- Industry: Economy; Printing & publishing
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The study of the individual pieces that together make an economy. Contrast with macroeconomics, the study of economy-wide phenomena such as growth, inflation and unemployment. Microeconomics considers issues such as how households reach decisions about consumption and saving, how firms set a price for their output, whether privatization improves efficiency, whether a particular market has enough competition in it and how the market for labor works.
Industry:Economy
Control the money supply, and the rest of the economy will take care of itself. A school of economic thought that developed in opposition to post-1945 Keynesian policies of demand management, echoing earlier debates between mercantilism and classical economics. Monetarism is based on the belief that inflation has its roots in the government printing too much money. It is closely associated with Milton Friedman, who argued, based on the quantity theory of money, that government should keep the money supply fairly steady, expanding it slightly each year mainly to allow for the natural growth of the economy. If it did this, market forces would efficiently solve the problems of inflation, unemployment and recession. Monetarism had its heyday in the early 1980s, when economists, governments and investors pounced eagerly on every new money-supply statistic, particularly in the United States and the UK. Many central banks had set formal targets for money-supply growth, so every wiggle in the data was scrutinized for clues to the next move in the rate of interest. Since then, the notion that faster money-supply growth automatically causes higher inflation has fallen out of favor. The money supply is useful as a policy target only if the relationship between money and nominal GDP, and hence inflation, is stable and predictable. The way the money supply affects prices and output depends on how fast it circulates through the economy. The trouble is that its velocity of circulation can suddenly change. During the 1980s, the link between different measures of the money supply and inflation proved to be less clear than monetarist theories had suggested, and most central banks stopped setting binding monetary targets. Instead, many have adopted explicit inflation targets.
Industry:Economy
When two businesses join together, either by merging or by one company taking over the other. There are three sorts of mergers between firms: horizontal integration, in which two similar firms tie the knot; vertical integration, in which two firms at different stages in the supply chain get together; and diversification, when two companies with nothing in common jump into bed. These can be a voluntary marriage of equals; a voluntary takeover of one firm by another; or a hostile takeover, in which the management of the target firm resists the advances of the buyer but is eventually forced to accept a deal by its current owners. For reasons that are not at all clear, merger activity generally happens in waves. One possible explanation is that when share prices are low, many firms have a market capitalization that is low relative to the value of their assets. This makes them attractive to buyers (see tobin). In theory, the different sorts of mergers have different sorts of potential benefits. However, the damning lesson of merger waves stretching back over the past 50 years is that, with one big ex ception – the spate of leveraged buy-outs in the United States during the 1980s – they have often failed to deliver benefits that justify the costs.
Industry:Economy
When economists make a number of simplified assumptions about how the economy, or some part of it, behaves, and then see what this implies in various different scenarios. Milton Friedman argued that economic models should not be judged on the basis of the validity of their assumptions, but on the accuracy of their predictions. An expert billiards player, he said, may not know the laws of physics, but acts as if he knows such laws. So his behavior could be predicted accurately with a model that assumes he knows the laws of physics. Likewise, the behavior of people making economic decisions may be accurately predicted by a model that assumes their goal is, say, profit Maximization, even if they are not actually conscious of this being their goal. The more complex the thing being modeled, the harder it is to get right. Economic forecasting has a poor overall track record. The more micro¬economic the thing being modeled, the more likely it is that a model can be designed that will deliver accurate predictions.
Industry:Economy
The conventional economic wisdom of the 17th century that made a partial come-back in recent years. Mercantilists feared that money would become too scarce to sustain high levels of output and employment; their favored solution was cheap money (low interest rates). In a forerunner to the 20th-century debate between Keynesians and monetarists, they were opposed by advocates of classical economics, who argued that cheap and plentiful money could result in inflation. The original mercantilists, such as John Law, a Scots financier (and convicted murderer), believed that a country’s economic prosperity and political power came from its stocks of precious metals. To maximize these stocks they argued against free trade, favoring protectionist policies designed to minimize imports and maximize exports, creating a trade surplus that could be used to acquire more precious metal. This was contested for the classicists by Adam Smith and David Hume, who argued that a country’s wealth came not from its stock of precious metals but rather from its stocks of productive resources (land, labor, capital, and so on) and how efficiently they are used. Free trade increased efficiency by allowing countries to specialize in things in which they have a comparative advantage.
Industry:Economy
Somewhere between short-termism, which is bad, and the long run, lies the hallowed ground of the medium term – far enough away to discourage myopic behavior by decision makers but close enough to be meaningful. But not many governments say exactly how long they think the medium term is.
Industry:Economy
When one buyer or seller in a market has the ability to exert significant influence over the quantity of goods and services traded or the price at which they are sold. Market power does not exist when there is perfect competition, but it does when there is a monopoly, monopsony or oligopoly.
Industry:Economy
Shorthand for the pressures from buyers and sellers in a market, rather than those coming from a government planner or from regulation.
Industry:Economy
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 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
