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.

safe harbor:

A safe-harbor provision of a law reduces or eliminates legal liability for an action as long as the action was undertaken in good faith.

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 decision makers 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.

Sarbanes-Oxley Act:

The Sarbanes-Oxley Act (aka Public Company Accounting Reform and Investor Protection Act of 2002) implemented a number of measures intended to increase corporate responsibility and accountability. These measures ranged from stiffer financial and auditing standards for publicly traded corporations to harsher criminal penalties for corporate misconduct. The act was passed in response to a series of accounting and corporate scandals involving Enron, WorldCom, Global Crossing, and numerous other firms.

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.

satisficing:

Behavioral economists follow the lead of Nobel Prize winner Herbert Simaon in using the term satisficing to refer to the foundations for decisionmaking because computational complexity yields bounded rationality, so that outcomes are expected to be adequate, and not necessarily the mathematically optimal decisions that would characterize perfect calculations based on perfect information and perfect un derstanding of the consequejnces of a choice. Behavioral economists view such mathematically optimal solutions as seldom if ever attainable in real life scenarios.

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 cumulations 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. See Keynesian Saving See Paradox of Thrift

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.

Schelling point:

A focal point is sometimes called a Schelling point, after Nobel prize winner Thomas Schelling, who described such locations in his writings on negotiation and bargaining.

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 decision maker 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.

selection bias:

Selection bias exists when a researcher chooses observations that support a particular hypothesis or when an individual mistakenly makes choices based on criteria that systematically tend to yield outcomes that differ from desired outcomes. For example, a pollster might visit a college campus to survey voters for their attitudes about penalties for underage drinking.

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 decision maker’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.

shareholding:

A shareholder is a person or other entity that owns corporate common stock.

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.

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.

short-termism:

Short-termism is a derisive label applied when actions that tend to enhance a situation in the short run are expected to worsen the situation in the long run. For example, corporate executives may have bonus plans in their compensation packages that stress short-term profits, but which ultimately weaken the firm and reduce its long run viability.

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:

Signaling is behavior by prospective agents intended to communicate special qualifications that will elicit the offer of a contract from a principal, or communications from principals intended to induce a potential agent to agree to a contract. See also screening and credentialism.

signaling game:

A signaling game is a strategic game in which there are two or more players. One player has private information that the other players lack. The player with the private information sends a signal using this information to the uninformed players before the uninformed players make their choices. Signaling based on asymmetric information may be used to improve the situation of the informed player to the detriment of the players who receive the signal.

simplified arc formula for elasticity:

Finding the simplified arc formula for elasticity entails simplifying the mathematical formula used to calculate arc elasticity. For example, the formula for the price elasticity of supply[(Q1-Q2) ∕ ((Q1+Q2) ∕ 2)]  ∕[(P1-P2) ∕ (P1+P2) ∕ 2)]simplifies to[(Q1-Q2) x (P1+P2)]  ∕  [(Q1+Q2) x (P1-P2)].See also elasticity, mid-point bases, and arc formula for elasticity.

sin tax:

A sin tax is slang for an excise tax applied to goods such as cigarettes and liquor because of the “moral questionability” of the good. See also excise tax and merit bad.

Singer, Peter:

Australian philosopher Peter Singer (1946-) has explored in depth many issues surrounding normative economics. Most notably, Singer argued in his essay “Famine, Affluence, and Morality” that famine relief is a moral imperative; that anyone able to donate money to fight hunger should do so assuming that he will still be able to maintain a reasonably comfortable lifestyle.

single payer system:

In a single payer health care system, government pays health care providers who are not necessarily government employees for providing health care to the entire population.

sinking fund:

Indenture provisions in a bond sometimes require the issuer to repay specified amounts of bonded indebtedness at specified intervals into a sinking fund. This helps ensure that the bond issuer will not default, which makes the bond more appealing to bondholders and allows the firm to issue the bond at a lower interest rate. See also bond indenture, collateral and call provision.

sit-down strike:

A sit-down strike is a strike during which striking workers refuse to leave their employers’ premises, thereby attempting to ensure that no work is done and that they are not replaced by nonunion workers. Seer also collective bargaining, strike, and lockout

SIV (structured investment vehicle):

SIV’s, or structured investment vehicles, are funds that participate in credit arbitrage, or try to take advantage or differences in interest rates. They normally deal with billions of dollars, investing this in various asset-backed securities. They are formed to exploit differences in short and long-term borrowing rates. To do this, an SIV would issue short-term corporate paper and then invest the money raised from those sales into long term investments. There are two mains risks incurred when using this strategy: the first would be that the value of the long term investments falls below what the SIV owes in the short term to investors in its corporate paper. The second is a liquidity risk: if a SIV suddenly does not have investors willing to buy its corporate paper, it loses the ability to service its long term investments. In other words, for a SIV to be able to keep its long term investments and not be forced to sell them when the SIV doesn’t want to (in a depressed market for example), they must always have willing buyers of its short term paper. See also arbitrage, asset-backed securities, and corporate paper.

skunk works:

A “skunk works” is a small elite group of workers carefully selected from the employees of a large corporation who operate with minimal supervision to quickly develop a new product (usually in secret). Note: This term originated in a “Lil’ Abner” cartoon drawn by Al Capp in the 1950s.

slope:

The slope of a curve is its rise divided by its run. In other words, between two points on a line, slope is the change in the y variable divided by the change in the x variable. See also rise ∕ run.

slumpflation:

Economic slumpflation is a term sometimes applied to an economy plagued by high unemployment, accelerating inflation, and declining growth.

