Pacific Rim:

The Pacific Rim is a term designating the countries are west of North America and along the Pacific Ocean. The term is usually applied to developed or rapidly developing countries such as Japan, China, Malaysia, Indonesia, Taiwan, Hong Kong, and South Korea. Many forecasters believe that world economic activity will increasingly be centered in this region within the next few decades.

paper balances:

Paper balances are monetary deposits not backed by tangible currency, but which instead exist only in accounts in computer files or on paper. For example, banks do not hold all their customers’ deposits as cash, nor does the Federal Reserve System hold cash to back up all the bank reserves it holds; such accounts are “paper balances.”

par value:

Par value is the “face” value of a financial instrument, and frequently has little or no effect on the market price of the instrument. Common stock, for example, may have a par value of $1 per share, but market value is largely determined by the discounted present value of the income stream associated with the stock. Another example: the market value of a discount bond is the face value after accounting for its relative riskiness, time to maturity, and prevailing market interest rates.

paradigm:

related terms:

school of thought

weltanshauung

gestalt

model

A paradigm comprises a shared collection of beliefs that shape both our thoughts about how things work and our actions. Broad paradigms may encompass what might be viewed as sub-paradigms, or schools of thought. For example, religions are usually paradigmatic. Belief in science and logic is a widely shared paradigm. Paradigms provide frameworks for how to think and act, but can prevent us from properly processing information that might improve comprehension of how things work. The change of a paradigm may be either evolutionary, or radically revolutionary. Today’s myths were often the commonsensical “truths” of an earlier era. For example, Ptolemaic and Copernican views of the cosmos were sequentially dominant paradigms, but incorrect ideas imbedded in these earlier paradigms were ousted only slowly, while apparently truer parts were absorbed into the relativism of Einstein and its modern variants. Scientific disciplines may emphasize slightly differentiated models. One important paradigm encompasses classical and neoclassical economic theory. Keynesian theory represents another economic paradigm, as does Marxism.

paradox of thrift:

The paradox of thrift is the possibility suggested by Keynes that if investment is positively related to national income, then an increase in saving at all income levels (depicted by an upward shift of a positively-sloped saving function in a Keynesian-cross model) may cause equilibrium income or output to decrease, and could result in less saving rather than more.

paradox of value:

The paradox of value, also known as the diamond-water paradox, was first described by the Greek philosopher Aristotle, and addresses the question of why necessities such as water are valued (priced) so cheaply, while frivolities like diamonds are highly valued and command outrageous prices. The paradox of value is resolved by recognizing that necessities may yield more total utility than luxuries, but that people adjust their purchases so that prices reflect marginal utility. See the law of equal marginal utilities per dollar. Click on the link paradox of value for more information.

Pareto efficiency:

Pareto (global) efficiency is a condition under which it becomes impossible for anyone to gain unless someone else loses. Pareto efficiency requires (a) that from given resources and states of technology, the value of output be maximized; (b) that production costs be minimized for each form of production, given the outputs of all other types of products, and (c) that all possible gains from exchange have occurred. Pareto efficiency does not address questions of equity; e.g., the distributions of income or wealth. Also called Pareto optimality or economic efficiency. Click on the link for more information on the components of economic efficiency.

Pareto move:

A Pareto moveor Pareto improvement occurs when there is a change in any activity (e.g., a market transaction or change in government policy) that harms no one and helps at least one individual. The resulting situation is described as Pareto superior.

Pareto sub-optimal:

See sub-optimal.

Pareto, Vilfredo

Vilfredo Pareto [1848-1923] was an engineer during the early years of his career, but spent a decade as a pioneering economic theorist beginning in his forties, ultimately spending the rest of his life as a sociologist. As an economist, he is most noted for his refinements of the theory of efficiency and social welfare, and for his polishing parts of general equilibrium theory, which had been developed by Leon Walras, his predecessor at the University of Lausanne. As a sociologist, Pareto is remembered most for developing the 80:20 rule, one application of which is known as Pareto’s law of distribution.

Pareto’s law of distribution:

Pareto’s law of distribution is the assertion by the Italian economist-sociologist Vilfredo Pareto that relative distributions of income or wealth are unaffected by the economic system (e.g., socialism or capitalism), and that governmental attempts to change these distributions are futile because the income distribution will quickly revert back to a social equilibrium. In effect, Pareto was arguing that competition for “shares of the pie” will cause the shape of a Lorenz curve to be very similar in all societies. See also Lorenz curve and Gini coefficient.

parity:

Parity is the idea that government subsidies should stabilize prices for agricultural goods relative to other prices.

partial equilibrium analysis:

Partial equilibrium analysis is a method of economic analysis which looks at the direct effects of some chosen variables on others, assuming other influences constant. Contrast with general equilibrium analysis.

partnership:

A partnership is an unincorporated firm owned by two or more persons.

part-time employment:

A job is considered part-time employment when a worker works fewer than 40 hours per week.

part-time unemployment:

Part-time unemployment exists when some employees [especially part-time workers] wish to work more hours. These workers are counted as “employed” when the official unemployment rate is computed, causing understatement of the true unemployment rate.

party cycle theory:

Party cycle theory is the hypothesis that macroeconomic activity is strongly influenced by political competition. The health of the economy is assumed affected by which party is in power [e.g., Democrat or Republican] because of the parties’ differing positions on taxes, regulations, government spending, transfer payments or other economic policies.

passive policy:

Passive policymaking entails setting permanent policies (e.g., a monetary growth rule) and allowing the market system to adjust to any temporary shocks to the economy.

patents:

Patents are legal barriers to entry that extend to their holders a renewable right to produce an economic good for 17 years (renewable for an additional 17 years) and that prohibits the production of the good by other firms. Patents are intended to promote research and development, and the innovation of new goods and technologies.

paternalism:

Paternalism occurs when people in positions of authority make decisions for other people because those empowered to make such decisions are presumed better able to fine-tune decisions that serve the interests of the affected parties than are the affected parties themselves. A government is practicing paternalism when laws or regulations reflect policymakers’ views about what is good for people (e.g., compulsory grade school education) and what is bad for people (e.g., psychoactive drugs), instead of allowing individuals to choose for themselves. See also asymmetric paternalism, libertarian paternalism, merit good, and merit bad.

path dependence:

Path dependence is the theory that even small random disturbances can change the course of history. The conventional QWERTY layout of computer keyboards, for example, is a consequence of the way mechanical typewriters were designed a century ago, allegedly to minimize entanglements of typewriter keys by slowing the typing process down. The QWERTY configuration still dominates today, despite its inefficiencies, because this old convention has considerable inertia, and change is a costly process. See also chaos theory, hysterisis, and historicism, and contrast with determinism.

pay-for-play:

See bribery.

