- Branche: Economy; Printing & publishing
- Number of terms: 15233
- Number of blossaries: 1
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When a market left to itself does not allocate resources efficiently. Interventionist politicians usually allege market failure to justify their interventions. Economists have identified four main sorts or causes of market failure. * The abuse of market power, which can occur whenever a single buyer or seller can exert significant influence over prices or output (see monopoly and monopsony). * externalities – when the market does not take into account the impact of an economic activity on outsiders. For example, the market may ignore the costs imposed on outsiders by a firm polluting the environment. * public goods, such as national defense. How much defense would be provided if it were left to the market?
* Where there is incomplete or asymmetric information or uncertainty. Abuse of market power is best tackled through antitrust policy. Externalities can be reduced through regulation, a tax or subsidy, or by using property rights to force the market to take into account the welfare of all who are affected by an economic activity. The supply of public goods can be ensured by compelling everybody to pay for them through the tax system.
Industry:Economy
The market value of a company’s shares: the quoted share price multiplied by the total number of shares that the company has issued.
Industry:Economy
The difference made by one extra unit of something. Marginal revenue is the extra revenue earned by selling one more unit of something. The marginal price is how much extra a consumer must pay to buy one extra unit. Marginal utility is how much extra utility a person gets from consuming (or doing) an extra unit of something. The marginal product of labor is how much extra output a firm would get by employing an extra worker, or by getting an existing worker to put in an extra hour on the job. The marginal propensity to consume (or to save) measures by how much a household’s consumption (savings) would increase if its income rose by, say, $1. The marginal tax rate measures how much extra tax you would have to pay if you earned an extra dollar. The marginal cost (or whatever) can be very different from the average cost (or whatever), which simply divides total costs (or whatever) by the total number of units produced (or whatever). A common finding in microeconomics is that small incremental changes can matter enormously. In general, thinking “at the margin” often leads to better economic decision making than thinking about the averages. Alfred Marshall, the father of Neo-classical economics, based many of his theories of economic behavior on marginal rather than average behavior. For instance, given certain plausible assumptions, a profit-maximizing firm will increase production up to the point where marginal revenue equals marginal cost. This is because if marginal revenue exceeded marginal cost, the firm could increase its profit by producing an extra unit of output. Alternatively, if marginal cost exceeded marginal revenue, the firm could increase its profit by producing fewer units of output. In all walks of life, a basic rule of rational economic decision making is: do something only if the marginal utility you get from it exceeds the marginal cost of doing it.
Industry:Economy
Making things like cars or frozen food has shrunk in importance in most developed countries during the past half century as services have grown. In the United States and the UK, the proportion of workers in manufacturing has shrunk since 1900 from around 40% to barely 20%. More than two-thirds of output in OECD countries, and up to four-fifths of employment, is now in the services sector. At the same time, manufacturing has grown in importance in developing countries. Many people think that manufacturing somehow matters more than any other economic activity and is in some way superior to surfing the Internet or cutting somebody’s hair. This is prob¬ably nothing more than nostalgia for times past when making things in factories was what real men did, just as 150 years ago growing things in fields was what real men did. Mostly, the shift from manufacturing to services (as with the earlier shift from agriculture to manufacturing) reflects progress into jobs that create more utility, this time for real women as well as real men, which may explain why it is happening first in richer countries.
Industry:Economy
The big picture: analyzing economy-wide phenomena such as growth, inflation and unemployment. Contrast with microeconomics, the study of the behavior of individual markets, workers, households and firms. Although economists generally separate themselves into distinct macro and micro camps, macroeconomic phenomena are the product of all the microeconomic activity in an economy. The precise relationship between macro and micro is not particularly well understood, which has often made it difficult for a government to deliver well-run macroeconomic policy.
Industry:Economy
Top-down policy by government and central banks, usually intended to maximize growth while keeping down inflation and unemployment. The main instruments of macroeconomic policy are changes in the rate of interest and money supply, known as monetary policy, and changes in taxation and public spending, known as fiscal policy. The fact that unemployment and inflation often rise sharply, and that growth often slows or GDP falls, may be evidence of poorly executed macro¬economic policy. However, business cycles may simply be an unavoidable fact of economic life that macroeconomic policy, however well conducted, can never be sure of conquering.
Industry:Economy
Goods and services that have a high elasticity of demand. When the price of, say, a Caribbean holiday rises, the number of vacations demanded falls sharply. Likewise, demand for Caribbean holidays rises significantly as average income increases, certainly by more than demand for many normal goods. Contrast this with necessities, such as milk or bread, which people usually demand in quite similar quantities whatever their income and whatever the price.
Industry:Economy
A tax that is the same amount for everybody, regardless of income or wealth. Some economists argue that this is the most efficient form of taxation, as it does not distort incentives and thus it has no deadweight cost. This is because each person knows that whatever they do they will have to pay the same amount. It is also cheap to administer, as there is no complex process of measuring each person’s income and assets in order to calculate their tax bill. However, because rich and poor people pay the same, the tax may be perceived as unfair – as Margaret Thatcher found out when she introduced a lump-sum “poll tax”, a decision that was later to play a large part in her ousting as British prime minister.
Industry:Economy
Shifting activities that used to be done inside a firm to an outside company, which can do them more cost-effectively. Big firms have outsourced a growing amount of their business since the early 1990s, including increasingly offshoring work to cheaper employees at firms in countries such as India. This has become politically controversial in countries that lose jobs as a result of offshoring. However, a firm that outsources can improve its efficiency by focusing on those activities in which it can create the most value; the firm to which it outsources can also increase efficiency by specializing in that activity. That, at least, is the theory. In practice, managing the outsourcing process can be tricky, particularly for more complex activities.
Industry:Economy
How far an economy’s current output is below what it would be at full capacity. On average, inflation rises when output is above potential and falls when output is below potential. However, in the short run, the relationship between inflation and the output gap can deviate from the longer-term pattern and can thus be misleading. Alas for policymakers – because nobody really knows what an economy’s potential output is, the size and even the direction of the output gap can easily be misdiagnosed, which can contribute to serious errors in macroeconomic policy.
Industry:Economy