Smith, Adam:

Adam Smith [1723-1790] was a Scottish philosopher usually acknowledged as having summarized the foundations for economics as a discipline separate and distinct from moral philosophy. His two most notable works were Theory of Moral Sentiments [1758] and An Inquiry into the Nature and Causes of the Wealth of Nations [1776]. See the link Adam Smith for more on his pioneering economic thinker.

Smoot-Hawley Tariff Act:

Passage of the Smoot-Hawley Tariff Act (1930) raised tariffs on imports to the highest levels in U.S. history. This provoked retaliation by other countries and a trade war that some economists view as responsible for the length and depth of the Great Depression.

smuggle:

To smuggle a good across a border could mean that it was a legal good and the person was just trying to avoid paying some sort of tariff or other trade barrier, or that it was an illegal good and therefore its exchange will not be included in the GDP.

smuggler:

Smugglers attempt to evade laws when moving goods across international borders. Legal goods may be smuggled to evade tariffs or other trade barriers. Other goods are smuggled because huge gaps frequently exist between prices in different countries when goods are illegal. For example, cocaine is priced much more highly in the United States than it is in Columbia or Peru.

snake bit effect:

The snake bit effect (also known as the risk aversion effect) is the tendency to act in a risk averse fashion following a negative outcome for an event known to occur randomly. For example, if you lose a one-on-one basketball game because your opponent, with whom you play every day, made an extraordinarily lucky half court shot, you might act in a risk averse fashion the next time you are in a similar situation because of an irrational expectation that your opponent will make another lucky half court shot. For example, allowing your opponent to drive toward the basket for a better shot by guarding your opponent too closely, instead of more wisely guarding at a distance that would prevent a more certainly winning drive toward the basket.

snob effect:

A snob effect is a negative network externality that results from a consumer’s desire to own a good because it is rare, exclusive or unique. The fewer the number of people who own a good with snobbish appeal, the higher the demand price an individual afflicted by the snob effect is willing to pay. The power of the snob effect depends largely on the satisfaction one gets from owning goods viewed as exclusive and prestigious. Examples of goods for which the snob effect can be powerful include rare works of art, custom designed clothing, and mansions. See also positional good, network externality and Veblen effect, and contrast with bandwagon effect.

social capital:

Social capital refers to non-governmental infrastructure that facilitates cooperation and production in a country. For example, social capital includes the productive activities of such non-governmental organizations (NGOs) as charities, churches, and other voluntary associations.

social cost:

The social cost of an economic activity is the total of the opportunity cost of the resources used in the activity plus any negative externalities and minus any positive externalities. Therefore, the social cost reflects all market and non-market costs of the activity. See also negative externalities.

social costs of inflation:

The social cost of inflation includes personal stress and social frictions deriving from disappointed expectations imbedded in the implicit and explicit agreements that bind people together. Contrast with distortion costs of inflation, which are the values of resources wasted because of inflation. See also menu costs of inflation and shoe-leather costs of inflation.

social Darwinism:

Social Darwinism is a theory that vigorous competition and inequalities in the distribution of income are a reflection of the rewards for characteristics that foster the survival of humans as a species.

social entrepreneurs:

Social entrepreneurs are individuals who start private organizations that tackle such social problems as poverty or infectious diseases and whose motives do not appear to be narrow self interest. For example, microcredit was originated by 2006 Nobel Peace Prize winner Muhammad Yunus, an economist and social entrepreneur who launched the non-profit Grameem Bank in Bangladesh. See also entrepreneur and microcredit.

social norm:

See norm.

social overhead capital:

See infrastructure.

Social Security:

In the depths of the Great Depression, President Franklin D. Roosevelt persuaded Congress to enact Social Security, which provided for an “Old Age Revolving Pension Plan”. This plan created a mandatory “savings” program for workers by withdrawing from their wages. (Social Security is funded by a payroll tax.) In theory, these “savings” would be returned to the workers through Social Security benefits when they retired. In fact, Social Security has always been largely a “pay as you go” plan, wherein today’s workers pay for today’s retirees. The Social Security system has also been broadened to include health insurance for retirees (Medicare) and payments to retirees’ spouses and disabled workers. Will Social Security Absorb National Debt

socialism:

Socialism is a system characterized by collective ownership of property and government allocation of resources. People who favor socialism are called socialists. Contrast with capitalism and laissez faire. See Evolutionary Socialism

socially conscious investment funds:

“Socially-conscious” investment funds channel saver’s funds into financial securities issued by firms that put a premium on operating ethically and protecting the environment. The theory of efficient markets suggests that the strategy of “socially conscious” investment ultimately has little or no economic effect.

socially necessary labor:

The Marxist concept is that socially necessary labor includes not only direct labor time, but also the labor time used to construct factories and to produce capital equipment; Marxists view all commodities and capital as “congealed labor”.

sociobiology:

Sociobiology is an academic discipline that emphasizes genetics and evolutionary theory to study the social, cultural, and economic behavior of humans and animals. All sentient organisms are assumed to behave in ways they expect to maximize the weighted probabilities that the organism’s gene pool will be perpetuated. Sociobiology is indiscernibly different from evolutionary psychology.

socioeconomic mobility:

Socioeconomic mobility is the ability of individuals to move from one socioeconomic class (e.g., low class, middle class, or upper class) to another socioeconomic class.

sociology:

Sociology is the study of human social behavior, especially the study of the origins, organization, institutions, and development of human society.

soft energy path:

Advocates of a set of policies known as soft energy path advocate reducing humankind’s dependence on fossil fuels by using existing energy sources more efficiently and encouraging development of alternative energy resources and technologies. Contrast with hard energy path.

soft landing:

Pundits sometimes use the term soft landing to describe a process by which government policies enable an economy to avoid a recession while inflationary are abated. See also: hard landing, inflation, and recession.

soft loan:

Soft loans are sometimes called concessional funding and are made at less than market interest rates and usually permit repayment at very lenient and flexible terms. Federal loans to financial institutions and U.S. automakers during the recession of 2008-2010 are examples.

sole proprietorship:

A sole proprietorship is non-corporate firm owned and managed by a lone individual.

Solovian growth:

Economic growth stimulated by increases in economic capital or improvements in human capital is sometimes termed Solovian growth, in honor of the growth theory developed by Nobelist Robert Solow.

Solow growth model:

The Solow growth model relies on neoclassical production functions and explains economic growth as, initially, roughly proportional to the rates of growth of labor and capital in a country. A more complete version of this model, authored by Nobel Prize winner Robert Solow, specifies growth as emerging from interactions between changes in four variables: K (capital), L (labor), AL (effective labor), and T (technology).

Solow residual:

In the Solow growth model, growth that cannot be explained by increases in the amounts of resources available are lumped into the Solow residual and attributed to technological advances.

Solow, Robert:

Robert Solow [1924- ] won the Nobel Prize in Economics in 1987.

solvent:

Individuals or organizations are solvent if the total value of their assets exceeds the total value of their liabilities, which implies that they are expected to be able to repay any indebtedness previously incurred.

spatial competition:

The model of spatial competition is based on an assumption that competing firms often locate close to each other to gain cluster economies – reductions in transaction costs for themselves or their customers. This theory explains the existence of shopping malls, for example.

spatial mismatch:

A spatial mismatch is a situation in which pools of people willing and otherwise available to work are located in geographic areas distant from potential places of employment and transportation costs render employment unfeasible. Many jobs, for example, have been relocated from central cities into suburban areas. The result is high unemployment rates among relatively unskilled urban dwellers.

special interest groups:

Special interest groups (SIGs) are collections of individuals or organizations that can gain from public policies not necessarily in accord with the interests of other groups or society as a whole. See Political Allocation

specialization:

Specialization is the process whereby different resources (e.g., capital, or different types of labor) are used to produce different goods. This is most advantageous when resources are allocated so that every good is produced at the lowest possible opportunity cost. See also division of labor.

specialization gains from trade:

The specialization gains from trade are benefits that arise from producing and selling goods in which you have a comparative advantage and buying other goods from other parties who can produce them at lower cost. See law of comparative advantage for elaboration.

specie:

Commodity money, usually gold or silver coins, is called specie, especially in early writings about economics.

specie-flow mechanism:

The specie-flow mechanism is a theory developed by David Hume to counter the view of most mercantilists that the wealth of a nation depends on exporting more than is imported, with this surplus in the balance of trade to be received as gold. Hume pointed out that such increases in the supply of gold would precipitate inflation, and that higher domestic prices would encourage imports and discourage foreigners from buying exports. Thus, Hume argued that mercantilist policies were self defeating. The specie-flow mechanism was an early foundation for the quantity theory of money.

specific risk:

Specific risk is the risk to a financial investor that a particular stock or bond may fall. Specific risk can be reduced through diversification of a portfolio. See also diversification, market risk and uncertainty.

specific training:

Specific training is human capital a firm provides a worker that only increases the productivity of the worker for that firm.

speculation:

Speculation is the process of buying a good or asset at one point in time in hopes of selling it for a higher price at a later time. See also arbitrage and intermediaries. Click on the link on speculation for a deeper look into its effects, both as a bane on the silver market of the 70s and 80s and as a boon following hurricane Katrina in 2005. See Speculators

speculative attack:

A speculative attack is the process in an asset market whereby a surge in sales of said asset is caused by investor expectations of an imminent price fall. The asset may not have objectively decreased in value, but sales (which ultimately result in devaluation of said asset) are caused by investors’ beliefs. Speculative attacks are frequently viewed as undermining the stability of the exchange rate of a vulnerable country’s currency when that currency is thought to be overvalued, but may also occur in when the stock issued by a corporation is viewed as overvalued. This type of market activity can be included as a subset of John Maynard Keynes’s belief in “animal spirits” – a herdlike mentality of investing.

speculative bubble.

A speculative bubble is a price deviation such that the prices of assets exceed the discounted present values of the expected income stream from the assets. Contrast with efficient markets and see also animal spirits and Ponzi scheme.

speculative demand for money:

The speculative demand for money is based on the characteristic of money is that it can serve as a store of value – a mechanism for holding wealth. The speculative demand for money is inversely related to the interest and refers to the amount of money that economic transactors desire to hold at alternative interest rates. People may view money as a desirable asset [store of value] if they: (a) perceive money as riskless relative to alternative assets, (b) confront transaction costs in acquiring other assets that exceed their expected rates of return, or (c) expect the prices of alternative assets to fall in the near future. Example: You might hold more money in cash or bank deposits if you expect the prices of stocks or bonds to fall. Also known as asset demand for money. See also liquidity preference and liquidity trap.

speculative money balances:

Speculative money balances rare funds held with the expectation that prices of alternative assets (e.g., stocks or bonds) will fall in the near future. See also liquidity preference.

speculators:

Speculators are intermediaries who buy a good in the hope of selling it at a higher price at a later point in time. Profitable speculation tends to reduce price volatility and the risks to others of doing business. Click on the link on speculation for a look into the place of speculators in any economy, be it positive or negative.

spillovers:

Spillovers (externalities) occur when benefits or costs are bestowed upon third parties who are not part of a transaction. Spillovers tend to produce false price signals and lead to nonoptimal decisions.

spin-off:

1.      A spin-off is a peripheral invention that accompanies a major innovation or project. For example, laser surgery became a spinoff of the space program.

2.      A spin-off is a former subsidiary of a company that achieves a separate corporate identity as a firm. For example, 3-Comm, a maker of computer connection devices, launched Palm in 2000 as a separate corporation after its Palm Pilot division became incredibly successful.

spot market:

In a spot market, goods, services, or financial securities are traded for immediate delivery. See also futures contracts and forward market, where delivery is mandated for a future point in time.

spot price:

The spot price is the most recent price agreed upon by a buyer and seller when a transactions in a commodity, currency, or security requires immediate delivery. A spot price differs from a forward price because in a spot transaction, delivery and payment are immediate, whereas in a forward price, delivery will occur at some point in the future, and payment may be either immediate or upon delivery.

spread:

The spread (or mark-up) is the difference between a sellers’ cost of securing a unit of a good and the price at which the good is sold. In financial markets, the spread is the difference between the interest rate paid the ultimate supplier of financial capital (e.g., a saver who makes a bank deposit) and the interest rate the financial intermediary charges for a loan.

stabilization:

Stabilization entails implementing monetary or fiscal policies intended to achieve full employment, price stability, and economic growth.

stable equilibrium:

A stable equilibrium exists if a disruption that displaces the system generates forces to restore the original equilibrium state. The first derivatives of functions within a stable system are zero and the second derivatives are positive. A stable equilibrium is similar to the bottom of a bowl. If a marble was dropped into the bowl it would roll up and down the sides of the bowl eventually stopping in the very bottom of the bowl. This point where the marble stops is the equilibrium because, untouched, the marble will remain indefinitely at this spot or equilibrium. It is stable as opposed to unstable because if the marble was pushed in any direction away from the center it will always come back to the same equilibrium point, provided it is not pushed all the way out of the bowl.

stagflation:

Stagflation is the simultaneous occurrence of high rates of inflation and high rates of unemployment; stagflation, or inflationary recession, occurs during both demand-induced and supply-induced cycles of inflation when Aggregate Supply declines relative to Aggregate Demand.

stakeholders:

Stakeholders are groups of individuals whose interests are perceived as potentially affected by the actions of an organization, usually a business firm. For example, a firm’s stakeholders include its stockholders, bondholders, employees, customers, and people who reside near a firm’s production facilities. People who assert that corporations have a social responsibility that transcends merely maximizing stockholders wealth often argue that the interests of these other stakeholders should partially shape corporate policies.

standard deviation:

A standard deviation is measure of variation that indicates the distance between the scores of a distribution and the mean; it is determined by taking the square root of the average of the squared deviations in a given distribution. It can be used to indicate the proportion of data within certain ranges of scale values when the distribution conforms closely to the normal curve. The formula for standard deviation in a given sample is: s=√Σ(x-μ)²/(n-1)

standard economic theory:

Standard economic theory (SET) about human behavior hinges on the assumptions that:

1.      Human beings are self-interested, and they seek pleasure and try to avoid pain.

2.      Human beings are rational and forward-looking.

3.      Human beings are time consistent –individuals’ choices at any moment are assumed consistent with the choices they expect to make at future points in time.

4.      Human beings tend to be somewhat risk averse.

5.      Human beings must optimize because choices are bounded by limited resources.

Behavioral economists differ with standard economic theory by accepting the research findings of cognitive psychologists and others that human decision-making is characterized by bounded rationality, bounded self interest, and bounded will power.  See also behavioral economics.

Standard Industry Classification:

Standard Industry Classification (SIC) codes are categories developed by the Bureau of Census to classify industries by the types of output firms produce.

standard of deferred payment:

Money performs as a standard of deferred payment because of its acceptability in the payment of contractual obligations involving future payments.

stars:

“Stars” are products with growing markets and significant market shares.

startup:

A recently established firm is sometimes called a “startup.”

state banks:

State banks are banks chartered by state governments, and have the option of becoming members of the Federal Reserve System.

static expectations:

Static expectations are expectations that some current situation (e.g., today’s prices, or the current rate of inflation) will prevail across the foreseeable future. Contrast with adaptive expectations and rational expectations.

static models:

Analytical models are static if variables in the model are assumed not to change in predictable ways across time. Contrast with dynamic models.

status quo:

The term status quo refers to the current state of affairs, such as the configuration of wealth or power or some other aspect of the current situation, whatever that might be.

status quo bias:

A status quo bias (or status quo effect) is a tendency to stick with established decisions. Greater subjective psychological damage seems to be associated with errors of commission than with errors of omission. Thus, preferences appear biased towards loss aversion and therefore, tend to favor the known to the unknown so that the current situation has significant inertia.

statutory (legal) incidence of a tax:

The statutory (legal) incidence of a tax falls on the party responsible for paying the tax, but a tax’s economic incidence (burden) may be shifted.

sticky prices:

Prices are sticky when the quantity of a good or resource supplied differs from the quantity demanded because prices fail to adjust instantaneously. Keynesian models of recessions are based in part on sticky wages and prices.

sticky wages:

Sticky wages partially account for the positive slope of short-run Aggregate Supply curves. “Stickiness” occurs when nominal wages fail to adjust to changes in market conditions as rapidly as prices do. Wages tend to rise in response to given amounts of excess demand for labor faster than they fall because of similar amounts of excess supply. Wage stickiness can result from (a) reluctance of individual workers to accept wage cuts when the value of their productivity has fallen, (b) the prevalence of implicit or explicit long term contracts between workers and firms, or (c) efficiency wages – employers may try to secure diligence (non-shirking) and/or the loyalty of career employees by paying wages rates that exceed those that would prevail in purely competitive labor markets. See also asymmetric wage-price reaction functions.

Stigler, George:

George Stigler [1911-1991] won the Nobel Prize in Economics in 1982, and is remembered for a large body of work in the theory of market structure, and for being the most prominent pioneer in developing the theory of regulation and the theory of information as a produced good. An avid intellectual historian, he and his long-time friend Milton Friedman were co-leaders of the Chicago school of economics for roughly five decades.

Stigler’s Law:

Nobel Prize winner George Stigler once observed that when economic laws or principles are attributed to particular people, (e.g., the Laffer curve), the person so attributed is seldom if ever the person who originally expressed the concept.  This observation has become known as “Stigler’s Law, which naturally raises the question, “Who was the first thinker to assert Stigler’s Law?”

stochastic macroequilibration:

Stochastic macroequilibration is the name Nobel-Prize winning economist James Tobin gave to his 1972 theory, which assumes that given amounts of excess demand in some sectors of the economy typically yield increases in wages and prices that exceed declines in wages and prices in response to comparable amounts of excess supply in other sectors of the economy. It further assumes that the structure of the economy is constantly in flux, and so cannot be assumed constant in the long run. This theory yields “long run” Phillips curves, and was offered as a rebuttal to the natural rate models offered by Milton Friedman and Edmund Phelps. Whether long run Phillips curves (trade-offs between unemployment and inflation) exist or not depends critically on what is assumed constant in the long run. Among other things, the “long run” cited by Friedman implicitly holds constant: (a) the structure of the economy, (b) the amount of human and physical economic capital, (c) the size and composition of the labor force, (c) technology, and (d) the composition of demand. The stochastic macroequilibration model relaxes the assumptions that such phenomena are fixed in the long run. [Note: A colleague remarked that Tobin apparently lacked a knack for marketing. The term “stochastic macroequilibration” lacks the elegance or panache of “natural rate.”] See also natural rate of unemployment, natural rate of interest, Phillips curve, asymmetric wage-price reaction functions, and hysteresis.

stochastic variabel:

A process involves stochastic variables when future values of the variables being observed cannot be predicted with certainty. For example, changes in the values of stocks or bonds are stochastic, as are the speeds of individual balls thrown by major league “knuckle-ball” pitchers, or the grades of students who are entering college. See also efficient market.

stock:

See common stock.

stock broker:

A stock broker is an intermediary who matches financial investors who want to buy stock with parties that want to sell stock  Most exchanges of stocks traditionally used two or more brokers as intermediaries but this pattern is being eroded because computerized on-line exchanges of stock are resulting in significant disintermediation in some financial markets.

stock variable:

A stock variable is any variable that can be measured holding time constant. Contrast with flow variable. Wealth, for example, is a stock variable, while income is a flow variable.

