Letter of Credit
A Letter of credit is an obligation of a bank, usually irrevocable, issued on behalf of their customer and promising to pay a sum of money to a beneficiary upon the happening of a certain event or events.
Oligopoly Market Structure
In an oligopoly market structure, there are just a few interdependent firms that collectively dominate the market. While individually powerful, each of these firms also cannot prevent other competing firms from holding sway over the market.
Monopolistic Competition
In monopolistic competition, there are many small firms who all have minimal shares of the market. Firms have many competitors, but each one sells a slightly different product.
Command Economy
In a command economy system, it is not the free market but the government that makes important decisions like which goods to produce, what amount of these goods to produce, and how much they cost. The government also makes decisions about incomes and investments.
Factors of Production
The four factors of production are inputs used in various combinations for the production of goods and services to make an economic profit. The factors of production are land, labor, capital, and entrepreneurship.
Comparative Advantage
Comparative advantage is a situation in which a country may produce goods at a lower opportunity cost than another country, but not necessarily have an absolute advantage in producing that good.
Stagflation
Stagflation is an unusual economic situation in which high inflation (leading to increasing prices) coincides with increasing unemployment rates and decreasing levels of output/stagnation of economic growth. That’s why it’s called “stagflation”.
Price Discrimination
Price discrimination is a kind of selling strategy that involves a firm selling a good or service to different buyers at two or more different prices, for reasons not necessarily associated with cost. Price discrimination results in greater revenue for the firm.
Moral Hazard
Moral hazard is a set of circumstances in which one individual or entity has the ability to take a risk because another individual or entity we’ll have to deal with any negative outcomes. Moral hazard specifically refers to the risk that exists when two parties lack equal knowledge of actions taken following an existing agreement.
Natural Monopoly
Most of us are well-acquainted with the idea of a monopoly: when there is only one firm prevailing in a particular industry. However, from a regulatory view, monopoly power exists when a single firm controls 25% or more of a specific market.
Price Ceiling
A price ceiling (in other words, a maximum price) is put into effect when the government believes the price is too high and sets a maximum price that producers can charge; this price must lie below the equilibrium price in order for the price ceiling to have an effect.
Purchasing Power Parity
Purchasing power parity (PPP) is a theory that says that in the long run (typically over several decades), the exchange rates between countries should even out so that goods essentially cost the same amount in both countries.
Marginal Cost
The marginal cost of production is an economic concept that describes the increase in total production cost when producing one more unit of a good. It is highly useful to decision-making in that it allows firms to understand what level of production will allow them to have economies of scale.
Introduction to Unemployment
A person is considered to be unemployed if he doesn’t currently doesn’t have a job and is actively searching for one. When we look at the unemployment rate, we consider someone who is actively seeking a job. Otherwise, we do not count them in the labor force.
Consumer Surplus
Consumer Surplus is the area under the demand curve (see the graph below) that represents the difference between what a consumer is willing and able to pay for a product, and what the consumer actually ends up paying.
Gross Domestic Product (GDP)
GDP stands for Gross Domestic Product, and the GDP of a country is the total value of all final goods and services produced within that country over a period of time.
Total Revenue
Total revenue is the amount of money that a company earns by selling its goods and/or services during a period of time (e.g. a day or a week).
Seasonal Unemployment
The concept of seasonal unemployment describes a situation when workers experience unemployment at certain times of the year when the demand has decreased. Although unemployment is always problematic, the upside is that seasonal unemployment doesn’t last–eventually, the peak season of a given industry arrives and many workers become employed once again.
Opportunity Cost
Opportunity cost is the positive opportunities missed out on by choosing a particular alternative (the next-best option). In other words, it’s what you don’t get to do when you make a choice.
Inflationary Gap
Otherwise known as an expansionary gap, an inflationary gap is the gap between an economy’s full-employment real GDP and its real GDP. In other words, the inflationary gap refers to the difference (that is, the gap) between the actual gross domestic product (GDP) and the GDP that would exist if the economy were at full employment (this is also known as the “potential GDP”).
