Economicae^©

an illustrated encyclopedia of economics

Famous Economists

Mathematics of Economics

S&P 500:	Standard & Poor’s 500 (the S&P 500) is an index of the market values of the securities of a collection of 500 widely held stocks. All stocks in the index are large public companies traded on NASDAQ and NYSE. The S&P 500 is assumed to reflect the overall performance of the stock market and is widely viewed as a leading indicator of macroeconomic performance in the United States.
sacrifice ratio:	A sacrifice ratio is a measure of the GDP lost as a consequence of policies that suppress inflationary pressure. This ratio equals the percentage loss in production divided by the percentage reduction in the rate of inflation.
sales tax:	A sales tax (or retail sales tax) is an example of an ad valorem tax, and is a percentage tax usually broadly levied on the total revenues from the sales of most commodities and/or services.
salience:	The salience or saliency of an object or event refers to its prominence in our perceptions relative to other objects or events. Salience is a cognitive consequence of contrasts between events relative to each other. Such behavioral economists as George Akerlof [Nobel Prize 2002] identify salience or non-salience as reasons for decisions to be less than perfectly rational. These theorists hypothesize that decisionmakers tend to overemphasize recent events that have occurred with greater than normal frequency or amplitude, and consequently overweigh the probability that such events will recur, while placing inadequate weight on the likelihood of events that have recently occurred less frequently or less intensely than usual. See also salience, adaptive expectations, bounded rationality, and behavioral economics. Contrast with standard economic theory [SET], efficient markets theories and rational expectations.
Samuelson, Paul:	Paul Anthony Samuelson [1915-] won the Nobel Prize in Economics in 1970. Samuelson may be the most prolific economist of all time. His Principles of Economics textbook was first published in 1948 and has been through roughly twenty editions. His scientific works illustrated the commonality of mathematical optimization in economics, beginning with his dissertation, Foundations of Economic Analysis, and now exceed 9,000 printed pages that cover the gamut of economic theory and policy. Samuelson may not have the public recognition enjoyed by Milton Friedman, but he almost undoubtedly had more influence on the thrust of economic research during the past six decades.
Samuelson-Rybczynski theorem:	The Samuelson-Rybczynski theorem is the assertion that an increase in a country's endowment of a resource will cause an increase in output of the good that uses that resource intensively, and a decrease in the output of the other good. For example, if a trading country accumulates more capital so that K/L increases, ceteris parebus, and if the production of good A is relatively capital intensive when compared to good B so that (K/L)A > (K/L)B, then the output of A will increase and the output of B will decrease. This theorem is a corollary of the Heckscher-Ohlin model of trade. See also factor price equalization and Heckscher-Ohlin model of trade.
satiation:	Satiation is the state of being so completely satisfied that an individual no longer wants additional units of a particular good or service, and the marginal utility derived from that specific good or service is zero. Although an individual may become sated (reach a point of satiety) for a specific good, economists assert that no one becomes sated with all goods. People always want more of something.
saving:	Saving is the change in one’s total wealth over some period of time, and it is a flow variable. Saving entails spending less on consumer goods than one’s income. Savings are the cumulation of past saving and they are a stock variable. Several motives underpin saving, including: (a) life cycle saving – individuals try to smooth their consumption across their lives, so they save when they are young and working, and spend from their savings when they retire; (b) precautionary saving – people use saving as a way to guard against illness or accidents or instability in their jobs; (c) target saving – people may save temporarily to accumulate funds for a major purchase, such as a down payment on a car or home, or to pay for a college education; and (d) bequest saving – many people try to build up wealth to leave to their heirs.
savings glut:	The persistent excess of US imports over US exports was ascribed to a savings glut in the rest of the world by Ben Bernanke in 2005, before he became the Chairman of the Federal Reserve System. Bernanke’s theory hinges on the idea that many foreigners or their governments view US financial assets as preferred international mediums of exchange or stores of value. See also seignorage, absorption equation and absorption problem.