payola:

See bribery.

payoff matrix:

In game theory, a payoff matrix is a table that matches sets of gains or losses when “players” choose from the options available to them. The payoff to any player from selecting a particular option depends on the option(s) selected by other players.

payroll taxes:

Payroll taxes are taxes on the wages a firm pays its employees, and include Social Security taxes (FICA), industrial compensation (to pay for on-the-job injuries), and unemployment compensation. Most economists conclude that the payroll taxes are largely backward shifted so that employees bear the tax burden. See also tax burden, forward shifting, and backward shifting.

peak:

The peak is the phase of the business cycle when a preponderance of measures of economic activity are at their high points. See also recession, depression, trough, and boom.

peak load pricing:

Peak load pricing is a strategy intended to reduce the need for productive capacity by shifting purchases of a good or service from periods when demands are above average to periods when demands are below average. For example, a peak load pricing strategy entails charging more for cell phone calls during peak business hours and less for calls at night or on weekends. Peak load pricing for electricity is widespread in Europe, and peak load pricing for parking has been proposed as a strategy to reduce traffic congestion in central cities. Restaurants and theaters also use a form of peak load pricing by reducing prices for “early bird” specials or matinees.

peak-end rule:

The peak-end rule is the idea advanced by some behaviorists (notably, Daniel Kahneman, a psychologist who won the Nobel Prize for Economics in 2003) that human happiness depends less on an individual’s level of income or consumption than it does on whether the individual is gaining or losing income or consumption. For example, an individual is likely to be far less happy with a current annual income of $100,000 if income in the preceding year were $150,000 than if income had been $80,000 in the previous year. The peak-end rule is a type of reference dependence, which more broadly suggests that how people evaluate a situation is contextual, and depends on whether they perceive their circumstances as improving in quality or descending. Open the prospect theory link for more discussion. See also behavioral economics.

pecuniary externalities:

Pecuniary (monetary) externalities occur when one person’s actions reduce the value—but not the physical characteristics—of another’s property. For example, a firm with a contract to provide certain services may suffer pecuniary externalities when the contract expires and another firm submits a lower bid to perform the same services. Most economists do not regard pecuniary externalities as a market failure.

pegging:

Pegging is the policy whereby a nation sets a fixed value for its currency relative to the currency of another nation. For example, the currencies of many Asian nations are now informally pegged to the Chinese yuan.

Peltzman effect:

The Peltzman effect is the tendency for people to engage in riskier or more dangerous behavior in response to regulations intended to increase safety. Named after Sam Peltzman, a University of Chicago economist, after he published studies suggesting, e.g., that safety belts and airbags intended to make cars safer have increased accidents and pedestrian fatalities because cars are driven more recklessly when drivers feel safer. This led economist Gordon Tullock to propose inserting spring-loaded spears in steering columns as a safety device that would protect pedestrians and passengers of other vehicles.

penetration pricing:

A strategy of penetration pricing is pursued when a firm tries to secure market share when it enters a market by slashing prices significantly below prices charged by established firms. Penetration pricing is intended to secure repeated sales to customers pleased by the relative quality of the firm’s product.

pension plan:

A pension plan is a financial agreement that ensures periodic payment of specified funds to a retired worker or the retired worker’s dependents. Pension plans can be provided by government (e.g., Social Security) or by employers, or they may be sold as savings plans (annuities) to individuals by private insurance organizations.

pent-up demand:

Pent-up demand is exceptionally strong demand that occurs when a product becomes available for purchase after an extended period during which it was unavailable for most consumers.

per capita income:

Per capita income is a crude measure of economic well-being computed by dividing National Income by the population.

per se doctrine:

The per se approach to antitrust law asserts that certain contracts, combinations, or business practices seem inherently so contrary to competition that they are illegal per se.

perceptual price points:

A perceptual price point is a price at which many consumers purchase quantities of goods that are significantly greater than purchases at minutely higher prices. For example, 99 cents and $19.99 are common perceptual price points because many consumers apparently view $1 and $20 as significantly higher prices that discourage purchases. The existence of perceptual price points is an anomaly for standard economic theory. See also framing effect, prospect theory and standard economic theory.

perestroika:

The restructuring of the Soviet Union economy and bureaucracy that began in the mid 1980s under President Gorbachev, and which in 1989-90 resulted in the dissolution of the Soviet Union, which split into 15 separate countries..

perfect competition:

A market operates in perfect competition if it meets the assumptions that (a) buyers and sellers are so numerous relative to the market that no single party can noticeably influence price, (b) economic agents view goods as homogeneous so that non-price competition is impossible, (c) there is freedom of entry and exit in the long run, and (d) contracting costs are zero. Perfect information and perfect mobility are assumptions that yield an absence of transaction costs and thus, zero contracting costs. See also pure competition, which differs only in that transactions costs are not precluded.

perfect complements:

Goods are perfect complements if a consumer views a good as worthless unless consumed with a fixed amount of the complementary good. For example, have you ever thrown away a perfectly good sock because its mate is missing? Socks matched by color and pattern are perfect complements for most of us unless you are color blind or match by thickness alone.

perfect information:

See complete information

perfect mobility:

Perfect mobility implies that transportation costs are zero, an assumption common to many economic models. See also complete information and zero transaction costs.

perfect price discrimination:

A firm practicing perfect (first-degree) price discrimination extracts from all consumers their demand prices for every unit of a good it sells. First degree price discrimination means that all potential consumer surpluses for the amount of the good purchased are transformed into revenues for the seller. See also demand price, consumer surplus, price discrimination, second degree price discrimination, block pricing, and third degree price discrimination.

perfect substitutes:

Goods are called perfect substitutes if a consumer is indifferent between and is consistently willing to give up a unit of one substitute for a fixed amount of the other good, or vice versa. (The marginal rate of substitution between the goods is constant). Ex. A consumer is willing to give up a pound of cane sugar for a pound of beet sugar, or vice versa, if the consumer views the two forms of sugar as perfect substitutes.

perfectly price elastic demand or supply curves:

Perfectly price elastic demand or supply curves are horizontal lines at the current market price; perfectly price elastic demand or supply curves have a price elasticity of infinity at every point.

perfectly price inelastic:

The demand (or supply) of a good is perfectly price inelastic if the absolute value of the elasticity coefficient is 0. Perfectly inelastic demands or supplies are vertical.

performance:

Performance refers to the efficiency of an industry in allocating resources and the profitability of the firms in the industry. The traditional structure à conduct à performance (SCP) paradigm viewed the conduct and performance of an industry as rigidly determined by its structure, but the new industrial organization views conduct and performance as significantly more influenced by the quality of information among rivals and the strategic behavior of rival firms, which is often modeled with the tools of game theory.

perishable goods:

