The General Theory of Employment, Interest & Money
E = Wages & Salaries N = Quantity of Equipment W = Wage-Unit
E = N*W
Total Revenue (TR)
Price x Quantity Demanded
Factors that affect MPC
1. Change in wage-units 2. A change in the difference between income and net income 3. Windfall changes in capital-values not allowed in calculating net income 4. Changes in the rate of the like-discounting (in the ratio of exchange between present goods and future goods) 5. Changes in fiscal policy 6. Changes in expectations of the relation between the present and the future level of income
David Ricardo (1772-1823)
1. Classical economist who developed several key theories that influential in economics. 2. Ricardo was a successful investor and member of Parliament who took up writing about economics after retiring on his fortunes. 3. Ricardo is best known for his theories on comparative advantage, and labor theory of value.
Marginal Propensity to Save (MPS)
1. MPS is the proportion of an increase in income that gets saved instead of spent on consumption. 2. MPS varies by level income. 3. MPS helps determine the Keynesian Multiplier, which describes the effect of increased investment or government spending as an economic stimulus. Note: The marginal propensity to save is generally assumed to be higher for wealthier individuals than it is for poorer individuals.
3 Factors that influence investment:
1. The method of financing the policy and the increased working cash, required by the increased employment and the associated rise of prices, may have the effect of increasing the rate of interest and so retarding investment in other directions unless the monetary authority takes steps contrary; whilst at the same time, the increased cost of capital goods will reduce their marginal efficiency to the private investor, and this will require an actual fall in the rate of interest to offset it. 2. With the confused psychology which often prevails, the government program may, through its effect on 'confidence', increase liquidity-preference or diminish the marginal efficiency of capital, which, again, may retard other investment unless measures are taken to offset it. 3. In an open system with foreign-trade relations, some part of the multiplier of the increased investment will accrue to the benefit of employment in foreign countries, since a proportion of the increased consumption will diminish out own country's favorable foreign balance; so that, if we consider only on the effect on domestic employment as distinct from world employment, we must diminish the full figure on the multiplier.
4 Factors that affect money being withheld form businesses or government:
1. The motive of enterprise, to secure resources to carry out further capital investment without incurring debt or raising further capital on the market. 2. The motive of liquidity, to secure liquid resources to meet emergencies, difficulties, and depressions. 3. The motive of improvement, to secure a gradually increasing income, which incidentally, will protect the management from criticism, since increasing income due to accumulation is seldom to distinguished from increasing income due to efficiency. 4. The move of financial prudence and the anxiety to be 'on the right side' by making a financial provision in excess of user and supplementary cost, so as to discharge debt and write off the cost of assets ahead of; rather than behind, the actual rate of wastage and obsolescence, the strength of this motive mainly depending on the quantity and character of the capital equipment and the rate of technical change.
8 Factors that convince people to refrain from spending:
1. To build up a reserve against unforeseen contingencies. 2. To provide for anticipated future relation between the income and the needs of the individual or his family different from that which exists in the present, as, for example, in relation to old age, family education, or the maintenance of dependents. 3. To enjoy interest and appreciation (because a larger real consumption at a later date is preferred to a smaller immediate consumption. 4. To enjoy a gradually increasing expenditure, since it gratifies a common instinct to look forward to a gradually improving standard of life rather than the contrary, even though capacity for enjoyment may be diminishing. 5. To enjoy a sense of independence and the power to do things, though without a clear idea of definite intention of specific action. 6. To secure a masse de manoeuvre to carry out speculative or business projects. 7. To bequeath a fortune. 8. To satisfy pure miserliness, unreasonable but insistent inhibitions against acts of expenditure as such.
Income
Income is money (or some equivalent value) that an individual or business receives, usually in exchange for providing a good or service or through investing capital.
Supply Curve
A curve that shows the relationship between the price of a product and the quantity of the product supplied.
Relationship Between Z & D
IF D > Z, there will be an incentive to entrepreneurs to increase employment beyond N and, if necessary, to raise costs by competing with one another for the factors of production, up to the value of N for which Z has become equal to D.
Liquid Capital
Money or goods that are easily spendable and can be converted to cash.
Public Works
A broad category of infrastructure projects, financed and constructed by the government, for recreational, employment, and health and safety uses in the greater community.