Say’s law of markets:	Say’s law of markets is the theory that the very act of producing a good is necessarily underpinned by an equivalent amount of Aggregate Demand, because people produce (e.g., work, or save and invest) only if they intend to buy something with their income. This assertion has been oversimplified as “Supply creates its own demand”. Say’s law is named for the classical economist Jean Baptiste Say. See also Walras’ law, which is a mathematically more complete law of equilibration in markets.
scab:	Scab is the pejorative label applied by union members to non-union workers who cross picket lines when a union is on strike.
scalability:	Scalability refers to the relative ease associated with increasing productive capacity to accommodate expanded demand for a product. Production processes are scalable if proportionally small amounts of new capital equipment increase potential output (or throughput) quickly and at relatively low incremental cost. Scalability is a characteristic of most telecommunications and software engineering processes in part because of the rapid rates of technological improvements in these industries. A firm is described as scalable if its business plan and technology facilitate rapid expansion to accommodate increasing demands.
scale economies:	See economies of scale and diseconomies of scale.
scarce good:	A scarce good is a good for which the quantity demanded exceeds the amount available at a zero dollar price. Contrasts with a free good.
scarcity:	Scarcity occurs because resources are limited and cannot accommodate all of our unlimited wants.
scatter plot:	A scatter plot is a way to graphically summarize relationships between random variables. Simple scatter plots depict relationships between two variables, and can help in the interpretation of correlation coefficient or regression models.
Schumpeter, Joseph A.:	Joseph Alois Schumpeter [1883-1950] is perhaps exceeded only by John Maynard Keynes in reputation as the greatest economist of the first half of the twentieth century. His theory of economic development, written in Capitalism, Socialism, and Democracy, and his History of Economic Thought are extraordinary as scholarly work. His dynamic theory of how capitalism operates as a system of creative destruction to generate economic progress is an important alternative to the standard but static theory of how markets operate.
Schumpeter’s first law:	Schumpeter’s first law refers to the inevitability of the destruction of obsolete industries and obsolete skills when entrepreneurs innovate new technologies or methods of doing business that create more desirable or less costly products or production processes. Joseph Schumpeter described this cycle as a process of “creative destruction.”
Schumpeter’s second law:	Schumpeter’s second law is the hypothesis that excessive government spending inevitably leads to the collapse of a government, either through the ballot box or via a revolt. Shortly after World War I, Joseph Schumpeter had served briefly as the Finance Minister of his native Austria, and hypothesized that no government could survive politically if government spending on goods and services exceeded roughly 20 percent of national income.
scientific balance:	The “scientific balance” argument against free international trade asserts that tariffs should be structured to eliminate any cost disadvantages of U.S. producers (ex: higher labor costs), and then “let the best man win.” Unfortunately, such tariffs would eliminate all incentives to trade, and all gains from trade in the long run.
scientific method:	The scientific method entails (a) identifying the problem, (b) preliminary thinking and data collection, (c) developing a theory and refining it, and (d) collecting more data and then testing and repeatedly retesting the model.
screening:	Screening is the process whereby a principal examines the qualifications of a potential agent before offering the agent a contract.
screening by attribute:	A heuristic termed “screening by attributes” is used when a decisionmaker facing numerous units of close substitutes for a good or resource narrows the range of choices by specifying attributes that eliminate some options. The rational ignorance yielded by this or any other heuristic may result in choices that, in retrospect, would be less than perfect were transaction costs zero. For example, if you will not watch a movie with less than a “four star” consensus rating by syndicated reviewers, you may fail to see the single movie that, more than any other, would have changed your life for the better. See also elimination by aspect.
sealed-bid auction:	In a sealed bid auction, all bidders must place their bids sealed envelopes that are opened simultaneously, with the winner being the person who submits the highest bid, in the case where an item is being sold at auction, or to the lowest bidder, when a good or service is being purchased through auction. The price to be paid (or received) by the winner can vary from the actual highest (lowest) bid, depending on the rules of the auction. See also auction, English auction, Dutch auction, and second price auction.
search unemployment:	See frictional unemployment.