Marginal Analysis
In the field of economics, marginal analysis entails the examination of the final or next unit of cost or of consumption. It involves a cost-benefit analysis of business decisions—that is, understanding whether a particular decision provides enough benefits to be worth the cost of that decision.
Marginal Utility
The concept of utility measures the satisfaction consumers derive from the consumption of goods and services. Marginal utility is specifically the utility that consumers derive from the consumption of additional units of goods and services.
Price Floor
A price floor or a minimum price is a regulatory tool used by the government. More specifically, it is defined as an intervention to raise market prices if the government feels the price is too low. In this case, since the new price is higher, the producers benefit. For a price floor to be effective, the minimum price has to be higher than the equilibrium price.
Average Variable Cost
In the field of economics, the term “average variable cost” describes the variable cost for each unit. Variable costs are those that vary with changes in output. Examples of variable costs, otherwise known as direct costs, include some forms of labor costs, raw materials, fuel, etc.
Discretionary Fiscal Policy
Discretionary fiscal policy refers to government policy that alters government spending or taxes. Its purpose is to expand or shrink the economy as needed. For instance, when the UK government cut the VAT in 2009, this was intended to produce a boost in spending.
Equimarginal Principle
The equimarginal principle is an important idea in the economic subfield of managerial economics. It is otherwise known as the “equal marginal principle” or the “principle of maximum satisfaction.” The equimarginal principle states that consumers choose combinations of various goods in order to achieve maximum total utility.
Supply Side Economics
Supply Side Economics involves policies aimed at increasing aggregate supply (AS), a shift from left to right. They are based on the belief that higher rates of production will lead to higher rates of economic growth.
Subsidies
Subsidies are defined as a form of support given to producers of a product that helps to reduce the cost of production. This has the intended effect of increasing the production and consumption of that product. Goods that governments want to increase the use of are subsidized; these include important services and institutions like education and healthcare, among others.
Producer Surplus
The producer surplus is the area under the supply curve (see the graph below) that represents the difference between what a producer is willing and able to accept for selling a product, on the one hand, and what the producer can actually sell it for, on the other hand.
Nominal Interest Rate
The nominal interest rate is the interest rate that has not yet had inflation accounted for in the overall number. This interest rate will be quoted on things like loans, bonds, and the like. It is the rate “as advertised,” which will not necessarily reflect the reality of how the interest rate will actually manifest as influenced by inflation, compounding interest, taxation, fees, and other such factors.
Real Interest Rate
The real interest rate is found by adjusting a standard interest rate so that the effects of inflation are not present. This allows you to understand the interest rate better by revealing the true yield of lenders and investors as well as the true cost of funds for borrowers.
Introduction to Supply
Supply is quite a straightforward concept, understood by non-economists and economists alike. The term “supply” refers to the amount of a good or service that a firm is willing and able to offer for sale for a given period of time.
The Lorenz Curve
One of the five major and common macroeconomic goals of most governments is the equitable (fair) distribution of income, which is a crucial element of a functioning democratic society. With regard to this macroeconomic goal, the distribution of income or wealth in an economy is represented by a Lorenz curve.
The Gini Coefficient
The Gini coefficient, or Gini index, is derived from the Lorenz curve, and like the Lorenz curve, it measures the degree of economic equality across a given population and simplifies this reality into a single number.
Negative Externalities
Externalities are defined as those spillover effects of the consumption or production of a good that is not reflected in the price of the good. More specifically, negative externalities are the costs or harmful consequences experienced by a third party when an economic transaction takes place (i.e. when a good is either produced or consumed).
Positive Externalities
Whether positive or negative, externalities are the effects of a good’s consumption or production on third parties; these effects are not accounted for in the price of said goods. Externalities are otherwise known as “spill-over effects.”