1.
Minimum wage
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A minimum wage is the lowest remuneration that employers must legally pay their workers. Equivalently, it is the floor below which workers may not sell their labor. Although minimum wage laws are in effect in many jurisdictions, differences of opinion exist about the benefits, supporters of the minimum wage say it increases the standard of living of workers, reduces poverty, reduces inequality, boosts morale and forces businesses to be more efficient. Modern minimum wage laws trace their origin to the Ordinance of Labourers, King Edward III, who was a wealthy landowner, was dependent, like his lords, on serfs to work the land. In the autumn of 1348, the Black Plague reached England, the severe shortage of labor caused wages to soar and encouraged King Edward III to set a wage ceiling. Subsequent amendments to the ordinance, such as the Statute of Labourers, while the laws governing wages initially set a ceiling on compensation, they were eventually used to set a living wage. An amendment to the Statute of Labourers in 1389 effectively fixed wages to the price of food, as time passed, the Justice of the Peace, who was charged with setting the maximum wage, also began to set formal minimum wages. The practice was eventually formalized with the passage of the Act Fixing a Minimum Wage in 1604 by King James I for workers in the textile industry. By the early 19th century, the Statutes of Labourers was repealed as increasingly capitalistic England embraced laissez-faire policies which disfavored regulations of wages, the subsequent 19th century saw significant labor unrest affect many industrial nations. As trade unions were decriminalized during the century, attempts to control wages through collective agreement were made, however, this meant that a uniform minimum wage was not possible. It was not until the 1890s that the first modern attempts to regulate minimum wages were seen in New Zealand. The movement for a wage was initially focused on stopping sweatshop labor. The sweatshops employed large numbers of women and young workers, paying them what were considered to be substandard wages, the sweatshop owners were thought to have unfair bargaining power over their employees, and a minimum wage was proposed as a means to make them pay fairly. Over time, the changed to helping people, especially families. The first modern national minimum wage law was enacted by the government of New Zealand in 1894, followed by Australia in 1896, in the United States, statutory minimum wages were first introduced nationally in 1938, and they were reintroduced and expanded in the United Kingdom in 1998. There is now legislation or binding collective bargaining regarding minimum wage in more than 90 percent of all countries, in the European Union,22 member states out of 28 currently have national minimum wages. Currently the American federal minimum wage rests at seven dollars, twenty-five cents per hour, however, some states do not recognize the minimum wage law such as Louisiana and Tennessee. Other states operate below the minimum wage such as Georgia
2.
Price ceiling
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A price ceiling is a government-imposed price control or limit on how high a price is charged for a product. Governments intend price ceilings to protect consumers from conditions that could make commodities prohibitively expensive, such conditions can occur during periods of high inflation or in monopolistic markets. In spite of these goals, a price ceiling can cause problems if imposed for a period without controlled rationing. Furthermore, price ceilings can lead to problems if a government sets unrealistic prices. In an unregulated market economy price ceilings do not exist, rent control is a price ceiling on rent. When soldiers returned from World War II and started families, but stopped receiving military pay, the government put in price controls, so soldiers and their families could pay the rent and keep their homes. However, this increased the quantity demanded for apartments and lowered the quantity supplied, Price ceilings create shortages when producers are allowed to abdicate market share or go unsubsidized. According to professors Niko Määttänen and Ari Hyytinen, price ceilings on Helsinki City Hitas apartments are economically highly inefficient and they cause queuing, and discriminate against the handicapped, single parents, elderly, and others not able to queue for days. These inefficiencies increase apartment shortage and raise the price of other apartments. As a result of declining competitive balance following the admission of Footscray, Hawthorn & North Melbourne in 1925, the Coulter Law was a strictly binding price ceiling through its history, mainly for top players such as Ron Todd, John Coleman and Brian Gleeson. A February 4,2009 Wall Street Journal article stated, Last month State Farm pulled the plug on its 1.2 million homeowner policies in Florida, State Farms local subsidiary recently requested an increase of 47%, but state regulators refused. State Farm says that since 2000 it has paid $1.21 in claims, a January 10,2006, BBC article reported that since 2003, Venezuela President Hugo Chávez had been setting price ceilings on food, and that these price ceilings had caused shortages and hoarding. A January 22,2008 article from Associated Press stated, Venezuelan troops are cracking down on the smuggling of food, the National Guard has seized about 750 tons of food. Hugo Chavez ordered the military to people from smuggling scarce items like milk. Hes also threatened to seize farms and milk plants, a January 3,2007 article in the International Herald Tribune reported that Chávezs price ceilings were causing shortages of materials used in the construction industry. There is a body of research showing that under some circumstances price ceilings can, paradoxically. The leading explanation is that price ceilings serve to coordinate collusion among suppliers who would compete on price. More precisely, Forming a cartel is profitable, because it enables nominally competing firms to act like a monopoly, limiting quantities and raising prices
3.
