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Flashcards in A (A-Z Economics) Deck (44):
1

Define Absolute Advantage

This is the simplest yardstick of economic performance. If one person, firm or country can produce more of something with the same amount of effort and resources, they have an absolute advantage over other producers.

2

Define Adaptive Expectations.

A theory of how people form their views about the future that assumes they do so using past trends and the errors in their own earlier predictions.

3

Define Adverse Selection.

When you do business with people you would be better off avoiding. This is one of two main sorts of market failure often associated with insurance. The other is moral hazard.

4

What is the argument against Advertising?

Some economists reckon that advertising merely manipulates consumer tastes and creates desires that would not otherwise exist. By increasing product differentiation and encouraging brand loyalty advertising may make consumers less price sensitive, moving the market further from perfect competition towards imperfect competition (see monopolistic competition) and increasing the ability of firms to charge more than marginal cost.

5

What is the argument for Advertising?

Some economists argue that advertising is economically valuable because it increases the flow of information in the economy and reduces the asymmetric information between the seller and the consumer. This intensifies competition, as consumers can be made aware quickly when there is a better deal on offer.

6

Define Agency Costs.

These can arise when somebody (the principal) hires somebody else (the agent) to carry out a task and the interests of the agent conflict with the interests of the principal.

7

Give an example of Agency Costs.

An example of such principal-agent problems comes from the relationship between the shareholders who own a public company and the managers who run it. The owners would like managers to run the firm in ways that maximise the value of their shares, whereas the managers' priority may be, say, to build a business empire through rapid expansion and mergers and acquisitions, which may not increase their firm's share price.

8

Give a solution to Agency Costs.

For instance, an increasingly common solution to the agency costs arising from the separation of ownership and management of public companies is to pay managers partly with shares and share options in the company. Another way to reduce agency costs is for the principal to monitor what the agent does to make sure it is what he has been hired to do.

9

Countries often provide support for their farmers using trade barriers and subsidy because:

1) Domestic agriculture, even if it is inefficient by world standards, can be an insurance policy in case it becomes difficult as it does, for example, in wartime) to buy agricultural produce from abroad;2) farmers groups have proved adept at lobbying;3) politicians have sought to slow the depopulation of rural areas;4) agricultural prices can be volatile, as a result of unpredictable weather, among other things; and5) financial support can provide a safety net in unexpectedly severe market conditions.

10

Broadly speaking, governments have tried two methods of subsidising agriculture. Whats first:

The first, used in the United States during the 1930s and in the UK before it joined the European Union, is to top up farmers' incomes if they fall below a level deemed acceptable. Farmers may be required to set aside some of their land in return for this support.

11

Broadly speaking, governments have tried two methods of subsidising agriculture. Whats second:

The second is to guarantee a minimum level of farm prices by buying up surplus supply and storing or destroying it if prices would otherwise fall below the guaranteed levels. This was the approach adopted by the EU when it set up its Common Agricultural Policy.

12

Touch on today’s international trade in agriculture.

The total value of international trade in agriculture has risen steadily. But the global agriculture market remains severely distorted by trade barriers and government subsidy, such as the european union's Common agricultural policy.

13

Define altruism.

The belief in or practice of disinterested and selfless concern for the well-being of others.

14

Define amortization.

The running down or payment of a loan by instalments.

15

Give an example of amortization.

An example is a repayment mortgage on a house, which is amortised by making monthly payments that over a pre-agreed period of time cover the value of the loan plus interest.

16

How do none-amortised loans work?

With loans that are not amortised, the borrower pays only interest during the period of the loan and then repays the sum borrowed in full.

17

Define Animal Spirit.

The colourful name that keynes gave to one of the essential ingredients of economic prosperity: confidence.

18

Describe Keynes explanation for Animal Spirit.

According to Keynes, animal spirits are a particular sort of confidence, "naive optimism". He meant this in the sense that, for entrepreneurs in particular, "the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death".

19

Define Antitrust.

Government policy for dealing with monopoly

20

Give an example of Monopoly policy.

