Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

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 move or 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.
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.
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:	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.
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.
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.
piracy:	In the 20^th 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 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.