Externality
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In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Economists often urge governments to adopt policies that internalize an externality, if external costs exist, such as pollution, the producer may choose to produce more of the product than would be produced if the producer were required to pay all associated environmental costs. Because responsibility or consequence for self-directed action lies partly outside the self, if there are external benefits, such as in public safety, less of the good may be produced than would be the case if the producer were to receive payment for the external benefits to others. For the purpose of these statements, overall cost and benefit to society is defined as the sum of the monetary value of benefits and costs to all parties involved. Two British economists are credited with having initiated the study of externalities, or spillover effects, Henry Sidgwick is credited with first articulating. Pigou is credited with formalizing the concept of externalities, suppose that there are K different possible allocations and N different agents, where K, N < ∞ and N ≥2. Suppose that each agent has a type θ i ∼ F i and that each agent gets payoff v i + t i, a map f = is a social choice function if ∑ i =1 N t i ≤0 for all θ ∈ N. An allocation κ, N → K is ex-post efficient if ∑ i =1 N v i ≥ ∑ i =1 N v i for all θ = ∈ N and all k ∈ K. Let κ ∗ denote an ex-post efficient allocation and let κ i ~ denote an ex-post efficient allocation without agent i. Then the externality imposed by agent i on the agents is ∑ j ≠ i v j − ∑ j ≠ i v j. Voluntary exchange is considered beneficial to both parties involved, because buyers or sellers would not trade if either thought it detrimental to themselves. However, a transaction can cause effects on third parties. From the perspective of those affected, these effects may be negative, neoclassical welfare economics asserts that, under plausible conditions, the existence of externalities will result in outcomes that are not socially optimal. Those who suffer from external costs do so involuntarily, whereas those who enjoy external benefits do so at no cost, a voluntary exchange may reduce societal welfare if external costs exist. The externality may even be seen as a trespass on their lungs, thus, an external cost may pose an ethical or political problem. Alternatively, it might be seen as a case of poorly defined property rights, as with, for example, on the other hand, a positive externality would increase the utility of third parties at no cost to them. Since collective societal welfare is improved, but the providers have no way of monetizing the benefit, Goods with positive externalities include education, public health initiatives and law enforcement. Positive externalities are often associated with the free rider problem, there are a number of potential means of improving overall social utility when externalities are involved
4.
Alfred Marshall
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Alfred Marshall was one of the most influential economists of his time. His book, Principles of Economics, was the dominant economic textbook in England for many years and it brings the ideas of supply and demand, marginal utility, and costs of production into a coherent whole. He is known as one of the founders of neoclassical economics, although Marshall took economics to a more mathematically rigorous level, he did not want mathematics to overshadow economics and thus make economics irrelevant to the layman. His father was a cashier and a devout Evangelical. Marshall experienced a crisis that led him to abandon physics. He began with metaphysics, specifically the philosophical foundation of knowledge and he saw that the duty of economics was to improve material conditions, but such improvement would occur, Marshall believed, only in connection with social and political forces. His interest in Georgism, liberalism, socialism, trade unions, womens education, poverty and progress reflect the influence of his social philosophy on his later activities. Marshall was elected in 1865 to a fellowship at St Johns College at Cambridge, in 1885 he became professor of political economy at Cambridge, where he remained until his retirement in 1908. Over the years he interacted with many British thinkers including Henry Sidgwick, clifford, Benjamin Jowett, William Stanley Jevons, Francis Ysidro Edgeworth, John Neville Keynes and John Maynard Keynes. Marshall desired to improve the mathematical rigour of economics and transform it into a more scientific profession, in the 1870s he wrote a small number of tracts on international trade and the problems of protectionism. In 1879, many of these works were compiled into a work entitled The Theory of Foreign Trade, in the same year he published The Economics of Industry with his wife Mary Paley. Although Marshall took economics to a mathematically rigorous level, he did not want mathematics to overshadow economics. Accordingly, Marshall tailored the text of his books to laymen, in a letter to A. L. Bowley, he laid out the following system, Use mathematics as shorthand language, rather than as an engine of inquiry. Keep to them till you have done, then illustrate by examples that are important in real life Burn the mathematics. If you cant succeed in 4, burn 3 and he became the first principal at University College, Bristol, which was the institution that later became the University of Bristol, again lecturing on political economy and economics. He perfected his Economics of Industry while at Bristol, and published it more widely in England as an economic curriculum, its simple form stood upon sophisticated theoretical foundations. Marshall achieved a measure of fame from this work, and upon the death of William Jevons in 1882, Marshall became the leading British economist of the scientific school of his time. Marshall returned to Cambridge, via a brief period at Balliol College, Oxford during 1883–4, at Cambridge he endeavoured to create a new tripos for economics, a goal which he would only achieve in 1903
5.
