to a full employment level at a higher price level when workers adjust after realizing that they have been fooled. Alternatively, overfull employment can occur as a result of governmental policies that compel people to work who would not voluntarily work at the offered wage rate. Examples would include slave labor camps in the USSR during the dictatorship of Joseph Stalin, or a military draft.
overhead costs:	Overhead costs [also known as “sunk” or “fixed” costs] are costs incurred even if a firm’s output is zero, and are irrelevant for rational decision-making. See also fixed costs.
overheating:	“Overheating” is a term that describes an economy in which Aggregate Demand is growing so rapidly, relative to potential output (Aggregate Supply) that excessive inflation seems unavoidable.
overshooting:	Overshooting refers to the tendency for prices of financial assets to increase more immediately or in a very short time frame than they will across a longer period in response to favorable new information, and the tendency for asset prices to fall more in the short term than they will across longer periods in response to given amounts of unfavorable news.
over-the-counter market:	The over-the-counter market (OTC) is a secondary market in which securities are bought and sold by dealers who “make a market” by buying and selling to price takers. The OTC market is known for being far riskier and more volatile than most other secondary markets, e.g., the New York Stock Exchange.
overtime:	Overtime refers to hours of work that exceed standard working hours. In the United States, private sector employees paid hourly usually must be paid 150% of their normal hourly wage rate when they work more than 40 hours per week.