Perishable goods deteriorate rapidly unless quickly consumed (e.g., fresh fruits and vegetables), or they may lose value quickly after being produced (e.g., newspapers and other periodicals). Contrast with durable goods.

perks:

Perks, a contraction of perquisites, refer to employee benefits beyond normal pay and fringe benefits, and tend to be very positively related to hierarchical position in a bureaucracy. Perks for high-level executives in large organizations commonly include such luxuries as compliant subordinates, chauffeured limousines, catered dining, spacious offices with magnificent views, private washrooms, country club memberships, and travel on corporate jets.

permanent income:

Permanent income is the discounted present value of average income expected over one’s lifetime. According to Milton Friedman, permanent income (a synonym for wealth) explains a person’s patterns of consumption and their holdings of money across their lives, and that people attempt to smooth their consumption across time, and are little affected by temporary ups and downs in their annual incomes. This theory is quite similar to the life-cycle hypothesis developed by Franco Modigliani. Open the permanent income figure for more detail.

perpetuity:

A perpetuity is a bond that will pay a fixed amount of money or annuity ($A) each year until it is repurchased by the government that issued it. The price (P) and interest rate (i) on a perpetuity are in accord with the formula P =$A⁄i . If you know the values of two of these variables, the third is easily computed.

personal discrimination:

Personal discrimination is bigotry, and generates inequitable housing conditions, higher prices for comparable goods, reduced medical care, and numerous other social problems.

persuasive advertising:

Persuasive advertising is designed to persuade consumers rather than to inform them, and frequently relies on jingles, endorsements by celebrities, pleasing images, or humor, and is viewed as a socially inefficient waste of resources. See also informative advertising.

pessimistic bias:

1) Pessimistic bias is a tendency for people to view current economic wellbeing as worse than it has been in the past, or the expectation that things will become much worse soon, despite the relatively persistent tendency for average material welfare to improve in most of the developed world across the past two centuries or more.

2) People exhibit pessimistic bias when they view the current economic environment as less certain or entailing greater hazards or costs or fewer benefits than actually exist, or when they consistently expect future events to be riskier or less prosperous than would reasonably be predicted based on recent history.

petrodollars:

Petrocurrency or petrodollars are the dollar-denominated deposits of agents in countries that rely heavily on petroleum exports for their national income. Most petrodollar deposits are held in financial intermediaries not in OPEC countries (e.g., in the United States).

phantom unemployment:

Phantom unemployment refers to people counted as unemployed but who should not be. In some cases people who work in the underground economy “off-the-books” or who are self-employed claim to be unemployed so they can draw unemployment benefits or other government subsidies. In other cases, dishonest non-workers claim to be available for work so they can draw unemployment benefits, even though they do not intend to work and should not even be considered as in the labor force. Both of these groups tend to cause the true unemployment rate to be overstated. See also dishonest non-workers and discouraged workers.

Phillips curve:

A Phillips curve is an inverse statistical relationship between the rate of change of the general price level and the rate of unemployment. In 1959, A. W. Phillips, an English economist, reported an empirical foundation for the idea that policymakers faced a permanent trade-off between unemployment and inflation. The Phillips curve proved highly unstable during the 1970s. See Keynesian Philips Curve

philosophy:

All areas of study derive from philosophy, the term applied to humankind’s earliest attempts to understand how and why. Science is a subset of philosophy that focuses on explanations of how. Economics was termed “moral philosophy” in the time of Adam Smith, and did not emerge as a distinct academic discipline until late in the nineteenth century.

Physiocrats:

The Physiocrats were 18th century French thinkers in one of the earliest schools of  economic thought. A central belief was that all wealth originated from land, and that farming multiplies its value. This group viewed industrialization as not adding to wealth, but only moving it around. These thinkers, led by Francois Quesnay [who “invented” the circular flow model] opposed mercantilist doctrines and tended to favor laissez faire policies and free trade.

picket line:

A picket line is group of people publicly protesting outside a building or business. Picket lines are commonly used by labor unions to indicate displeasure with what union members believe to be unfair treatment.

piece rate compensation:

In a piece rate compensation system, employees are paid per unit of the output that they personally produce. Migrant workers, for example, may be paid based on the amounts of fruits or vegetables they harvest.

piggyback mortgage:

A piggyback mortgage is a second mortgage that is initiated simultaneously with the first mortgage on a property, and is usually an amount not greater than the down payment made by the borrower. Such second mortgages became common in the late 1990s after better credit reporting data enabled lenders to rely less heavily on down payments to avoid adverse selection when borrowers had solid credit records.

Pigou effect:

See real balance effect. The Pigou effect (also known as the real balance effect) is named after Arthur C. Pigou [1877-1959], a contemporary of John Maynard Keynes. Pigou’s discussion of unemployment was the central point of attack on neoclassical macroeconomics by Keynes in his General Theory (1936).

Pigouvian subsidy:

A Pigouvian subsidy is a governmental payment or incentive intended to prompt increased production or consumption of goods that generate external benefits. See also industrial policy.

Pigouvian tax:

A Pigouvian tax is a charge imposed by government that ideally  compensates perfectly for the external costs (negative externalities) associated with producing or consuming a good. Arthur C. Pigou [1877-1959] originated the idea that an appropriate tax yields efficiency by optimally reducing quantities of goods when private decisions would yield production exceeding optimal quantities because of failures to account for negative externalities.

pink collar work:

A pink-collar worker performs jobs traditionally reserved for women. These are jobs that do not generally require as much skill as a white-collar job but is performed in a cleaner or safer environment than those of blue-collar jobs. A secretary, cosmetologist, librarian or maid would be considered a pink-collar job.

piracy:

In the 20th century “piracy” refers to the unlicensed use or production for sale of intellectual property, especially movies, music, and computer software. See also counterfeit goods and “knock-offs.”

planned economy:

A planned economy is an economic system in which government dominates decisions about allocating resources, often through direct control of major resources, especially economic capital and land; planned economies have been, in general, notoriously inefficient and corrupt because of governmental cronyism; common examples in the 20th century have included the Communist economies of the Soviet Union and Maoist China; often considered the opposite of a capitalist economy, in which distributive decisions are made in private enterprise through free-market prices.

planned injections = planned withdrawals:

Planned injections must equal planned withdrawals in macroeconomic equilibrium. Injections include all forms of autonomous spending; withdrawals represent such dilutions from spending streams as saving or taxation.

planned investment:

Planned or intended investment is the amount of investment that business firms desire to make at each level of national income, assuming that business expectations remain unchanged.

planned saving:

Planned or intended saving is the amount of saving desired at each level of national income, assuming that savers’ expectations remain constant.

plant:

A plant is a production facility with a specific location, and may be a center or location for processing, fabrication, assembly, wholesale, or retail.