Stolper-Samuelson theorem of trade:

See factor price equalization.

store of value:

A store of value is any asset used to conserve wealth. Money is often useful as a store of value (a mechanism for holding wealth) in that, except for inflation, it is relatively riskless. Another risk, though usually minor, is than money may lose value in international payments because of exchange rate risk.

strategic barriers to entry:

Strategic barriers to entry are erected through the policies of existing firms to raise the costs of entry into an industry by new firms.

strategic behavior:

Strategic behavior is based on ascertaining how other people (“players” in game theory) are likely to behave, and then following tactics to maximize the decision maker’s gains or to minimize any harm.

strategic complementarity:

Strategic complementarity exists when the choices of other participants in an event provides incentives for similar behavior. For example, if people tend to walk on the right-hand side of a sidewalk when foot traffic is congested, then other pedestrians will gain by walking on the right-hand sides of sidewalks.

strategic substitutability:

Strategic substitutability occurs when choices by participants in an activity provide incentives for offsetting behavior by other participants. For example, if the price of gasoline is driven up because most people buy gas hog SUVs, many other commuters will gain by buying hybrid vehicles that, on average, generate much high gas mileage.

stratification:

Stratification is the state in which social divisions are apparent through or perhaps even defined by differences in wealth and power.

strike:

A strike occurs when unionized workers refuse to work until the union and the employer sign a contract that covers wages and working conditions. See also collective bargaining, scab, and lockout.

striking price:

The striking price is the price at which a stock may be sold (put) or bought (call), as outlined in the conditions of an option.  See also call, option, put.

structural deficit or surplus:

A structural deficit is the budget shortfall that would result because of the design of current government tax and outlay programs, were the economy operating at its capacity – at full employment. The structural deficit is sometimes called the full-employment deficit. If federal government revenue would exceed federal government spending were the economy at full employment, then the federal government is running a structural surplus, which may entail fiscal drag. See also cyclical deficit.

structural inflation:

Structural inflation is inflation that results from systematic changes in market conditions other than changes induced by monetary or fiscal policies. For example, accelerating industrialization and growing demands in developing countries may consistently raise the prices of petroleum across time, independently of domestic monetary policies.

structural shocks:

Structural shocks cause aggregate supply to fall. If the shock is permanent, then the analysis of real business cycle theorists may apply. If the shocks are temporary, then costly friction encountered in moving resources from declining to growing sectors of the economy may cause the price level to rise and temporary increases in unemployment rates.

structural shocks theory:

The structural shocks theory is a part of modern Keynesian analysis suggesting that recurring shocks to large numbers of individual markets may create excessive unemployment that can only be overcome by expansionary policies, lending a natural inflationary bias to market-based economic system. The structural shocks theory has been offered as an explanation for Phillips curves. Shocks may temporarily reduce Aggregate Supply because of friction encountered in moving resources from declining to growing sectors. See also asymmetric wage-price reaction functions and stochastic macroequilibration.

structural unemployment:

Structural unemployment occurs because potential workers lack the skills required for existing job opportunities.

structuralist approach:

The Keynesian structuralist theory of Phillips curves posits that as unemployment falls and full employment is approached, it becomes increasingly costly to produce extra output. This structuralist approach emphasizes production bottlenecks as foundations for the Phillips curve.

structure-conduct-performance paradigm:

The structure-conduct-performance (S-C-P) paradigm is the broad theory that market structure (e.g., economies of scale, the number and relative sizes of firms in an industry, and the nature of the product) almost rigidly determines each firm’s conduct (e.g., output decisions, pricing behavior, and expenditures on research and development), which yields an industry’s overall performance (e.g., its profitability, efficiency and rate of technological progress.)

structured finance:

Structured finance is the process of bundling a collection of assets that are at less than perfectly homogeneous and establishing these collections as collateral for new securities, which because the underlying assets are somewhat diversified, are presumably less risky than the original assets. See also securitization and collateralized debt obligations (CDOs).

stylized facts:

Most models are judged by their predictive power instead of the realism in their assumptions, so economists use the phrase stylized facts to characterize the assumptions in many models.

subjective probability:

A subjective probability is an assessment about probability based on the extent to which an individual believes a probability function to have certain properties without proof that the assumptions upon which the subjective probabilities are based are either relevant or accurate. See also Bayesian inference.

sub-optimal:

A situation is described as sub-optimal when a feasible change can yield a Pareto superior result. See Pareto move.

subprime lending:

Subprime lending involves granting mortgage loans to borrowers who can pay only minimal or no down payments, and to borrowers with poor credit histories. Subprime loans frequently exceed the value of the collateral for the loan. Lenders who initiate subprime loans commonly downplay the riskiness of these loans when sell them to larger financial institutions after bundling such loans. Foreclosures predictably tend to be common.

subsidies:

Subsidies are payments by government for conformity to certain criteria (e.g., income level) or that incentivize specific production (e.g., agricultural goods and football stadiums), specific categories of transactions (e.g., exports), or specific forms of consumption (e.g., education). Click on the link for an example of subsidies in a comparison between effluent charges and subsidizing abatement as two different and opposing ways to provide incentives for firms to reduce pollution.

subsistence crop:

A subsistence crop is a crop fed to the farmer’s own livestock or grown as food for the farmer’s family. Contrast with a cash crop, which is intended for sale instead of being consumed on the farm.

subsistence theory of wages:

The subsistence theory of wages is the theory that classical economists (most notably Thomas Malthus, David Ricardo, and a minor Ricardian named Karl Marx) used to explain how wage rates were determined. This theory suggests that wages will barely accommodate the biological needs of workers, with only minor adjustments to meet their social and customary needs.

substitute goods:

Substitute goods are goods that are substituted one for another in consumption. Positive cross price-elasticities of demand exist between substitute goods. Click on the link on speculation to read on the Hunt family silver hoarding of the 70s and 80s and learn why when the price of silver rose, gold prices also soared.

substitution effect (consumption):

The substitution effect in consumption is the change in the pattern of consumption brought about by a change in the relative price structure. This substitution effect of a price change is always negative, because consumers will always substitute goods that become relatively more costly with goods that become relatively cheaper. A substitution effect occurs when, as a good becomes relatively less costly, it is substituted for relatively more costly goods, and vice versa. The substitution effect is generally so powerful that it serves as the theoretical underpinning for the law of demand.

substitution effect: (labor vs. leisure):

In labor markets, a higher wage yields a substitution effect by which there are incentives for more hours of work, and reduced leisure time – it becomes more costly to consume leisure.  Therefore, higher wages impose pressure to work more hours.

substitution effect: (production):

In production, the substitution effect causes firms to adjust the relative intensities with which they use resources as relative resource costs vary. For example, an increase in the wage rate of labor relative to the cost of capital (w/r) will result in the substitution of capital for labor.

sumptuary goods:

Sumptuary goods are positional goods overwhelmingly consumed by the upper-class or elite group in a society.

sunk cost effect:

The sunk cost effect is the tendency to persist in a behavior because of previous expenditures of resources, or money, or of personal time and effort. The sunk cost effect is both inefficient and irrational, in that decisions will be suboptimal whenever sunk costs weigh on decisions. Negative aspects of sunk cost effects occur when investors hold on to losing stocks while selling stocks that have increased in price, or when policymakers continue to support a costly and bloody war based on the argument that the military personnel already killed or maimed will have died (or sacrificed) in vain if the conflict is not continued until victory is achieved.

sunk costs:

See fixed costs.

sunspot equilibrium:

A pundit skeptical that prevailing beliefs are valid about how an arbitrary external factor affects a market may sarcastically refer to the equilibrium that exists because of such beliefs as a sunspot equilibrium.

sunspot theory:

Sunspot theory is an exotic and largely discredited external shock theory of business cycles developed in 1875 by W. Stanley Jevons, a pioneering mathematical economist, who reasoned that sunspots (nuclear storms on the sun’s surface) affect weather and, hence, agriculture on the earth.

superior good:

A loosely defined type of good for which the income elasticity of demand is greater than one. The demand for a superior good is relatively sensitive to changes in real income. A luxury good is a good for which the income elasticity of demand is significantly greater than one.

superneutrality:

Superneutrality means that equilibrating price adjustments are instantaneous so that changes in money growth lack even transitory effects on any and all economic variables. See neutrality for elaboration.

supplier surplus:

A supplier surplus is any excess of revenues over costs. In a competitive market for output, supplier surplus is the area above a supply curve but below the price line. In a competitive resource market, supplier surplus corresponds precisely to economic rent. See also consumer surplus, compensating variation, producer surplus, rent, and quasi-rent.

supplier-induced demand:

Supplier-induced demand (SID) occurs when an agent (e.g., a doctor) uses superior knowledge to induce a principal (e.g., a patient) to buy more of a good (e.g., medical care) than is necessary. Supplier-induced demand is often cited as an example of inefficiency caused by principal-agent problems in the medical care market. Click on the link on asymmetric information for a look at supplier-induced demand compared to fee for service within the medical profession.

supply:

Supply refers to the amounts of specific goods or resources that producers or owners are willing to sell in the market under various conditions.

supply chain:

A supply chain comprises the institutional arrangements and technologies that yield delivery of a final product to its ultimate users, and begins with the initial transformation of the raw materials used to produce the goods.

supply curve:

A supply curve is a graphic representation of the maximum quantities of a good or resources that producers or owners are willing to supply at various market prices.

supply function:

A supply function is a representation of how the amount of a good or resource made available in the marketplace is affected by certain determinants. A market supply function, for example, can be expressed as Qs = h(P, Pres, Pog, Tech, T, N, E), where Qs = the amount sellers will make available for purchase per period; P = price of the good; Pres = resource prices; Pog = prices of other relevant producible goods; Tech = the state of technology; T = a proxy for taxes, subsidies, or government regulations governing production and sales; N = number of firms in the market; and E = expectations about such things as future prices, regulations, or resource availability.

supply of labor:

The supply of labor is a graph depicting the amounts of time people are willing to work per period at alternative wage rates.

supply price:

The supply price is the lowest price at which sellers are willing to make a specific quantity of a good available. See also demand price.

supply schedule:

A supply schedule is a table reflecting the maximum quantities of a given good or resource that sellers will make available for purchase per period at various market prices.

supply shock:

A supply shock is any disruption that shifts a supply curve. In macroeconomics, supply shocks are external forces that increase rates of unemployment or inflation.

supply, law of:

The law of supply is the theory that the quantity of an economic good supplied varies directly with the price of the economic good.

supply-side economics:

Supply-side economics is an emphasis on the importance of the effects of government policies on Aggregate Supply; an attempt to rebut the Keynesian emphasis on Aggregate Expenditures.

supply-side inflation:

Supply-side inflation results when Aggregate Supply shrinks relative to Aggregate Demand, causing the price level to rise and aggregate output to fall. Cost-push inflation and administered price inflation are subsets of supply side inflation. Extreme episodes of supply-side inflation are slumpflation and stagflation.

surplus:

In a market, a surplus (or excess supply) is the excess of the quantity supplied over the quantity demanded at a given price. Contrast with shortage or excess demand.

surplus in a budget:

When referring to a government budget, a surplus is any excess of government revenues over government outlays.

surplus value:

Surplus value is the Marxist term for the difference between the total value of what workers produce and what workers are paid for their labor service. Thus, surplus value is the sum of rent, interest, and profits. Surplus value is expropriated by the capitalists, according to Marxists.

survival principle:

The survival principle is the theory that the most efficient firms in an industry are those that remain viable over time. Thus, the optimal size for firms in an industry is identified as the size of the firms that survive in an industry over long periods.

sustainable development:

Sustainable development entails achieving a level of economic activity that supports the current population without reducing the resources available so much that the per capita income of future generations will fall. Advocates of the concept of sustainable development as a curb on the rate economic growth tend to be skeptical about technological advances as an offset to the reduced availability of such nonrenewable natural resources as oil across time.

sustainable growth:

Sustainable growth is the maximum rate of economic growth that yields no net pressure for future declines in the level of economic activity.

swap:

A swap is a contract between two parties to exchange streams of payment for a specified duration governed by predetermined rules. Swaps are financial derivatives, and these obligations are often fixed-rate payments of one party exchanged for floating-rate payments of the other.

sweatshop:

A factory or other place of work where employees work under harsh conditions.  The workers are either are paid much less than the prevailing wage, or they are abused, or are forced to work excessive hours, or in unsafe conditions, or some combination of these circumstances.

switching costs:

Switching costs are the costs encountered when a buyer switches from one marketplace or supplier to another. As switching costs rise, the amount of switching that occurs in response to relatively lower prices from other markets or suppliers will decline. For example, a long term contract on a cell phone may be a barrier to a consumer who could purchase cell phone services from a rival firm that just announced lower prices. Network effects often increase switching costs. If most of your friends and acquaintances subscribe to a cell phone service that does not charge for calls made to other subscribers, the resulting high switching costs tend to “lock in” current subscribers.

syllogism:

Syllogism is a subset of deductive reasoning, and entails deriving a logical conclusion based on only two premises: If proposition A is true and proposition B is true, then conclusion C must be true. Aristotle advocated the use of syllogism as tool for exposing falsehood and discovering truth, but the technique requires very careful definitions of terms. Open the file misleading syllogisms to see examples of problems with syllogisms. See also deductive reasoning and inductive reasoning.

symmetric game:

In game theory, a game is symmetric when all players face exactly the same choices, and every choice generates the same outcomes for every player. The best response to a particular player is the same choice of the other player, although the players may not make the same choices in every constest, especially if the game is repetitive. The Prisoner’s Dilemma, Chicken, Battle of the Sexes, and the Stag Hunt can all be structured as symmetric games. See also game theory, prisoner’s dilemma, and stag hunt.

symmetric information:

Information is symmetric when agents who are potential parties to a transaction have equivalent access to information germane to their potential actions or agreements. See also transparency and contrast with asymmetric information.

syndicalism:

Syndicalism is a revolutionary sociopolitical theory that advocates the overthrow of government and the reorganization of society into syndicates, which are effectively industry-wide trade unions.

syndicate:

A syndicate is a short term organization formed among investment bankers to ensure the placement of a new security issue.

synergy:

A synergy is a gain from combination when the whole is greater than the sum of its parts. Corporate mergers are often publicized as yielding synergies – gains from economies of scale or scope – that are beneficial to all the stockholders and to the public at large. See also network externality.

systemic risk:

Systemic risk, also known as systematic risk or market risk, is the risk that the values of all financial assets will fluctuate simultaneously and in similar directions. Diversification can reduce or eliminate specific risk, which applies to the values of particular assets, but not systemic risk.