In the United States, monopoly policy has been built on the Sherman Antitrust Act of 1890. This prohibited contracts or conspiracies to restrain trade or, in the words of a later act, to monopolise commerce.

21

Define Arbitrage

Buying an asset in one market and simultaneously selling an identical asset in another market at a higher price.

22

Give an example of a pure arbitrage.

Some kinds of arbitrage are completely risk-free-this is pure arbitrage. For instance, if EUROS are available more cheaply in dollars in London than in New York, arbitrageurs (also known as arbs) can make a risk-free PROFIT by buying euros in London and selling an identical amount of them in New York.

23

Touch on arbitrages in today’s market.

Opportunities for pure arbitrage have become rare in recent years, partly because of the GLOBALISATION of FINANCIAL MARKETS. Today, a lot of so called arbitrage, much of it done by hedge funds, involves assets that have some similarities but are not identical. This is not pure arbitrage and can be far from risk free.

24

Define the arbitrage pricing theory.

The arbitrage pricing theory says that the price of a financial asset reflects a few key risk factors, such as the expected rate of interest, and how the price of the asset changes relative to the price of a portfolio of assets. If the price of an asset happens to diverge from what the theory says it should be, arbitrage by investors should bring it back into line.

25

What are the two influential economic theories of how assets are priced?

Arbitrage pricing theoryCapital assets pricing model

26

Define Asymmetric Information.

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 practising game theory, are interested in it.

27

Define Asymmetric Shock.

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.

28

Give an example of Asymmetric Shock.

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.

29

Why are auctions useful?

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.

30

Define Austrian Economics

A brand of neo-classical economics established in Vienna during the late 19th century and the first half of the 20th century. Prominent members included Friedrich hayek, Joseph schumpeter and Ludwig von Mises.

31

Define Autarky

The idea that a country should be self-sufficient and not take part in international trade. The experience of countries that have pursued this Utopian ideal by substituting domestic production for imports is an unhappy one. No country has been able to produce the full range of goods demanded by its population at competitive prices. Indeed, those that have tried to do so have condemned themselves to inefficiency and comparative poverty, compared with countries that engage in international trade.

32

TERM FOR: This is the simplest yardstick of economic performance. If one person, firm or country can produce more of something with the same amount of effort and resources, they have an absolute advantage over other producers.

Absolute Advantage

33

TERM FOR: A theory of how people form their views about the future that assumes they do so using past trends and the errors in their own earlier predictions.

Adaptive Expectations.

34

TERM FOR: When you do business with people you would be better off avoiding. This is one of two main sorts of market failure often associated with insurance. The other is moral hazard.

Adverse Selection

35

TERM FOR: These can arise when somebody (the principal) hires somebody else (the agent) to carry out a task and the interests of the agent conflict with the interests of the principal.

Agency Costs

36

TERM FOR: The belief in or practice of disinterested and selfless concern for the well-being of others.

Altruism

37

TERM FOR: The running down or payment of a loan by instalments.

Amortization

38

TERM FOR: The colourful name that keynes gave to one of the essential ingredients of economic prosperity: confidence.

Animal Spirit

39

TERM FOR: Government policy for dealing with monopoly

Antitrust

40

TERM FOR: Buying an asset in one market and simultaneously selling an identical asset in another market at a higher price.

Arbitrage

41

TERM FOR: When somebody knows more than somebody else.

Asymmetric Information.

42

TERM FOR: 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.

Asymmetric Shock

43

TERM FOR: A brand of neo-classical economics established in Vienna during the late 19th century and the first half of the 20th century. Prominent members included Friedrich hayek, Joseph schumpeter and Ludwig von Mises.

Austrian Economics.

44

TERM FOR: The idea that a country should be self-sufficient and not take part in international trade. The experience of countries that have pursued this Utopian ideal by substituting domestic production for imports is an unhappy one. No country has been able to produce the full range of goods demanded by its population at competitive prices. Indeed, those that have tried to do so have condemned themselves to inefficiency and comparative poverty, compared with countries that engage in international trade.

Autarky