seasonal unemployment:	Seasonal unemployment is a type of unemployment that varies systematically across the year. For example, migrant farm workers experience systematically high unemployment rates when agricultural land lies fallow in the middle of winter, and labor is not need to plant new crops or harvest rip crops. Ski instructors and department store Santa Claus specialists similarly suffer seasonal unemployment.
seasonality:	Seasonality refers to changes that recur at regular times each year. Such macroeconomic data as unemployment rates and GDP are usually “de-seasonalized” for regular monthly [e.g., high sales during the winter holidays] or quarterly deviations from long run trends.
second best:	The theory of the second best was elaborated by Richard Lipsey and Kelvin Lancaster in 1956, and addresses the economic effects on market efficiency when idealized conditions for optimality do not hold. For example, efficiency that would be achieved economy-wide if all markets were perfectly competitive may not be realized if even one market is imperfectly competitive. In fact, if one of n markets cannot be perfectly competitive, then perfect competition in the n-1 other markets may yield less efficiency than if all were less than perfectly competitive. The theory of the second best is an assertion that moving some (but not all) markets in the direction of perfect competition may yield net welfare losses. A “second-best” policy may qualitatively be very different from the “first-best” policy whenever some constraint prevents attainment of the idealized first-best economic configuration.
second degree price discrimination:	“Quantity discounts” (also known as block pricing) are a common form of second degree discrimination, which occurs when a seller charges different prices for different quantities of a good. This strategy can be profit maximizing if the buyers of different quantities of goods have different price elasticities of demand, but the block-pricing link discusses how this strategy can facilitate efficiency in the provision of, e.g., electricity or natural gas. See also first degree price discrimination, block pricing, and third degree price discrimination.
second mover strategy:	The second mover (or follower) strategy in game theory is based on expectations that being the first to take an action (e.g., for a firm to adopt a new technology or enter a market) will entail a relatively high-cost learning curve, and that followers will gain an advantage over first movers through such strategies as reverse engineering. See also first mover strategy and reverse engineering.
secondary boycott:	A secondary boycott is a refusal by union members working for one firm to handle any products produced by other firms when workers at the other firm are on strike . Secondary boycotts are forbidden by the Taft Hartley Act.
secondary market:	A secondary market is a market in which previously issued financial instruments are traded. The firm that initially issued the securities receives funding only when the securities were sold in a primary market. See also primary market.
secondary sector:	The sector of an economy that processes raw material into finished products is sometimes referred to as the secondary sector. The more roundabout are production processes and the more developed is an economy, the greater tends to be the relative significance of the secondary sector.
second-price bid auction:	All maximum bids are sealed when an item is sold in a second price bid auction, and the highest bidder receives the item being auctioned, but pays only the highest competing bid (the second highest bid). Each bidder’s dominant strategy is to bid exactly the bidder’s demand price. The prices of most items sold on E-Bay, for example, are set in a second price bid auction. In cases where the auction will determine who provides a good or service, the lowest bidder wins, and receives a gross payment equal to the second lowest bid made. In these cases, each bidder’s dominant strategy is to bid exactly the bidder’s supply price. Second price bid-auctions were first proposed by the Nobel Prize winning economist William Vickrey, and consequently are sometimes called Vickrey auctions.
secured bond:	A secured bond is a bond backed by collateral. In the event that the issuer of a bond fails to pay as promised, the owners of secured bonds may liquidate the collateral to collect the funds owed by the borrowing entity. The risk of non-payment is consequently less than for a debenture – an unsecured bond. See also collateral and contrast with debenture.