playing chicken:

“Playing chicken” is a game in which two agents engage in an activity likely to result in serious harm to both unless one of them backs down. For example, two disputants may be and engage in psychological warfare over territory, each close to the other and sitting on a time bomb that will destroy them both along with the disputed territory, unless the other party acquiesces first, stops the clock, and retreats. See also game theory.

plurality:

A plurality voting rule is in effect if the outcome of an election is determined by which side gets the most votes and a majority is unnecessary.

point elasticity:

Point elasticity is an estimate of the proportional responsiveness of one variable to changes in a related variable, and is computed as the percentage change in the dependent variable [the numerator] divided by the percentage change in the independent variable [the denominator]. Such measures are ambiguous, however, because the percentage change for a given upward movement is greater than the percentage change for a given downward movement. Consequently, economists usually use arc elasticity to measure elasticity.

point voting:

A point voting rule exists if each voter is assigned a certain number of votes and can cast them among various electoral issues depending on the intensity of their individual preferences.

policy ineffectiveness

The new classical “policy ineffectiveness” argument flows out of the theory of rational expectations and asserts that decisionmakers will accurately anticipate predictable changes in macroeconomic policy and will insulate themselves perfectly against any such policy changes focused on adjusting aggregate demand. Consequently, macroeconomic policy can have no “real” effect unless the policy is a completely unpredictable surprise to private decisionmakers. See also rational expectations.

political allocation:

Political business cycles are swings in economic activity that occur when macroeconomic policies are manipulated to improve incumbent politicians’ prospects for reelection. The economy booms before elections, and stagnates after them.

political business cycles:

Political business cycles are swings in economic activity that occur when macroeconomic policies are manipulated to improve incumbent politicians’ prospects for reelection. The economy booms before elections, and stagnates after them.

political inefficiency:

Collective decisionmaking yields political inefficiency if political institutions systematically yield failures of allocative efficiency, productive (technical) efficiency, or distributive efficiency. Contrast with market failure, and see also public choice and the link market failure versus political failure for discussion.

political gains (from trade):

Political gains from trade arise when economic interdependency fostered by trade facilitates international political stability and cooperation. Interdependency increases the costs of conflict and reduces the likelihood of war. See also gains from trade, uniqueness gains, and dynamic gains.

poll tax:

A poll tax is a tax required before a citizen is allowed to vote. Poll taxes have been found unconstitutional. See also head tax.

pollution:

See negative externality.

pollution abatement programs:

Pollution abatement programs are techniques used to reduce pollution. See also abatement.

pollution rights:

Pollution rights are licenses to discharge given amounts of waste products. See also abatement and tradable pollution rights. Click on the link for a look into how pollution rights work and how it was put into practice by the European Union in order to comply with the Kyoto Protocol.

Ponzi scheme:

A Ponzi scheme is a pyramid scam in which depositors are promised fantastic returns, and then the deposits roll in for a while. The con artists running a Ponzi scheme establish some credibility by robbing Peter to pay Paul – i.e., using new deposits to pay the promised rates of return on older deposits when the holder of the older deposit withdraws funds. Most depositors, however, continue to keep their funds deposited, relying on promises of continuing high rates of return. In the end, a Ponzi pyramid collapses because deposits are not backed by meaningful assets. Chain letters are a variant on the Ponzi scheme, as are most multi-level marketing systems.

pooling equilibrium:

A pooling equilibrium is the equilibrium that results if asymmetric information affects the behavior of many economic agents in similar ways so that the market equilibrium differs from optimality in a systematic fashion.

population dynamics:

The population dynamics theory of the business cycle reflects Thomas Malthus’s theory that any period of prosperity inevitably causes population to increase, and this creates a period of falling per capita income and widespread suffering, which reduces population growth and which may set the stage for renewed prosperity if new land or other resources are discovered.

population S curve:

A graphical version of Thomas Robert Malthus’s model of population dynamics, which predicted that, in the long-run, humans could only expect to live at a bare subsistence level. According to Malthus, war, disease, and famine are positive checks on population growth, and starvation is the ultimate check on population.

pork barrel:

The term pork barrel refers to legislation that yields benefits that are primarily local, but where funding is by the national government. See Political Allocation

portfolio:

A portfolio is the collection of all assets and liabilities controlled by an individual investor or a financial intermediary.

portfolio theory:

Portfolio theory addresses optimization of the mix of assets and liabilities in a portfolio, given the preferences of the owner of the portfolio. These theories are intended to permit the construction of optimally diversified portfolios after considering such variables as risk, duration (maturity structure), liquidity, tax consequences, transaction costs, and expectations about inflation in. Much of modern portfolio is based on the liquidity preference theory of John Maynard Keynes.

positional good:

A positional good is a good that is more highly valued by its owner than the good would be valued were the individual isolated from the rest of society because the positional good serves as a signal of the owner’s class, status, or power. Rolls-Royces, tattoos, expensive jewelry or furs, massive boom-boxes, or black leather jackets festooned with hardware are often positional goods. See also bling.

positive economics:

Positive economics is relatively scientific (testable) and focuses on value-free descriptions of and predictions about economic relationships. Open this link for discussion about positive vs. normative economics.

positive externality:

A positive externality is generated when an activity bestows unpaid benefits on parties who are not direct transactors involved in the activity.

positive limits:

Thomas Malthus theorized that population will constantly press against resources, and that population growth will ultimately be hindered by limits he classified as positive limits or preventive limits. Positive limits were seen as deriving from limited food supplies. Malthus hypothesized a physiological standard of living to regulate population, with starvation as the ultimate positive check. See also preventive limits.

positive relationship:

A function for which an increase in the value of one variable is associated with an increase in the value of the other variable. A graph of a positive relationship is positively sloped—an increase in the x variable (the run) yields a corresponding increase in the y variable (the rise). See also negative relationship.

positive-sum game:

A positive-sum game is an interaction in which the total gains to all participants exceed total losses (if any) to some other participants.

post hoc ergo propter hoc fallacy:

A translation of the Latin phrase post hoc ergo propter yields “after this therefore because of this.” The post hoc ergo propter hoc fallacy is committed when precedence is assumed to imply causation. Would roosters be justified in believing that early morning crowing causes the sun to rise? Do union wage hikes or big government deficits, or growth in the money supply necessarily cause price inflation simply because they precede it? Is the fact that welfare rolls increased in California following an upsurge of illegal immigration into California proof that illegal immigration caused welfare rolls to grow? The answers to all such questions is no. These are simply statistical artifacts until more scientific causal explanations are developed and tested. See also fallacy and ad hominem.

potential GDP:

Potential GDP (gross domestic product) is an estimate of how much an economy could produce at high rates of utilization of all resources; full employment GDP approximates potential GDP. See also potential output and full employment level of output.