Goods
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In economics, goods are materials that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods that are property, and services, which are non-physical. A good is an item that is useful to people but scarce in relation to its demand. In contrast, free goods, such as air, are naturally in abundant supply, commodities may be used as a synonym for economic goods but often refer to marketable raw materials and primary products. Although in economic theory all goods are considered tangible, in reality certain classes of goods, such as information, only take intangible forms. For example, among other goods an apple is an object, while news belongs to an intangible class of goods. Goods may increase or decrease their utility directly or indirectly and may be described as having marginal utility, some things are useful, but not scarce enough to have monetary value, such as the Earths atmosphere, these are referred to as free goods. In economics, a bad is the opposite of a good, Goods diversity allows for their classification into different categories based on distinctive characteristics, such as tangibility and relative elasticity. A tangible good like an apple differs from a good like information due to the impossibility of a person to physically hold the latter. Intangible goods differ from services in that goods are transferable and can be traded. Price elasticity also differentiates types of goods, an inelastic good is one for which there are few or no substitutes, such as tickets to major sporting events, original works by famous artists, and prescription medicine such as insulin. Complementary goods are generally more inelastic than goods in a family of substitutes and this is because hamburger buns and beef are complementary goods. It is important to note that goods considered complements or substitutes are relative associations, the following chart illustrates the classification of goods according to their exclusivity and competitiveness. Goods are capable of being delivered to a consumer. Goods that are economic intangibles can only be stored, delivered, Goods, both tangibles and intangibles, may involve the transfer of product ownership to the consumer. Services do not normally involve transfer of ownership of the service itself, for example, distributing electricity among consumers is a service provided by an electric utility company. While the service is a process that remains in its entirety in the ownership of the service provider. The consumer becomes electric energy owner by purchase and may use it for any lawful purposes just like any other goods, fast-moving consumer goods Final goods Intangible asset Intangible good List of economics topics Goods and services Service Tangible property Bannock, Graham et al
6.
Monopoly
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A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors, in economics, a monopoly is a single seller. In law, a monopoly is an entity that has significant market power, that is. Although monopolies may be big businesses, size is not a characteristic of a monopoly, a small business may still have the power to raise prices in a small industry. A monopoly is distinguished from a monopsony, in there is only one buyer of a product or service. Likewise, a monopoly should be distinguished from a cartel, in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations in one or a few entities have market power and therefore interact with their customers. Monopolies can be established by a government, form naturally, or form by integration, in many jurisdictions, competition laws restrict monopolies. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, patents, copyrights, and trademarks are sometimes used as examples of government-granted monopolies. The government may also reserve the venture for itself, thus forming a government monopoly, There are four basic types of market structures in traditional economic analysis, perfect competition, monopolistic competition, oligopoly and monopoly. A monopoly is a structure in which a single supplier produces, if there is a single seller in a certain market and there are no close substitutes for the product, then the market structure is that of a pure monopoly. Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced and this is termed monopolistic competition, whereas in oligopoly the companies interact strategically. Most economic textbooks follow the practice of explaining the perfect competition model. The boundaries of what constitutes a market and what does not are relevant distinctions to make in economic analysis, in a general equilibrium context, a good is a specific concept including geographical and time-related characteristics. Most studies of market structure relax a little their definition of a good, price Maker, Decides the price of the good or product to be sold, but does so by determining the quantity in order to demand the price desired by the firm. High Barriers, Other sellers are unable to enter the market of the monopoly, single seller, In a monopoly, there is one seller of the good, who produces all the output. Therefore, the market is being served by a single company, and for practical purposes. Price Discrimination, A monopolist can change the price or quantity of the product and he or she sells higher quantities at a lower price in a very elastic market, and sells lower quantities at a higher price in a less elastic market
7.
