Marginal Propensity to Consume
…to Save. Marginal Propensity to Consume Example For example, if an individual receives a $1,000 bonus on top of their normal annual salary. Now they have an extra $1,000 to…
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Financial Instruments
…are short-term and their maturity is usually less than 1 year For example, Commercial paper, treasury bills (federal govt. debt), short-term municipal debt, re-purchase agreements (repos), euro dollars. 2. Bonds…
Introduction to Demand
…For example, we say that the price of olive oil has gone up. In comparison to olive oil, other cooking oils such as canola oil or peanut oil suddenly seem…
Asymmetric Information
…to produce cheaper information (in the financial sector – companies need to disclose information). Companies are required to follow standard accounting principles, the presence of rating firms, the disclosure of…
The Lorenz Curve
…another example graph, in which there is less inequality, with the Lorenz curve now nearer to the line of perfect equality. In this example, the poorest 20% of the population…
The Decoy Effect
…option is, therefore, a decoy serving to increase preference for the dominating option. Decoy Effect Examples For example, if we consider a set of MP3 players, consumers will generally see…
Total Revenue
…does not affect it. However, most markets are imperfectly competitive. In an imperfectly competitive market, P has an inverse relationship with Q. In an imperfectly competitive market, too, price is…
Aggregate Demand
Aggregate demand (AD) is the total demand for final goods and services in a given economy at a given time and price level. There are four components of Aggregate Demand…
Welcome to Intelligent Economist
…You can learn more about the people behind The Intelligent Economist on our About page. Explore by categories: Latest Articles: The Federal Reserve Consumer Sovereignty The Accelerator Effect Indirect Tax…
The Easterlin Paradox
…happiness during the same period. However, over the years many researchers have provided evidence to disprove the Easterlin Paradox. For example, in an August 2008 research paper, Betsey Stevenson, Justin…
5 Macroeconomic Goals
…most central banks aim to achieve. For example, the U.S. Federal Reserve targets the inflation rate at roughly 2%. Five Macroeconomic Goals 1. Non-Inflationary Growth In other words, this is…
Stagflation
…services. Stagflation is commonly triggered by sharp increases in commodity prices. What Causes Stagflation? Stagflation has a number of potential causes, including: Government expansion of the money supply: When, for…
Introduction to Externalities
…the good. For example, the production of steel results in pollution being released into the air, but the cost of the pollution to the environment is not reflected in the…
Positive Externalities
…governments can use tax revenue to subsidize (or even make completely free) things like college education, thereby encouraging more youth to go to college. In this example, the positive externality…
Price Ceiling
…because a price ceiling is a maximum, rather than an exact required price. Real-World Price Ceiling Example Rent Control Rent control is a prominent price ceiling example. The local government…
Budget Constraint
When consumers’ income limits their consumption behaviors, this is known as a budget constraint. In other words, it’s all of the many combinations of goods/services that consumers are able to…
Exceptions to the Law of Demand
…they were compelled to spend more on a fixed quantity of bread. Therefore, they could not afford to purchase as much meat as before. They substituted bread for meat to…
Profit Maximization Rule
…= Marginal Revenue The MC = MR rule is quite versatile so that firms can apply the rule to many other decisions. For example, you can apply it to hours…
The Coase Theorem
…each other to reach a compromise than file a lawsuit. The Coase Theorem Example There is a fish market next to a coffee shop and the smell from the fish…
Marginal Rate of Substitution
…MRS. Marginal Rate of Substitution Example To illustrate an example, we’re going to use the following table as points on our indifference curve. This table is known as the indifference…
Constant Returns to Scale
…it describes how effectively and efficiently—in other words, profitably—a particular company or business is producing its goods or services. At this point, all factors of production are variable (not fixed)…
Labor Arbitrage
…of any work that can be performed on a computer (such as computer programming) or that makes use of college education, have been significantly reduced. Often, a prosperous nation (such…
Ceteris Paribus
…Example For example, when determining the cause of an increase in demand for a product, we could say that the price of a complementary product increases, Ceteris Paribus, then the…
Inferior Good
…worst economic disaster since the Great Depression of 1929.” Can you guess which two stocks thrived? McDonalds and Walmart. Both companies position themselves as cost options. Examples of Inferior Good…
Regulatory Capture
…Examples Here are a few notable examples of regulatory capture to help you understand how this phenomenon occurs: The fracking industry in Pennsylvania: there is a revolving door between industry…
Contestable Market
…entrants have equal access to technology, there is a constant threat of potential entry. This continuous risk increases competition in the market since there is virtually no cost to enter…
Tariffs
…The rates are broken down by the components and sizes of specific parts as well. For example, the general tariff rate on an imported microwave oven is 2%. Effect of…
Principles of Money And Banking
…has value and inflation adversely affects value. It affects decisions on immediate or later consumption, investment, and compound interest earnings. Lenders will demand compensation for parting with their money and…
The Glass-Steagall Act
History of The Glass-Steagall Act The Glass-Steagall Act (1933) separated depository institutions aka retail banks from investment banks and limited securities, activities, and affiliations within commercial banks and securities firms….
The Gini Coefficient
…curve) into a one-dimensional number, it doesn’t account for a whole host of potential variations within that single number. The Gini Index in Practice: A Global Example There are several…
Producer Surplus
…also increases. When the price of the good on the market decreases, the producer surplus likewise decreases. Producer Surplus Example Because it is essentially the same across all producers, coffee…
Proportional Tax
…Social Security (wherein the tax rate decreases as income increases). Proportional Tax Example The United States’ sales tax is an example of a proportional tax. No matter their income level,…
Exchange Rate
The exchange rate of a currency is the price a currency expressed in terms of another currency. For example, $1 is worth €0.82 (07/15/12). The foreign exchange market is a…
Real Interest Rate
…you purchased this year is 5% more expensive when compared to last year. Continuing with our previous example, the lender would make nothing if he loaned it out at 5%…
The Substitution Effect
…consumers and producers. Substitution Effect Example Let’s say you buy apple juice at $5 per 16-ounce bottle and orange juice at $2.50 per 16-ounce bottle. One bottle of apple juice…
Moral Hazard
…risks. Moral Hazard Examples There are many diverse examples of moral hazard, but here are some common scenarios: 1. Government Bank Bail-Outs If governments declare that they will bail out…