Securities & Exchange Commission:	The Securities & Exchange Commission is a federal agency that regulates stock transactions and attempts to prevent fraud and other abuses by corporations and other entities that issue financial securities. This agency was established by the Securities Act of 1933.
securities:	Securities are paper certificates or electronic records that identify the ownership of stocks (corporate equity) or bonds (corporate or governmental debt obligations.
securitization:	Securitization is the process of collecting and converting less liquid and marketable debt instruments into more liquid and marketable instruments. For example, individual mortgages are not especially homogeneous and the market for individual mortgages incurs significant transaction costs. Securitization occurs when mortgages are bundled and then standardized securities are issued that are backed by the income stream from the bundled mortgages. The standardized instruments can consequently be bought and sold in secondary markets with much lower transaction cost being incurred.
seignorage:	Seignorage is the profit made by governments when they coin or print fiat money. The production cost of currency is much less than the value of currency in exchange.
selective memory:	Selective memory is a synonym for hindsight bias or Monday morning quarterbacking, and as an underpinning for overconfidence. We tend to retrospectively emphasize our earlier thoughts that proved to be predictive of the unfolding of events, and to repress previous thoughts that proved unpredictive. Selective memory is also operative when we suppress memories of our previous mistakes and transgressions, and when we emphasize the events that place our past behavior in a relatively favorable light, or that warrant compensation to us. See also overconfidence and hindsight bias.
self insurance:	An individual or household is self-insured if they do not buy insurance externally that will at least partially offset the damage that might be caused by a negative potential event. If you do not have fire insurance, for example, then you are self-insured and will bear all losses in the event that a fire destroys your home and possessions.
self interest:	The assumption that enlightened self interest guides all economic decisions is fundamental to conventional economic models of behavior. Even charitable acts are assumed to serve the psychic needs of the donor. Click on the link to view Adam Smith’s take on self interest.
self-dealing:	Self-dealing occurs when agents who have influence over the decisions of a firm or financial institution conduct transactions with that institution. Self-dealing usually creates serious principal agent problems. Contrast with arms-length transactions.
self-incrimination strategy:	A firm pursues a self-incrimination strategy when it tries to boost net income by confronting customers with information costs that tilt purchases towards items with higher markups above costs. This strategy price discriminates based on asymmetric information. For example, many consumers assume that larger packages of an item cost less per unit than smaller packages – a “family sized” twelve pound box of detergent presumably costs less per pound than a “regular three pound box. A retailer that charges more for per pound for the family sized box than for the “regular” box is using a self-incrimination strategy. See also price discrimination.
selfish gene:	Sociobiologists replace the economist’s driving assumption of self interest with an assumption that all decisions are based on attempts to maximize the likelihood of the survival of the decisionmaker’s gene pool.
sellers’ market:	A sellers’ market exists when the prevailing market price lies below the equilibrium price, resulting in a shortage.
selling short:	Selling short entails selling an asset before actually possessing it, with the agreement that the asset will be provided at a later date.
seniority rules:	Seniority rules are formalized decisions about employment based on how long an employee has been employed, or in a particular position. Seniority rules are commonly used to allocate pay hikes, promotions, or the continuation of work itself.
service:	A service is an intangible good that usually may not be owned. For example, someone mopping a floor is “producing a good” by providing that service, but “mopping” per se cannot be owned.
settlement:	A settlement is reached when two or more parties successfully negotiate an agreement or will abide by terms specified by a neutral arbiter. A settlement may take the form of a contract, or as a resolution of legal action, or myriad of other possibilities. See also arbitration.
sexism:	Sexism is economic or personal discrimination based on gender or sexual orientation.
shadow prices:	Shadow prices are the theoretical sets of relative prices that would prevail if the marginal social benefits and marginal social costs were equated for all possible activities (MSB=MSC). The equilibrium prices set by markets will differ from shadow prices to the extent that markets fail to yield efficient results. See market failure for an elaboration.
shakeout:	A shakeout occurs in an industry when market conditions change significantly, resulting in unusually high rates of failure by marginal firms or, in financial markets, when worried speculators sell assets, often at a loss, because of dramatic changes in the business climate.
sharecropping:	Sharecropping is a system of economic subsistence in which a farmer who works directly on the land pays rent to the landowner in the form of a share of the crop. Though most common under feudalism, the share-cropping system is still practiced in some regions of the world, including parts of the United States.
shareware:	Shareware is copyrighted software that is available free of charge on a trial basis, usually with the condition that users pay a fee for continued use and support.