potential money multiplier:

The potential money multiplier (mp) equals the monetary base (MB) times the reciprocal of the required reserve ratio (rr): mp = MB × 1/rr. Open banks and money multipliers for more on this concept, and see also actual money multiplier.

potential output:

Potential output is an estimate of the value of output that an economy can produce if all resources are fully and efficiently employed. See also full employment level of output and potential GDP.

potential Pareto improvement criterion:

The “potential Pareto improvement criterion” [also known as the Kaldor-Hicks test] is a technique for ascertaining whether a proposed change in production or distribution would yield a potentially Pareto superior allocative result. If people harmed by an adjustment could theoretically be compensated by the people made better off so that no one would lose, then the contemplated change passes the Kaldor-Hicks test. Note, however, that actual compensation is not required.

pound:

The pound (£) is the official currency of Great Britain, although England is under pressure to join continental Europe in the use of the euro (€).

poverty:

Poverty is the condition of lacking sufficient income and wealth. Open the link absolute and relative poverty for more discussion, or see absolute poverty and relative poverty.

poverty line:

The poverty line is an estimate by the U.S. Department of Health and Human Services of the income requirements for families of various sizes and structures to live above a level of poverty that American society deems unacceptable. Families with incomes below the poverty line are usually eligible for various forms of public assistance.

praxeology:

Austrian economists follow the methodological lead of Ludwig von Mises by adhering to praxeology, which rejects both the possibility of meaningful empirical testing of theory and any necessity to empirically validate subjectively constructed theories. Praxeology also holds that human decisionmaking is a sequential process that is solely binary for each decision, and it is methodologically a strictly a priori approach that emphasizes deductive reasoning from a small set of reductionist assumptions. See also economic theoreticians and contrast with empirical economics.

pragmatism:

Pragmatism is a philosophy that rejects the possibility the humans can know any specific thing in an absolute and definitive fashion (“truth”), and that the best we can do is to act on the basis of our expectations that some specific decisions and actions are likely to yield salutary and predictable results, while other decisions and actions are likely to yield less satisfactory and less predictable results.

precautionary demand for money:

The precautionary demand for money is the amount of money that economic transactors desire to hold to cover unexpected expenses; and it is positively related to income or wealth.

preconditions for growth:

Walt W. Rostow’s called the second stage in his theory of economic development “preconditions for growth.” The traditional economy begins to change, with rapid increases in agricultural productivity.  Growing agricultural surpluses free workers for industry and allow investment in capital goods.  Entrepreneurship begins to blossom. This establishes the conditions necessary for Rostow’s next stage, the “takeoff.”

predatory behavior:

Predatory behavior is tactics firms use in attempts to drive rivals from an industry or to deter entry. Predatory tactics include low prices, expanded output, aggressive advertising, cloning rival products and overly rapid technological innovation.

predatory dumping:

Dumping is termed predatory dumping when an exporter is alleged to be trying to gain market power by driving competitors out of the market into which the goods are exported. See also dumping.

predatory lending:

Predatory lending refers to abusive (both illegal and legal) practices by lenders that deceive borrowers about complex aspects of a loan. For example, consider a desperate but trusting homeowner behind on mortgage payments but with positive equity in a home. A predatory lender might persuade the homeowner to assign to the lender the homeowners’ equity in the home in exchange for high-interest refinancing that would ultimately cause foreclosure, with “profit” (the homeowners’ accumulated equity) flowing to the predatory lender.

predatory pricing:

Predatory pricing is a strategy whereby a firm sells at low prices calculated to drive its competitors from the market, presumably so that it can charge higher prices after it gains market power.

prediction market:

People buy “shares” in prediction markets that are effectively bets about how future events will transpire. These events range from the outcomes of elections to the relative growth rates of sales within a corporation to horse races. A common assumption is that prediction markets efficiently process and then capitalize all available information that might be germane in forecasting particular outcomes. If so, then the likelihood of a particular outcome is reflected perfectly in the prices of these shares. For example, if the “share price” for the election of the Democratic candidate for president is 53 cents for each dollar to be received in the event that the democrat wins, then the consensus prediction of participants is that the Democrat has a 53%probability of victory. The sum of all shares per dollar received by the holder of each winning share must be $1. Thus, in this example, the share prices for the Republican, Libertarian, various other candidates must sum to 47 cents. The accuracy of prediction markets depends on assumptions like those that underpin the theories of rational expectations and efficient markets. See also wisdom of crowds.

preference function:

A preference function is a foundation for explaining consumer decisions. Individuals are assumed capable of identifying which one of any two bundles (sets) of goods they prefer, or whether they are indifferent between the two bundles. See the link to preference functions for more discussion.

preferred stock:

Preferred stock in a corporation provides for payment of a specified amount before any dividends are paid to common stock holders, but after payments to all other creditors of the corporation. Preferred stock is, in essence, a misleading label, because preferred stock functions as a bond with lower priority for payment than a debenture.

prehistory:

The first stage of Marx’s six stages of development. Prior to the dawn of civilization, humankind consisted of largely self sufficient and nomadic hunter-gatherers. Gradually these groups evolved into primitive culture, during which land was settled and society increasingly relied on agriculture. In Marx’s version of history, primitive culture is followed by feudalism, capitalism, a revolution, a dictatorship of the proletariat, and finally, a utopian communism.

premium:

[1] A premium is the payment per period for an insurance policy. [2] A premium is the amount by which a risky investment commands a higher expected rate of return than does a riskless investment. See also risk premium. [3] A premium is the price paid up front to buy an option. This caps the maximum loss possible when buying a call or put.  See also call, option, and put.

present value:

The present value of any asset is the value now of the income stream expected from the asset, discounted by the interest rate; the demand price of the asset.

pretax income:

Pretax income is the gross income that a person makes before the payment of taxes or the receipt of transfer payments.

pretrade costs:

Pretrade costs are the rates of exchange (relative prices) that exists domestically between goods prior to international trade; also referred to as the domestic terms of trade; given by the slope at each point along the production possibility frontier.

preventive limits:

In Malthusian population theory, preventive limits include such things as abstinence, contraception, abortion, infanticide, or anything else that limits the numbers of children. Only abstinence was morally acceptable, in Malthus’s view, so he pessimistically concluded that population growth would be checked primarily by positive limits. See also positive limits.

price:

The economic price of any object or activity is the opportunity cost associated with acquiring it. See also nominal price, relative price, and opportunity cost.

price ∕ earnings ratio:

The price ∕ earnings ratio is the price of a common stock divided by corporate earnings per share of stock.

price ceiling:

A price ceiling is maximum legal price, normally set at the behest of buyers. See also price floor and (the link on) price controls.

price controls:

Price controls are legal maximums (ceilings) or minimums (floors) for the prices of specific goods or resources. Click on the link for an exploration of price controls and its effects.

price discrimination:

Price discrimination occurs when virtually identical units of a good are sold at different prices, and price differentials do not reflect different production costs. Perfect price discrimination absorbs all potential consumer surplus derived from consuming a good. Open the price discrimination and efficiency file for discussion of how efficiency may be facilitated by price discrimination.

price elasticity of demand:

Price elasticity of demand is a measure reflecting the responsiveness of the quantity demanded of a good to a change in its price. This elasticity is computed by dividing the relative changes in quantities demanded of a good by the relative changes in its price. This roughly equals %DQ ∕ % DP, and is commonly stated as an absolute (positive) value. To see how these percentage changes are calculated, however, see mid-point bases. See also elasticity, income elasticity of demand.

price elasticity of supply:

Price elasticity of supply is a measure reflecting the responsiveness of the quantity supplied of a good to a change in its price. This elasticity is computed by dividing the relative changes in quantities supplied of a good by the relative changes in its price. This roughly equals %DQ ∕ % DP. To see how these percentage changes are calculated, however, see arc elasticity and mid-point bases. See also elasticity.

price fixing:

Price fixing is a strategy for firms with oligopoly power to increase their joint control over prices, enabling them to charge higher prices, either through illegal collusion or through price setting via favorable laws.

price floor:

A price floor is a minimum price that can be legally charged or paid, and is usually set at the behest of sellers. See also price ceiling and price controls. Click on the link for a glimpse into the purpose and effect of price floors.

price gouging:

Price gouging is a common charge levied against sellers who raise prices after a natural disaster, such as a hurricane, or when a sellers market emerges following a sharp decrease in supply. Oil companies, for example, are commonly accused of price gouging when the price of gasoline rises sharply in response to say, turmoil in the Middle East. See also profiteer.

price maker:

A firm with market power is a price maker. Control over prices derives from inadequate competition or a lack of perfect substitute for a firm’s products. Price makers include monopolies, oligopoly firms, and monopolistic competitors.

price searcher:

A price searcher is a seller that can influence price through negotiation or by the amount she sells, or a buyer who can influence price through negotiation about the amount he buys.

price supports:

Price supports are payments made to farmers by the government to keep the price of the goods above price floors established by government. See also parity.

price system:

The price system is an economic system that relies primarily on prices, as determined by the forces of supply and demand, to allocate the production, distribution, and consumption of goods and services. See also market economy.

price taker:

A price taker (or quantity adjuster) is a competitive buyer or seller whose actions do not affect prices; they can choose only quantities.

price-level stability:

Price-level stability is a normative goal often advocated for economic policy. If the average price level (e.g., the CPI) is excessively volatile, people may be uncertain about how much their wages will buy or whether to consume now or invest in hopes of future returns. See also inflation targeting.

price-specie flow:

The philosopher David Hume [1711-1776] developed the price-specie flow mechanism, which posits that one country’s attempts to gain a “favorable” balance of trade will be self-defeating, and will initially result only in that same country suffering from an increasing price level. This then leads to a decreasing demand for that country's exported goods. In sum, any attempt to increase the specie flowing into the nation would only reverse the flow and force it outward. Hume’s theory was a precursor of the quantity theory of money, inspired the thinking on international finance expressed in Adam Smith’s Wealth of Nations, and signaled the beginning of the end of mercantilism as the dominant system of economic thought.

primary market:

A primary market is a market in which new issues of financial instruments are sold. The firm that initially issues securities receives funding only from primary markets. In secondary markets, any funds paid are received by the owners of the previously issued securities.

primary sector:

The primary sector is that part of an economy producing output solely and directly through the processing of natural resources, and is often relatively large and important in many developing countries.

prime rate:

The prime rate is the allegedly lowest interest rate that a lender, such as a commercial bank, is currently charging its most favored customers, such as blue chip corporate borrowers. In fact however, lending is commonly at less than “the” prime rate to a bank’s most favored borrowers.

primitive culture:

Primitive culture is the second stage of history according to Karl Marx. Extended families and tribes emerged during this period. Agriculture began to bind small groups to specific territories, but animal herding and hunting continued to be important. As claims to exclusive territories became more extensive, some families were more successful than others in establishing their rights to land, resulting in feudalism.

principal:

[1] A principal is a person who contracts with an agent in expectation that the agent will serve the principal’s interest. An employer is an example of a principal, and the employee acts as an agent. [2] The principal is the amount loaned to a borrower, with an expectation of being repaid, plus interest.

principal-agent problem:

A principal-agent problem occurs when an agent (e.g., an employee) pursues personal goals that conflict with the principal’s (e.g., the employer’s) contractual rights. Click on the link for a deeper look into the principal-agent problem.

principle of increasing costs:

The principle of increasing costs states that repeatedly increasing output by some set proportion ultimately requires more than proportional increases in resources and, thus, higher costs. See also decreasing returns to scale and click on the link for a more in-depth look into the principle of increasing costs.

prisoners’ dilemma:

A prisoners’ dilemma is a noncooperative “game” in which every player’s dominant strategy imposes losses on all other players. The result is that all players lose relative to the payoffs available if all players followed cooperative strategies. Click on the link for prisoner’s dilemma for more information.

private debt:

Debts owed by consumers or business firms are private debts. See also national debt.

private enterprise:

Resources are privately owned in an economic system based on private enterprise. See also capitalism.

private equity:

Private equity is a financial investment in a corporation with stock not trading in public markets, or an investment in a firm that is then taken private. Private equity holdings are relatively illiquid and are considered long term investments.

private giving:

See charity.

private finance:

See Private/Public Finance.

private good:

A private good is rival and exclusive, and will be provided efficiently if markets are competitive. Examples of private goods include apples, buildings, clothing, etc. Click on the link for a look into the characteristics of goods.

private placement:

Private placement is the direct selling of securities to such institutional investors as banks, pension plans, mutual funds, or insurance companies. These security sales are not subject to SEC registration unless the securities are bought for fairly rapid resale opportunities.

private property rights:

Private property rights assign individuals or organizations the rights to control access to certain resources or assets, including rights to sell them or charge for their use. See also fee simple property rights. Click on the link for more information on private property rights. See also the evolution of property rights.

private sector:

The private sector of the economy encompasses households and businesses, with most decisions flowing through markets. See also public sector.

privatization:

Privatization is the conversion of governmental production into a private business, usually through licensing and the sale or auctioning of assets previously controlled by the government.

probability:

The probability of a given event is the proportion of times that such event can be expected to occur out of all possible outcomes in which the event is one possible outcome, given an infinite set of repeated trials.

probability function:

A probability function is a mathematical summation of all probabilities for all possible outcomes for a given activity. See Bell curve for an example.

producer cooperatives:

Members of producer cooperatives share profits from jointly marketing such things as handicrafts or farm outputs.

producer price index:

The producer price index (PPI) covers nonretail markets, averaging price changes for over almost 3,000 primary products and such intermediate goods as flour, steel, and office supplies. Most prices summarized by this index are the wholesale selling prices of representative producers, but some prices come from specialized markets such as commodity exchanges. See also consumer price index and GDP deflator.

producer surplus:

Producer surplus is the difference between the minimum total revenues producers require for providing a given quantity of goods, and the larger total revenue that is actually changed to consumers. It is the area above the supply curve but below the price line in a standard graph showing supply and demand in a competitive market. See also economic rent.

product bundling:

Product bundling refers to the marketing practice of cutting the price of a combination of goods, where the bundled price is less than the total amount buyers would pay if they bought the bundled items separately. Bundling is especially common for high technology items and for fast food. For example, the “deal” on a Big Mac meal is usually less than the items in the meal if purchased separately. When a firm has significant market power, product bundling can be synonymous with tie-in sales.

product differentiation:

Product differentiation by a firm has been successful when consumers perceive valuable differences in competing goods. Real differences in similar products may be related to durability, styling, or other physical characteristics. Artificial differences result from advertising or the imaginations of consumers. Firms often advertise to differentiate their products in attempts to shift the demands for their products to the right and to decrease the price elasticity of the demands for their goods. See also monopolistic competition, informative advertising, and persuasive advertising.

product liability:

Product liability is a doctrine that underpins much of consumer protection legislation, and requires producers to compensate the consumers of defective products or victims injured by unsafe products. See also consumer protection laws, caveat emptor, and caveat venditor.

product preannouncement:

Product preannouncement occurs when a firm publicizes plans to upgrade its product before the product is actually upgraded and available, consequently attracting more customers or “locking-in” existing customers to prevent them from buying rival firms’ products. This tactic, especially common in the software industry, is viewed as a potentially predatory barrier to entry that makes it more difficult for rivals to sell. See also predatory behavior.

production:

Production occurs when knowledge—or technology—is used to apply energy to transform materials in ways that make the materials more valuable in satisfying human wants.

production function:

A production function is the technical relationship between inputs and outputs. Q = f(K, L) is an example. A production function considers how output is affected by variations in the levels of all resources, so it is not synonymous with a total product curve.

production possibilities schedule:

A production possibilities schedule is a table that displays the maximum quantity of a specific product that can be produced given the quantities of other products currently being produced. A production possibilities schedule identifies certain points on a production possibilities frontier.

production possibility frontier:

A production possibility frontier (PPF) is a curve showing the various combinations of goods that an economy could produce, assuming a fixed technology and full employment and efficient resource utilization. The production possibilities frontier is sometimes referred to as the production possibilities curve. Click on the link for a graph and further exploration on the production possibility frontier.

productive efficiency:

Productive efficiency (technical efficiency) requires minimizing opportunity costs for a given level of output. This ensures maximum output from given amounts of costs or resources. In financial markets, productive efficiency translates into minimization of the “spread” – e.g., the difference between the interest rates banks pay depositors and the interest rates charged borrowers. See also allocative efficiency, distributive efficiency, and economic dual. Click on the link for more information on the components of economic efficiency.

productive inefficiency:

Productive inefficiency occurs when costs are not minimized or less output is produced than is possible with the resources available, given the current state of technology.

productive resources:

Productive resources (or simply resources) provide the energy and materials that combined through technology, make production possible. They are also called factors of production or inputs, and are usually categorized as land, labor, capital, and entrepreneurship.

productivity:

The broad term productivity is a vernacular reference to the value of the marginal product or the marginal revenue product or the average revenue product of a resource.

productivity paradox:

In the late 1980s, Nobel Prize winner Robert Solow applies the term productivity paradox to the apparent lack of an immediate surge in productivity following the widespread introduction of information and computer technologies [ICT]. See also technological presbyopia.

professional corporations:

Some doctors, dentists and lawyers who would normally operate as sole proprietors instead organize professional corporations, which are treated as corporations for tax purposes, but its “owners” do not have the advantage of the unlimited liability that protects stock holders in other corporate enterprises.

profit:

Profit is the excess of a firm’s total revenues over total cost. Accounting profits consider only the explicit costs incurred by a firm, but economists view total costs in terms of opportunity costs, which include both explicit and implicit costs. Economic profit is a return to entrepreneurs for bearing uncertainty and innovating. Click on the link on profits for a look at all the considerations related to profits.

profit sharing:

Each employee covered by a profic sharing plan receives a share of the firm’s profits. Profit sharing is intended to incentiize workers and reduce shirking by employees.

profiteer:

Profiteer is a pejorative term for a seller who raises prices sharply following a strong increase in demand or decrease in supply. Profiteering is synonymous with price gouging in the minds of many critics of the practice.

program trading:

Program trading, usually accomplished through computer activated sales and purchases, is the simultaneous trading of a portfolio of stocks instead of buying or selling one stock at a time, and is slowly but steadily replacing “public outcry” as the mechanism by which stocks, bonds, and financial derivatives are traded. Program trading became popular in the 1970s when new technologies reduced the transaction costs of trading, and investors increasing realized that diversification can reduce risk. Program trading, primarily by large institutional investors, now accounts for roughly 10% of the volume on the New York Stock Exchange.

progressive taxes:

Progressive taxes are tax structures in which tax rates vary directly with income, so that the proportion of income devoted to taxes rises as income rises.

proletariat:

Proletariat is a term Karl Marx used to refer to members of the blue-collar working class.

promotional profits:

Promotional profits are the increases in the values of stock controlled by individuals who engineer a merger.

propensity:

Economists commonly use the word propensity to refer to a tendency, which is usually expressed as a proportion. For example, a person who spends 60 cents out of each additional dollar of income is characterized as having a marginal propensity to consume of 0.6, or sixty percent.

property rights:

Property rights are the legal rights that people possess over property, which includes resources, intellectual property (e.g., patents or copyrights), produced goods, or any other thing that can be owned. The broadest forms of property rights are fee simple property rights that allow individuals: (a) to use goods in any manner so long as other people’s property rights are not violated; (b) to exchange these property rights for others or to give them away; and (c) to deny others the use of this property. This link to property rights provides more discussion, and the evolution of property rights is discussed at this link.

property tax:

A property tax is a tax based on the value of reasonably immobile capital improvements such as buildings, and the land where they are located.

proportional taxes:

A proportional tax system has tax rates that do not vary with income. The same percentage of income is collected in taxes regardless of the income level.

proprietary trading:

A financial intermediary engages in proprietary trading when it uses its own capital to buy or sell assets with the intention of generating greater income than would be generated by merely pairing the bid and ask market orders of its customers; proprietary trading involves much more risk than is incurred if a firm merely acts as an intermediary.

proprietor:

Proprietors are individuals in business for themselves.

proprietors’ income:

In the National Income accounts, proprietors’ income includes all income earned by sole proprietorships, partnerships, professional associations and unincorporated farms. Wages, interest and rent that proprietors could have earned if they did not run their own business are included in this income category for accounting purposes.

prospect theory:

Prospect theory is a collection of explanations for observed exceptions to the standard economic assumptions: (a) that people’s preferences are orderly and conform to a general law of diminishing returns (strict convexity, for those of a mathematical bent), and (b) that human behavior is “rational” in that choices can reasonably be expected to accomplish the decisionmaker’s goals. Open the prospect theory link for more discussion. See also behavioral economics and peak-end rule.

prospector theory:

Prospector theory is the view that as more and more people devote their time to research and development intended to generate technological advances, the likelihood of progress increases, just as discoveries of precious metals or minerals are more likely if more prospectors look for gold. New discoveries can be a matter of chance. Investigations intended to explore opportunities a given area may serendipitously yield unexpectedly rich findings of a very different kind.

protectionism:

Protectionism is the advocacy of policies to protect domestic industries and workers from lower-cost foreign competitors.

proxy fight:

A proxy fight is an attempt by disgruntled shareholders to replace current corporate managers by securing sufficient proxy votes (the votes of other owners of common stock) to take control of a corporation’s Board of Directors.

proxy variable:

A proxy variable takes the place of an unobserved explanatory variable in a model. The explanatory variable can be unobserved for a variety of reasons including infeasibility and high expense, but the proxy variable is thought to be a reasonable estimate of the unobserved values.

psychic income:

Psychic income is the subjective value of nonmonetary satisfaction gained from a productive activity.

psychological theories of the business cycle:

Psychological theories of the business cycle focus on the herd instincts of human beings coupled with prolonged periods of pessimism and optimism to explain the magnitudes and durations of recessions and periods of prosperity.

psychology:

Psychology is a scientific discipline that studies mental processes and emotions, and how they affect the behavior of humans or animals. [See also behavioral economics.]

public choice:

Public choice is an emerging discipline that is an amalgam of political science and economics, and entails the interpretation political behavior as a reflection of self interests. Public choice emphasizes the study of voting, legislative and regulatory processes, and bureaucratic behavior.

public choice theory of regulation:

The public choice theory of regulation addresses incentives for regulatory complexity intended to increase the power and budgets of bureaucrats. The theory augments the industry interest approach by pointing out that regulatory bureaucrats also have personal interests. See also industry interest [private] theory of regulation and contrast with public interest theory of regulation.

public debt:

Public debt is created when government spends more than it collects in tax revenue. The public debt grows when government sells bonds to the public to finance a deficit. See government budget constraint for elaboration.

public fianance:

See Private Public Finance

public good:

A public good is a good which can be consumed by more than one individual at a time (nonrivalry) and whose consumption cannot be denied a consumer who desires it (nonexclusion) once the good is provided. A public good is non-rival and non-exclusive. Examples of public goods include national defense and certain types of scientific research that yields new information. Click on the link for a look into the characteristics of goods.

public interest theory of regulation:

The public interest theory of regulation suggests that government should control unethical business practices and regulate businesses plagued by such market failures as: (a) externalities, or (b) monopoly power derived from economies of scale. Contrast with industry interest [private] theory of regulation and public choice theory of regulation.

public sector:

The public sector is that part of the economy controlled by or through government. The private sector encompasses households and firms.

public spending:

Public spending refers to funds spent by government for publicly-provided goods or services. Examples include health care (Medicare and Medicaid), education, national defense, and infraxstructure projects. See also infrastructure, public goods.

public utility:

A public utility is a firm that provides goods such as electricity, natural gas, or water, for which economies of scale are so significant relative to total market demand that such firms are regarded as natural monopolies. Technological changes can change the status of a public utility, as when telephone services became competitive because of the advent of cell phones and the communications possible via the internet (e.g., email and Skype).

punch-in-the-nose theorem:

The punch-in-the-nose theorem asserts that in the absence of utopian lump-sum compensation, the greater the potential net gains from trade yielded solely by comparative advantage, the greater will be the absolute losses imposed on the losers from such trade. This theorem is based on the Stolper-Samuelson (factor price equalization) theorem implicit in the Hechscher-Ohlin model, and ignores the dynamic gains from trade, and the gains from uniqueness, scale and scope, and the political gains from more pacific international relations.

pump-and-dump:

Pump-and-dump refers to a stock market scam in which a stock’s price is artificially pumped up by aggressive sales by brokers involved in the scam. When a requisite number of gullible victims have purchased the stock, the brokers then dump their shares at the inflated price, thus making a profit. See also boiler room, Ponzi scheme, and pyramid scheme.

purchasing power:

The ability to buy goods and services, as determined by real income or wealth. Alternatively, the purchasing power of money (e.g., a dollar) is inversely related to the price level P, so that it equals $1/P.

purchasing power parity:

Purchasing power parity (PPP) is a theory that the exchange rate between any two currencies adjusts to reflect relative changes in the price levels of the respective countries. Relative inflation will result in a proportional decline in the exchange rate of a currency, while relative deflation yields a proportional increase in a country’s exchange rate.

pure competition:

A market operates in pure competition if it meets the assumptions that (a) buyers and sellers are so numerous relative to the market that no single party can noticeably influence price, (b) goods are homogeneous so that non-price competition is impossible, and (c) there is freedom of entry and exit in the long run. See also perfect competition, which differs only in that transactions costs are precluded.

pure strategy:

A pure strategy is defined by a specific move a player will unfailingly follow in a particular game no matter what the situation. These moves cannot be random, or taken from a distribution. For example, a player in a repeated prisoner’s dilemma is playing a pure strategy whenever the player either unfailing cooperates or never cooperates, regardless of whether the opposing player’s behavior in any previous round or regardless of the structure of payoffs. See also game theory.

put option:

A put option (or put) is a contract between a buyer and a seller that provides the buyer with the right but not any requirement to sell a specific amount of a commodity or a specific asset at a fixed strike price no later than a specific expiration date. An American option may be exercised on any day prior to the end of the expiration date. A European option can be exercised only on the specified expiration date. See also option, American option, European option, call, hedge, short, and long.

pyramid scheme:

A pyramid scheme is a system that enriches people at the top of the pyramid or who become involved early in such activities as chain letters at the expense of people lower in the pyramid or who become involved later. See also Ponzi scheme.