Microeconomics
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One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations and it also analyzes market failure, where markets fail to produce efficient results. Microeconomics also deals with the effects of economic policies on the aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon microfoundations—i. e, based upon basic assumptions about micro-level behavior. Microeconomic theory typically begins with the study of a single rational, to economists, rationality means an individual possesses stable preferences that are both complete and transitive. The technical assumption that preference relations are continuous is needed to ensure the existence of a utility function, microeconomic theory progresses by defining a competitive budget set which is a subset of the consumption set. It is at point that economists make the technical assumption that preferences are locally non-satiated. Without the assumption of LNS there is no guarantee that an individual would maximize utility. With the necessary tools and assumptions in place the utility maximization problem is developed, the utility maximization problem is the heart of consumer theory. The utility maximization problem attempts to explain the action axiom by imposing rationality axioms on consumer preferences, the utility maximization problem serves not only as the mathematical foundation of consumer theory but as a metaphysical explanation of it as well. That is, the utility maximization problem is used by economists to not only explain what or how individuals make choices, the utility maximization problem is a constrained optimization problem in which an individual seeks to maximize utility subject to a budget constraint. Economists use the extreme value theorem to guarantee that a solution to the utility maximization problem exists and that is, since the budget constraint is both bounded and closed, a solution to the utility maximization problem exists. Economists call the solution to the utility maximization problem a Walrasian demand function or correspondence, the utility maximization problem has so far been developed by taking consumer tastes as the primitive. However, a way to develop microeconomic theory is by taking consumer choice as the primitive. This model of microeconomic theory is referred to as Revealed preference theory, the theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices, quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the works well in situations meeting these assumptions
8.
Relative price
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A relative price forsay, is the price of a commodity such as a good or service in terms of another, i. e. the ratio of two prices. A relative price may be expressed in terms of a ratio between any two prices or the ratio between the price of one good and a weighted average of all other goods available in the market. A relative price is an opportunity cost, microeconomics can be seen as the study of how economic agents react to changes in relative prices. In the demand equation Q = f, P is the price of the good or service rather than the nominal price. It is the change in a price that prompts a change in demand. This situation can lead to inefficiency, and is one of the negative effects of inflation. Price premium Relative value Jargon Explained
9.
Sunk cost
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In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are costs that may be incurred or changed if an action is taken. Both retrospective and prospective costs may be fixed or variable costs. However, many consider it a mistake to classify sunk costs as fixed or variable. For example, if a firm sinks $400 million on a software installation. A fixed cost would be monthly payments made as part of a contract or licensing deal with the company that set up the software. The upfront irretrievable payment for the installation should not be deemed a fixed cost, Sunk costs should be kept separate. The variable costs for this project might include data centre power usage, in traditional microeconomic theory, only prospective costs are relevant to an investment decision. Traditional economics proposes that economic actors should not let sunk costs influence their decisions, doing so would not be rationally assessing a decision exclusively on its own merits. Alternatively, a decision-maker might make rational decisions according to their own incentives and this is considered to be an incentive problem and is distinct from a sunk cost problem. Evidence from behavioral economics suggests this theory fails to predict real-world behavior, Sunk costs do, in fact, influence actors decisions because humans are prone to loss aversion and framing effects. In light of such cognitive quirks, it is unsurprising that people fail to behave in ways that economists deem rational. Sunk costs should not affect the rational decision-makers best choice, however, until a decision-maker irreversibly commits resources, the prospective cost is an avoidable future cost and is properly included in any decision-making processes. For example, if one is considering preordering movie tickets, but has not actually purchased them yet, the sunk cost is distinct from economic loss. For example, when a new car is purchased, it can subsequently be resold, however, the economic loss is the difference. It may also be used as shorthand for an error in due to the sunk cost fallacy, irrational decision-making or, most simply. Economists argue that sunk costs are not taken into account when making rational decisions, in either case, the ticket-buyer has paid the price of the ticket so that part of the decision no longer affects the future. The economist will suggest that, since the second option involves suffering in one way
10.
Tax wedge
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The tax wedge is the deviation from equilibrium price/quantity as a result of a taxation, which results in consumers paying more, and suppliers receiving less. Following from the Law of Supply and Demand, as the price to consumers increases, and the price from suppliers decreases, after a tax is introduced, a new equilibrium is reached, where consumers pay more, suppliers receive less, and the quantity exchanged falls. The difference between P c and P s will be equivalent to the value of the tax, while both consumers and suppliers pay some portion of the tax, the distribution depends on the structure of the supply and demand curves, respectively. As long-run supply curves tend to flatten over time, consumers tend to pay a larger portion of the tax
11.
Indifference curve
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In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, the consumer has no preference for one combination or bundle of goods over a different combination on the same curve, one can also refer to each point on the indifference curve as rendering the same level of utility for the consumer. In other words, a curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come, the main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles. There are infinitely many curves, one passes through each combination. A collection of curves, illustrated graphically, is referred to as an indifference map. The theory can be derived from William Stanley Jevons ordinal utility theory, a graph of indifference curves for several utility levels of an individual consumer is called an indifference map. Points yielding different utility levels are associated with distinct indifference curves. Each point on the curve represents the same elevation, If you move off an indifference curve traveling in a northeast direction you are essentially climbing a mound of utility. The higher you go the greater the level of utility, the non-satiation requirement means that you will never reach the top, or a bliss point, a consumption bundle that is preferred to all others. Indifference curves are typically represented to be, Defined only in the quadrant of commodity quantities. That is, as quantity consumed of one increases, total satisfaction would increase if not offset by a decrease in the quantity consumed of the other good. Equivalently, satiation, such that more of good is equally preferred to no increase, is excluded. So, with, no two curves can intersect, transitive with respect to points on distinct indifference curves. That is, if each point on I2 is preferred to each point on I1, with, convex preferences imply that the indifference curves cannot be concave to the origin, i. e. they will either be straight lines or bulge toward the origin of the indifference curve. If the latter is the case, then as a consumer decreases consumption of one good in successive units, the consumer has ranked all available alternative combinations of commodities in terms of the satisfaction they provide him. Assume that there are two consumption bundles A and B each containing two commodities x and y, also if A I B and B I C, then A I C. Preferences are continuous If A is preferred to B and C is sufficiently close to B then A is preferred to C, continuous means infinitely divisible - just like there are infinitely many numbers between 1 and 2 all bundles are infinitely divisible
12.
Pareto efficiency
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The concept is named after Vilfredo Pareto, Italian engineer and economist, who used the concept in his studies of economic efficiency and income distribution. The concept has applications in fields such as economics, engineering. The Pareto frontier is the set of all Pareto efficient allocations, an allocation is defined as Pareto efficient or Pareto optimal when no further Pareto improvements can be made. The notion of Pareto efficiency can also be applied to the selection of alternatives in engineering, each option is first assessed under multiple criteria and then a subset of options is identified with the property that no other option can categorically outperform any of its members. Pareto optimality is a defined concept used to determine when an allocation is optimal. If there is a transfer that satisfies this condition, the reallocation is called a Pareto improvement, when no further Pareto improvements are possible, the allocation is a Pareto optimum. A formal definition for an economy is as follows, Consider an economy with i agents and j goods. Here in this economy, feasibility refers to an allocation where the total amount of each good that is allocated sums to no more than the total amount of the good in the economy. It is important to note that a change from a generally inefficient economic allocation to an efficient one is not necessarily a Pareto improvement, even if there are overall gains in the economy, if a single agent is disadvantaged by the reallocation, the allocation is not Pareto optimal. For instance, if a change in economic policy eliminates a monopoly and that subsequently becomes competitive. However, since the monopolist is disadvantaged, this is not a Pareto improvement, thus, in practice, to ensure that nobody is disadvantaged by a change aimed at achieving Pareto efficiency, compensation of one or more parties may be required. However, in the world, such compensations may have unintended consequences. They can lead to incentive distortions over time as agents anticipate such compensations, under certain idealized conditions, it can be shown that a system of free markets, also called a competitive equilibrium, will lead to a Pareto efficient outcome. This is called the first welfare theorem and it was first demonstrated mathematically by economists Kenneth Arrow and Gérard Debreu. However, the result only holds under the assumptions necessary for the proof. In the absence of information or complete markets, outcomes will generally be Pareto inefficient. In addition to the first welfare theorem linking the concepts of Pareto optimal allocations and free markets, the second welfare theorem is essentially the reverse of the first welfare theorem. It states that under similar ideal assumptions, any Pareto optimum can be obtained by some competitive equilibrium, or free market system, a weak Pareto optimum is an allocation for which there are no possible alternative allocations whose realization would cause every individual to gain