Sherman Antitrust Act:	The Sherman Antitrust Act (1890 – our first antitrust law) specifies that “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared illegal”; and, according to the second section, “every person who shall monopolize, or attempt to monopolize . . . shall be deemed guilty of a felony.” [Note: The original act specified that violators would be “deemed guilty of a misdemeanor”, but the word misdemeanor was later amended to felony.]
shifted backward:	A tax is shifted backward when its economic incidence falls on owners of resources supplied to the firm.
shifted forward:	A tax is said to be shifted forward when the economic incidence of the tax falls on the consumer.
shirking:	A principal-agent problem that occurs when an agent (e.g., an employee) fails to perform because the principal (e.g., an employer) cannot adequately and cost-efficiently monitor the agent’s performance.
shmoo:	Cartoonist Al Capp created the shmoo, a fictional creature, for his Lil Abner comic strip in 1948. Each mythical shmoo delighted in transforming itself into any good that people want, so some economists used shmoo to represent a composite good in their analyses. For example, GDP has the shmoo-like property that it becomes whatever consumers are willing and able to buy. See this link for more elaboration about shmoo.
shocks:	A shock is an unexpected event that disrupts market supplies or demands. A severe external shock (e.g., war or bad weather) causes macroeconomic disequilibrium by disrupting Aggregate Supply. Aggregate Demand may be disrupted by such external shocks as the eruption of a trade war, or significant defaults on the national debt of a major trading country (e.g., Russia in 1998), or by massive speculation against currency under a regime of pegged exchange rates.
shoe leather costs of inflation:	The shoe leather costs of inflation are the additional transaction costs incurred when individuals try to reduce real money balances to avoid expected losses of purchasing power because they begin expecting inflation. Expected inflation raises the perceived opportunity costs of holding money, and thus, people make more trips to banks and financial institutions to shift funds from savings accounts to checking accounts, or make more frequent trips to ATMs to use debit cards, converting funds in money market accounts into cash. Imagine the leather of your shoes being worn away from frequent trips to the bank teller. [Note: This concept originated after Nobel-Prize winner James Tobin sarcastically remarked that, in the end, the “real” costs of mild inflation seemed to boil down to extra trips to the bank. Financial institutions seem to have responded creatively to mild inflation by offering interest bearing accounts that minimize such transaction costs. Presumably, the Fisher effect on money market interest rates would make the shoe leather costs of inflation negligible. See also Fisher effect, menu costs, and creative response.
short:	Shorting is the act of contractually promising to deliver or selling an option that may require delivery at a future date of a commodity or financial or economic asset not currently possessed by the seller. A short sale is also known as a put. See also long, option, call, and hedge.
short run:	The short run (SR) from a microeconomic perspective is an analytic period of time in which at least one resource is fixed so that firms can neither enter nor leave the marketplace‑‑a firm can shut its plant down, but it cannot leave the industry. The short run from a macroeconomic perspective is a period insufficiently long for full adjustment to a disequilibrating event, such as a significant change in government policy, a major external shock, or the widespread implosion of speculative bubbles in financial markets. Click on the link for more information on the short run.
short run industry supply curve:	The industry supply curve a purely competitive industry in the short run is the horizontal sum of the supply curves of all firms in the industry.
short sell:	To short sell is to sell a financial instrument short by borrowing the asset being sold, usually from a broker, and promising to deliver the asset to the broker at a later point in time. A “covered” short sell differs from an illegal naked short sell, in which the short seller does not currently possess (has not borrowed) the instrument being promised for future delivery.
shortage:	A shortage occurs if some people cannot buy all of an economic good for which they are willing to pay the going price.
shutdown point:	The shutdown point is price ∕ output combination at which a firm’s total revenue equals total variable costs. In the short run, the firm must at least cover the variable costs of production. If it cannot, then it will shut down and minimize its losses by incurring only fixed costs.
shuttle trade:	Shuttle trade is an informal form of importing in which international tourists buy goods in a country they visit and take the goods home, usually in their luggage, with the intent of reselling the goods in their own country.
signaling: