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A general term for anything done by a firm, or firms, to inhibit competition. Generally against the law. (See antitrust and cartel. )
Industry:Economy
A brand of neo-classical economics established in Vienna during the late 19th century and the first half of the 20th century. It was strongly opposed to Marxism and, more broadly, to the use of economic theories to justify government intervention in the economy. Prominent members included Friedrich Hayek, Joseph Schumpeter and Ludwig von Mises. It gave birth to the definition of economics as the science of studying human behavior as a relationship between ends and scarce means that have alternative uses. Austrian economic thinking was characterized by attributing all economic activity, including the behavior of apparently impersonal institutions, to the wishes and actions of individuals. It did this by examining choices in terms of their opportunity cost (that is, what is the next best use of resources to that which is being considered?) and by analyzing the impact of timing on decision making. Hayek correctly predicted the failure of Soviet-style central planning. His ideas are said to have inspired many of the free-market reforms carried out during the 1980s in the United States under Ronald Reagan and in the UK under Margaret Thatcher. Schumpeter developed a theory of innovation and economic change characterized by the phrase creative destruction.
Industry:Economy
The rewards for doing business. Returns usually refer to profit and can be measured in various ways (see rate of return and total returns).
Industry:Economy
Going, going, gone. Holding an auction can be an extremely efficient way for a seller to set the price of its products, especially if it does not have much information about how much people may be willing to pay for them. Auctions fascinate economists, especially those who specialize in game theory. They have long been a feature of the sale of art and antiques in the rooms of firms such as Sotheby's and Christie's. But in recent years they have played a growing role in other parts of the economy, ranging from the allocation of government-controlled broadcasting bandwidth to the awarding of work to subcontractors by governments and big firms using competitive tendering, and even more recently the sale of goods over the Internet. An English auction is the most familiar. Bidders compete to offer higher prices and drop out until only one remains. In a Dutch auction, the auctioneer calls out a high price then keeps lowering it until there is a buyer. There are various forms of sealed bid auctions. In a first price sealed bid, each buyer submits a price in a sealed envelope and all bids are opened simultaneously, with the highest offer winning. In a second (or third, fourth, and so on) price sealed bid, the highest bidder wins but pays only the second (third, fourth) highest price bid. An English or Dutch auction will work well for a seller if there is more than one serious bidder, as competition will ensure that the price is set at the level at which it is not worth more to any other bidder but the winner. Indeed, in a competitive auction the successful bidder may end up offering more than what is being auctioned is actually worth. This is known as the winner's curse. Which method will generate the best price for the seller depends on how many bidders take part and how well informed they are. Unfortunately for the seller, this information is not always available before the auction takes place.
Industry:Economy
An example of a popular joke among economists: two economists see a Ferrari. “I want one of those,” says the first. “Obviously not,” replies the other. To get a smile out of this it is necessary (but not, alas, sufficient) to know about revealed preference. This is the notion that what you want is revealed by what you do, not by what you say. Actions speak louder than words. If the economist had really wanted a Ferrari he would have tried to buy one, if he did not own one already. Economists have three main approaches to modeling demand and how it will change if prices or incomes change. * The cardinal approach involves asking consumers to say how much utility they get from consuming a particular good, aggregating this across all goods and services, and calculating how demand would change on the assumption that people will consume the combination of things that maximizes their total utility. * The ordinal approach does not require consumers to say how much utility they get in absolute terms from consuming a particular good. Instead, it asks them to indicate the relative utility they get from consuming one item compared with another, that is, to say if they prefer one basket of goods to another, or are indifferent between them. * The third approach is revealed preference. To model demand it is only necessary to be able to compare an individual’s consumption decisions in situations with different prices and/or incomes and to assume that consumers are consistent in their decisions over time (that is, if they prefer wine to beer in one period they will still prefer wine in the next).
Industry:Economy
When something unexpected happens that affects one economy (or part of an economy) more than the rest. This can create big problems for policymakers if they are trying to set a macroeconomic policy that works for both the area affected by the shock and the unaffected area. For instance, some economic areas may be oil exporters and thus highly dependent on the price of oil, but other areas are not. If the oil price plunges, the oil-dependent area would benefit from policies designed to boost demand that might be unsuited to the needs of the rest of the economy. This may be a constant problem for those responsible for setting the interest rate for the Euro given the big differences--and different potential exposures to shocks--among the economies within the Euro zone.
Industry:Economy
The controversial idea, suggested by David Ricardo, that government deficits do not affect the overall level of demand in an economy. This is because taxpayers know that any deficit has to be repaid later, and so increase their savings in anticipation of a tax bill. Thus government attempts to stimulate an economy by increasing public spending and/or cutting taxes will be rendered impotent by the private-sector reaction.
Industry:Economy
When somebody knows more than somebody else. Such asymmetric information can make it difficult for the two people to do business together, which is why economists, especially those practicing game theory, are interested in it. Transactions involving asymmetric (or private) information are everywhere. A government selling broadcasting licenses does not know what buyers are prepared to pay for them; a lender does not know how likely a borrower is to repay; a used-car seller knows more about the quality of the car being sold than do potential buyers. This kind of asymmetry can distort people's incentives and result in significant inefficiencies.
Industry:Economy
The chance of things not turning out as expected. Risk taking lies at the heart of capitalism and is responsible for a large part of the growth of an economy. In general, economists assume that people are willing to be exposed to increased risks only if, on average, they can expect to earn higher returns than if they had less exposure to risk. How much higher these expected returns need to be depends partly on the probability of an undesirable outcome and partly on whether the risk taker is risk averse, risk neutral or risk seeking. During the second half of the 20th century, economists greatly improved their understanding of risk and developed theories of risk management, which suggest when it makes sense to use insurance, diversification or hedging to change risk exposures. In financial markets the most commonly used measure of risk is the volatility (or standard deviation) of the price of, or more appropriately the total returns on, an asset. Often added to the risk profile are other statistical measures such as skewness and the possibility of extreme changes on rare occasions. (See stress testing, scenario analysis and value at risk. )
Industry:Economy
During 1997-98, many of the East Asian tiger economies suffered a severe financial and economic crisis. This had big consequences for the global financial markets, which had become increasingly exposed to the promise that Asia had seemed to offer. The crisis destroyed wealth on a massive scale and sent absolute poverty shooting up. In the banking system alone, corporate loans equivalent to around half of one year's GDP went bad - a destruction of savings on a scale more usually associated with a full-scale war. The precise cause of the crisis remains a matter of debate. Fingers have been pointed at the currency peg adopted by some countries, and a reduction of capital controls in the years before the crisis. Some blamed economic contagion. The crisis brought an end to a then widespread belief that there was a distinct "Asian way" of capitalism that might prove just as successful as capitalism in America or Europe. Instead, critics turned their fire on Asian cronyism, ill-disciplined banking and lack of transparency. In the years following the crisis, most of the countries involved have introduced reforms designed to increase transparency and improve the health of the banking system, although some (such as South Korea) went much further than others (such as Indonesia).
Industry:Economy