Command Economy (Opposite of Capitalism)
A command economy is when government central planners own or control the means of production, and determine the distribution of output. Command economies suffer from problems with poor incentives for planners, managers, and workers in state-owned enterprises. Central planners in a command economy are unable to rationally determine the methods, quantities, proportions, location, and timing of economic activity across an economy without private property or the operation of supply and demand. Proponents of command economies argue that they are better for achieving fair distribution and social welfare over private profit.
Foreign Trade
Buying and selling goods from other countries.
Firm
A firm is a for-profit business organization—such as a corporation, limited liability company (LLC), or partnership—that provides professional services. Most firms have just one location. However, a business firm consists of one or more physical establishments, in which all fall under the same ownership and use the same employer identification number (EIN). When used in a title, "firm" is typically associated with businesses that provide professional law and accounting services, but the term may be used for a wide variety of businesses, including finance, consulting, marketing, and graphic design firms, among others.
Marginal Efficiency of Capital (MEC)
A nation's output depends on its stock capital. An increase in the stock of capital increases output. The question is how much increase in investment raises output? This depends on the productivity of new capital. Marginal efficiency of capital is the rate of return expected to be obtainable on a new capital asset over its life time.
Entrepreneur
A person who creates a new business, bearing most of the risks and enjoying most of the rewards. Commonly seen as an innovator, a source of new ideas, goods, and services, and businesses/procedures.
Aggregate Consumption Function
C = A + MD C = Consumer Spending A = Autonomous Spending (i.e. food) M = Marginal Propensity to Consumer D = Disposable Income Graph: y-axis = Consumer Spending & x-axis = Disposable Income
(Physical) Product
A product can be differentiated, and value can be added by the manufacturer and through branding and marketing. Products are made using commodities and are then put on the market and sold to consumers. Products, which are also referred to as consumer goods or final goods, are purchased for consumption by the average consumer. Products are typically classified as either durable or consumable goods. Durable consumer goods, such as appliances, furnishings, and jewelry, are generally long-lasting and purchased infrequently. Consumable goods, which include gas, groceries, and tobacco products, are used quickly or need frequent replacement.
Sinking Funds
A sinking fund is an account containing money set aside to pay off a debt or bond. Sinking funds may help pay off the debt at maturity or assist in buying back bonds on the open market. Callable bonds with sinking funds may be called back early removing future interest payments from the investor. Paying off debt early via a sinking fund saves a company interest expense and prevents the company from being put in financial difficulties in the future.
Demand Schedule
A table that shows the relationship between the price of a good and the quantity demanded.
Supply Schedule
A table that shows the relationship between the price of a good and the quantity supplied.
Write-Off
A write-off primarily refers to a business accounting expense reported to account for unreceived payments or losses on assets. Three common scenarios requiring a business write-off include unpaid bank loans, unpaid receivables, and losses on stored inventory. Write-offs are a business expense that reduces taxable income on the income statement.
Economic Stimulus
Action by the government to encourage private sector economic activity by engaging in targeted, expansionary monetary or fiscal policy based on the ideas of Keynesian economics. The term economic stimulus is based on an analogy to the biological process of stimulus and response, with the intention of using government policy as a stimulus to elicit a response from the private sector economy. Commonly employed during times of recession. Policy tools often used to implement economic stimulus include lowering interest rates, increasing government spending, and quantitative easing, to name a few.
Adam Smith (1723-1790)
Adam Smith was an 18th-century Scottish economist, philosopher, and author, and is considered the father of modern economics. Smith is most famous for his 1776 book, "The Wealth of Nations." Smith's ideas-the importance of free markets, assembly-line production methods, and gross domestic product (GDP)-formed the basis for theories of classical economics.
Aggregate Supply
Aggregate supply, also known as total output, is the total supply of goods and services produced within an economy at a given overall price in a given period. It is represented by the aggregate supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Typically, there is a positive relationship between aggregate supply and the price level.
Investment
An asset of item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth. An investment always concerns the outlay of some asset today, time, money, or effort, in hopes of a greater payoff in the future than what was originally put in.
Aggregate Demand
An economic measurement of the total amount of demand for all finished goods and services produced in an economy. Aggregate demand is expressed as the total amount of money exchanged for those goods and services at a specific price level and point in time.
Factors of Production
An economic term describing the general inputs used to produce goods and services to make a profit. 4 Factors: 1. Land 2. Capital 3. Labor 4. Entrepreneurship Land: the area/property owned and operated by the business as well as the raw materials that are extracted from the it. Labor: the employees and workers that perform the physical and intellectual work needed to keep a business up and running. Capital: the buildings, machines, and tools used in the process of producing a good or service. Intellectual Capital: the technological expertise that a business acquires over time, trade secrets, and unique business practices. Social Capital: the ability to operate because society has agreed to a system of order, conduct and law. These facilitate an economic environment that allows the business to operate.
Theory
An explanation using an integrated set of principles that organizes observations and predicts behaviors or events.
Illiquidity
An inability to convert assets into cash quickly.
Industry
An industry is a group of companies that are related based on their primary business activities. In modern economies, there are dozens of industry classifications. Industry classification are typically grouped into larger categories called sectors. Individual companies are generally classified into an industry based on their largest sources of revenue. For example, while an automobile manufacturer might have a financing division that contributes 10% to the firm's overall revenues, the company would be classified in the automaker industry by most classification systems.
Investment
An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth. An investment always concerns the outlay of some asset today—time, money, or effort—in hopes of a greater payoff in the future than what was originally put in.
Open System
An open system is an economic system with little to no barriers to free-market activity. An open system doesn't include tariffs, licensing requirements, subsidies, unionization, and any other regulations or practices that interfere with free-market activity.
(Common) Resources
Any scarce resource, such as water or pasture, that provides users with tangible benefits but which for nobody in particular owns or has exclusive claim to. A major concern with common resources is overuse, especially when there are poor social-management systems in place to protect the core resource. A common resource may also go by the term open-access resource.
Friedrich Hayek (1899-1992)
Austrian economist who believed that economies function best without government interference. In his book The Road to Serfdom , Hayek argued that free markets self-regulate and that government intervention distorts the price signals that allow self-regulation.
John Maynard Keynes (1883-1946) & Keynesian Economics
British economist who introduced Keynesian economics. Keynesian economics is a school of thought in which government plays an important role in mitigating economic recessions. Believed that depressions occur because of an excessive amount of savings which leads to a decrease in aggregate demand. Government should spend in a recession and cut spending in during expansion. Economic Expansion: Taxes increase, Spending on social programs decrease, Interest rates increase and vice versa during contraction.
Business Cycle
Business cycles are a type of fluctuation found in the aggregate economic activity of nations...a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions...this sequence of changes is recurrent but not periodic." That description, from the 1946 magnum opus by Arthur F. Burns and Wesley C. Mitchell, Measuring Business Cycles, remains definitive today.
Capital
Capital is a term for financial assets, such as funds held in deposit accounts and/or funds obtained from special financing sources. Capital can also be associated with capital assets of a company that requires significant amounts of capital to finance or expand. Capital can be held through financial assets or raised from debt or equity financing. Businesses will typically focus on three types of business capital: working capital, equity capital, and debt capital. In general, business capital is a core part of running a business and financing capital intensive assets. Capital assets are assets of a business found on either the current or long-term portion of the balance sheet. Capital assets can include cash, cash equivalents, and marketable securities as well as manufacturing equipment, production facilities, and storage facilities.
Capitalism
Capitalism is an economic system in which private individuals or businesses own capital goods. The production of goods and services is based on supply and demand in the general market—known as a market economy—rather than through central planning—known as a planned economy or command economy. The purest form of capitalism is free market or laissez-faire capitalism. Here, private individuals are unrestrained. They may determine where to invest, what to produce or sell, and at which prices to exchange goods and services. The laissez-faire marketplace operates without checks or controls. Today, most countries practice a mixed capitalist system that includes some degree of government regulation of business and ownership of select industries.
Capital Profits
Capitalization of profits is the use of a corporation's retained earnings (RE) to pay a bonus to shareholders in the form of dividends or additional shares. It is a reward to shareholders, distributed in proportion to the number of shares each owns.
Marginal Propensity to Consume (MPC)
Change in Consumption/Change in Income Y-axis/X-axis
Conclusion about Short-Term Consumption
Changes in short-term consumption largely depend on changes in the rate at which income (measured in wage-units) is being earned and not on changes in the propensity to consume out of a given income.
Classical Economics
Classical economic theory was developed shortly after the birth of western capitalism. It refers to the dominant school of thought for economics in the 18th and 19th centuries. Classical economic theory helped countries to migrate from monarchic rule to capitalistic democracies with self-regulation. Adam Smith's 1776 release of the Wealth of Nations highlights some of the most prominent developments in classical economics. Theories to explain value, price, supply, demand, and distribution, was the focus of classical economics. Classical economics was eventually replaced with more updated ideas, such as Keynesian economics, which called for more government intervention.
Collective Bargaining
Collective bargaining is the process of negotiating the terms of employment between an employer and a group of workers. The terms of employment are likely to include items such as conditions of employment, working conditions, and other workplace rules, as well as base pay, overtime pay, work hours, shift length, work holidays, sick leave, vacation time, retirement benefits, and health care benefits.
Comparative Advantage
Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.
Consumption Goods
Consumer goods are products bought for consumption by the average consumer. Alternatively called final goods, consumer goods are the end result of production and manufacturing and are what a consumer will see stocked on the store shelf. Clothing, food, and jewelry are all examples of consumer goods. Basic or raw materials, such as copper, are not considered consumer goods because they must be transformed into usable products.
Contract Rent
Contract rent refers to a situation wherein there is a mutually agreed-upon deal between two parties, but in which external conditions change over time, granting one party unequal benefit; usually at the expense of the other party.
Aggregate Demand Function
D = Proceeds which entrepreneurs expect to receive from the employment of (N) men D = f(N) --> Aggregate Demand Function
David Ricardo
David Ricardo was a classical economist who developed several key theories that remain influential in economics. Ricardo was a successful investor and member of Parliament who took up writing about economics after retiring young on his fortunes. Ricardo is best known for his theories of comparative advantage, economic rents, and the labor theory of value.
Classical Theory of Interest
Defined as reward for the use of capital and the rate of interest is determined by the demand and supply of capital. The supply of capital is a positive and the demand for capital is a negative function of the rate of interest. Graph: x1 = first position of the investment-demand schedule; x2 = second position of this curve; Y1 = amounts saved out of an income Y1 to various levels of the rate of interest curves Y2 & Y3.
Demand
Demand is an economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a good or service will decrease the quantity demanded, and vice versa. Market demand is the total quantity demanded across all consumers in a market for a given good. Aggregate demand is the total demand for all goods and services in an economy. Multiple stocking strategies are often required to handle demand.
Differential Rent
Differential rent refers to the excess profit that may arise owing to differences in the fertility of the land. The surplus that arises due to the difference between the marginal and intramarginal land is the differential rent. It is generally accrued under conditions of extensive land cultivation. Differential ground rent was first proposed by the classical political economist David Ricardo.
Consumption Expenditure
Differs from consumption, consumption expenditure is the explicit cost to buy a good or service, non-durable or durable good to use as instantaneous consumption of a consumption service.
Disinvestment
Disinvestment is the action of an organization or government selling or liquidating an asset or subsidiary. Absent the sale of an asset, disinvestment also refers to capital expenditure (CapEx) reductions, which can facilitate the re-allocation of resources to more productive areas within an organization or government-funded project. Whether disinvestment results in the divestiture or the reduction of funding, the primary objective is to maximize the return on investment (ROI) related to capital goods, labor, and infrastructure.
Economic Growth (Output)
Economic growth is an increase in the production of economic goods and services, compared from one period of time to another. It can be measured in nominal or real (adjusted for inflation) terms. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used.
Economic Rents
Economic rent is an amount of money earned that exceeds that which is economically or socially necessary. This can occur, for example, when a buyer working to attain a good or service that is considered exclusive makes an offer prior to hearing what a seller considers an acceptable price. Market imperfections thus lead to the rise of economic rents; it would not exist if markets were perfect since competitive pressures would drive down prices.
Capital Equipment
Equipment that you use to manufacture a product, provide a service or use to sell, store and deliver merchandise. This equipment has an extended life so that it is properly regarded as a fixed asset.
Keynes' Definition of Income & Saving
Income = Value of output = consumption + investment Saving = Income - consumption
Fixed Capital
Fixed capital includes the assets and capital investments, such as property, plant, and equipment (PP&E), that are needed to start up and conduct business, even at a minimal stage. These assets are considered fixed in that they are not consumed or destroyed during the actual production of a good or service but have a reusable value. Fixed-capital investments are typically depreciated on the company's accounting statements over a long period of time—up to 20 years or more.
Forced Saving
Forced saving occurs when the spending of a person is less than their earnings, due to the consumer goods shortages which can cause hyperinflation.
Net Income
Formula: Total Revenue (TR) - Business Expenses - Tax = Net Income (NI) Other Name(s): "Bottom Line" (found at the bottom of a company's balance sheet) or Total Earnings. Distribution: Retained by the company, paid out to shareholders as dividends.
Frictional Unemployment
Frictional unemployment is the result of employment transitions within an economy. Frictional unemployment naturally occurs, even in a growing, stable economy. Workers voluntarily leaving their jobs and new workers entering the workforce both add to frictional unemployment.
Full Employment
Full employment is an economic situation in which all available labor resources are being used in the most efficient way possible. Full employment embodies the highest amount of skilled and unskilled labor that can be employed within an economy at any given time.
Non-durable Goods
Goods that are consumed immediately last less than 3 years.
Theory of Interest
He described interest as the price of time, and "an index of community's preference for a dollar of present over a dollar of future income.
Real Wage
How much money an individual or entity makes after accounting for inflation when referring to an individual's income. Individuals often closely track their normal vs. real income to have a better understanding of their purchasing power.
Diminishing Return(s)
In economics, diminishing returns is the decrease in the marginal output a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant.
Credit
In the first and most common definition of the term, credit refers to an agreement to purchase a good or service with the express promise to pay for it later. This is known as buying on credit. The most common form of buying on credit is via the use of credit cards. People tend to make purchases with credit cards because they may not have enough cash on hand to make the purchase. Accepting credit cards can help increase sales at retailers or between businesses.
Net Investment (Income)
Investment profits - fees.
National Dividend
Just as a private company may distribute its profit to its shareholders in the form of dividends, so too can a nation monetize its macroeconomic profit and distribute the usufruct to its citizens.
Laissez-Faire Economics
Laissez-faire is an economic theory from the 18th century that opposed any government intervention in business affairs. The driving principle behind laissez-faire, a French term that translates to "leave alone" (literally, "let you do"), is that the less the government is involved in the economy, the better off business will be, and by extension, society as a whole. Laissez-faire economics is a key part of free-market capitalism.
Lassize-Faire
Laissez-faire is an economic theory from the 18th century that opposed any government intervention in business affairs. The driving principle behind laissez-faire, a French term that translates to "leave alone" (literally, "let you do"), is that the less the government is involved in the economy, the better off business will be, and by extension, society as a whole. Laissez-faire economics is a key part of free-market capitalism.
Monopoly Rent
Monopoly rent refers to the situation wherein a monopoly producer lacks competition and thus can sell its goods and services at a price far above what the otherwise competitive market price would be; at the expense of consumers.
Liquidity Preference Theory
Liquidity Preference Theory is a model that suggests that an investor should demand a higher interest rate or premium on securities with long-term maturities that carry greater risk because, all other factors being equal, investors prefer cash or other highly liquid holdings. Investors prefer to keep their money liquid as cash and demand interest in return for sacrificing their liquidity. Keynes' proposed that people keep their money for 3 reasons: 1. Everyday transactions 2. Caution for unforeseen expenses 3. For speculation to take advantage of favorable interest rates *The amount of money investors hold varies inversely with the rate of interest. Investors will hold money until rates increase.
Liquidity
Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price.
Durable Goods
Manufactured items that have a life span longer than three years.
Manufacturing
Manufacturing is the processing of raw materials or parts into finished goods through the use of tools, human labor, machinery, and chemical processing. Large-scale manufacturing allows for the mass production of goods using assembly line processes and advanced technologies as core assets. Efficient manufacturing techniques enable manufacturers to take advantage of economies of scale, producing more units at a lower cost. Manufacturing is a value-adding process allowing businesses to sell finished products at a higher cost over the value of the raw materials used. It is often reported on by the conference board, and well examined by economists.
Modern Monetary Theory (MMT)
Modern Monetary Theory (MMT) is a heterodox macroeconomic framework that says monetarily sovereign countries like the U.S., U.K., Japan, and Canada, which spend, tax, and borrow in a fiat currency they fully control, are not operationally constrained by revenues when it comes to federal government spending. Put simply, such governments do not rely on taxes or borrowing for spending since they can print as much as they need and are the monopoly issuers of the currency. Since their budgets aren't like a regular household's, their policies should not be shaped by fears of rising national debt. MMT challenges conventional beliefs about the way the government interacts with the economy, the nature of money, the use of taxes, and the significance of budget deficits. These beliefs, critics say, are a hangover from the gold standard era and are no longer accurate, useful, or necessary. MMT is used in policy debates to argue for such progressive legislation as universal healthcare and other public programs for which governments claim to not have enough money to fund.
Money
Money is an economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy. Money provides the service of reducing transaction cost, namely the double coincidence of wants. Money originates in the form of a commodity, having a physical property to be adopted by market participants as a medium of exchange. Money can be: market-determined, officially issued legal tender or fiat moneys, money substitutes and fiduciary media, and electronic cryptocurrencies.
Net Savings
Net disposable income - final consumption expenditure.
Poverty
Poverty is a state or condition in which a person or community lacks the financial resources and essentials for a minimum standard of living. Poverty means that the income level from employment is so low that basic human needs can't be met. Poverty-stricken people and families might go without proper housing, clean water, healthy food, and medical attention. Each nation may have its own threshold that determines how many of its people are living in poverty. Exclusions Include: 1. Institutionalized People 2. People living in military quarters 3. People living in dormitories 4. Individuals under the age of 15
Labor Market
The labor market, also known as the job market, refers to the supply of and demand for labor, in which employees provide the supply and employers provide the demand. It is a major component of any economy and is intricately linked to markets for capital, goods, and services.
Purchasing Power
Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you would be able to purchase.
Prospective Yield of Investment
Refers to the amount of annual income an investor expects to obtain from selling the output of his investment or capital assets after deducting the running expenses for obtaining that output during its life-time.
Marginal Product
Refers to the extra output, return, or profit yielded per unit by advantages from production inputs. Inputs can include things like labor and raw materials.
Utility
Refers to the total satisfaction received from consuming a good or service.
Production Function
Relates physical output of a production process to physical inputs or factors of production. It is a mathematical function that relates to maximum output that can be obtained from a given number of inputs, generally capital and labor.
Skilled Labor
Skilled labor is a segment of the workforce that has specialized know-how, training, and experience to carry out more complex physical, or mental tasks than routine job functions. Skilled labor is generally characterized by higher education, expertise levels attained through training and experience, and will likewise correspond with higher wages.
Machinery
Specific machines or machines in general. Machinery has to do with how something works or functions (usually a physical product or device).
Rate of Interest (Interest Rate)
The interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal. The interest rate is typically noted on an annual basis known as the annual percentage rate (APR). The assets borrowed could include cash, consumer goods, or large assets such as a vehicle or building.
Supply
Supply is a fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph. This relates closely to the demand for a good or service at a specific price; all else being equal, the supply provided by producers will rise if the price rises because all firms look to maximize profits.
Interest Rate
The interest rate is the amount charged on top of the principal by a lender to a borrower for the use of assets. Most mortgages use simple interest. However, some loans use compound interest, which is applied to the principal but also to the accumulated interest of previous periods. A loan that is considered low risk by the lender will have a lower interest rate. A loan that is considered high risk will have a higher interest rate. Consumer loans typically use an APR, which does not use compound interest. The APY is the interest rate that is earned at a bank or credit union from a savings account or certificate of deposit (CD). Savings accounts and CDs use compounded interest.
'Supply creates its own demand' (Say's Law)
The ability to purchase something depends on the ability to produce and thereby generate income. To have the means to buy, a buyer must first have produced something to sell. Thus, the source of demand is production, not money itself. Implies that production is the key to economic growth and prosperity and the government policy should encourage (but not control) production rather than promoting consumption.
Wage
The amount of money paid by the employer to the employee on behalf of the employee's labor.
(Annual) Salary
The amount of money your employer pays you over the course of a year in exchange for the work you perform. The salary you receive is based on a 40-hour work week, although (if you are on salary) your wages are not determined by the number of hours you work.
Labor
The amount of physical, mental, and social effort used to produce goods and services in an economy.
(Average) Propensity to Consume
The average propensity to consume (APC) measures the percentage of income that is spent rather than saved. This may be calculated by a single individual who wants to know where the money is going or by an economist who wants to track the spending and saving habits of an entire nation. In either case, the propensity to consume can be determined by dividing average household consumption, or spending, by average household income, or earnings. Note: Average propensity to consume is lower for wealthy individuals and higher for poorer individuals.
Ca$h Price
The cash price is the actual amount of money that is exchanged when commodities are bought and sold in the real world. The cash price might include other costs, such as fees incurred for transportation or storage of a commodity. Rather than buying and selling actual commodities, investors often trade commodity futures to profit from anticipated changes in commodity prices. However, commodity cash prices are actually separate from futures prices. The futures contracts reflect anticipated cash prices at a later time.
User Cost
The cost incurred from using a fixed capital asset such as machinery or raw materials, equivalent to the loss in the asset's value due to its use.
Supplementary Cost
The general cost of an undertaking as a whole including administration, interest, taxes, general maintenance, depreciation, and obsolescence —distinguished from prime cost.
Labor Theory of Value
The labor theory of value (LTV) was an early attempt by economists to explain why goods were exchanged for certain relative prices on the market. It suggested that the value of a commodity was determined by and could be measured objectively by the average number of labor hours necessary to produce it. In the labor theory of value, the amount of labor that goes into producing an economic good is the source of that good's value. The best-known advocates of the labor theory were Adam Smith, David Ricardo, and Karl Marx. Since the 19th century, the labor theory of value has fallen out of favor among most mainstream economists.
Supply & Demand
The law of demand says that at higher prices, buyers will demand less of an economic good. The law of supply says that at higher prices, sellers will supply more of an economic good. These two laws interact to determine the actual market prices and volume of goods that are traded on a market. Several independent factors can affect the shape of market supply and demand, influencing both the prices and quantities that we observe in markets.
Law of Diminishing Marginal Returns
The law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output. For example, a factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level. With all other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations.
Long Run
The long-run is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas, in the short run, firms are only able to influence prices through adjustments made to production levels. Additionally, while a firm may be a monopoly in the short term, they may expect competition in the long run. In economics, long-run models may shift away from short-run equilibrium, in which supply and demand react to price levels with more flexibility.
(Market) Price
The market price is the current price at which a good or service can be purchased or sold. The market price of an asset or service is determined by the forces of supply and demand; the price at which quantity supplied equals quantity demanded is the market price. In financial markets, the market price can change quickly as people change their bid or offer prices, or as sellers hit the bid or buyers hit the offer.
Savings
The money a person has left over when they subtract their consumer spending from their disposable income over a given period of time. Savings can be used to increase income through investing.
Net Profit
The number of earnings that an organization is left with after deducting all the expenses involved in operations, interest, and taxes.
Employment
The number of people currently employed in the economy.
Supply Price
The price of a given quantity at which producers will supply that quantity.
Keynes' Theory on the Rate of Interest
The rate of interest is determined by demand for money and the supply of money. OM is the total amount of money supplied by the central bank. At point E, demand for money becomes equal to the supply of money.
Replacement Cost
The replacement cost is an amount that a company pays to replace an essential asset that is priced at the same or equal value. The cost to replace an asset can change, depending on variations in the market value of components used to reconstruct or repurchase the asset and other costs needed to get the asset ready for use. Companies look at the net present value and depreciation costs when deciding which assets need to be replaced and whether the cost is worth the expense.
Effective Demand
The value of D at the point of the aggregate demand function, where it is intersected by the aggregate supply function, will be called the effective demand.
Short Run
The short run is a concept that states that, within a certain period in the future, at least one input is fixed while others are variable. In economics, it expresses the idea that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short run does not refer to a specific duration of time but rather is unique to the firm, industry or economic variable being studied.
Stock Exchange/Market
The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces which operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities. While both terms - stock market and stock exchange - are used interchangeably, the latter term is generally a subset of the former. If one says that she trades in the stock market, it means that she buys and sells shares/equities on one (or more) of the stock exchange(s) that are part of the overall stock market. The leading stock exchanges in the U.S. include the New York Stock Exchange (NYSE), Nasdaq, and the Chicago Board Options Exchange (CBOE). These leading national exchanges, along with several other exchanges operating in the country, form the stock market of the U.S.
Invisible Hand Theory
The tendency of free markets to regulate themselves by means of competition, supply & demand, and self-interest.
Bank Credit
The term bank credit refers to the amount of credit available to a business or individual from a banking institution in the form of loans. Bank credit, therefore, is the total amount of money a person or business can borrow from a bank or other financial institution. A borrower's bank credit depends on their ability to repay any loans and the total amount of credit available to lend by the banking institution. Types of bank credit include car loans, personal loans, and mortgages.
Investment Multiplier
The term investment multiplier refers to the concept that any increase in public or private investment spending has a more than proportionate positive impact on aggregate income and the general economy. It is rooted in the economic theories of John Maynard Keynes. The multiplier attempted to quantify the additional effects of investment spending beyond those immediately measurable. The larger an investment's multiplier, the more efficient it is in creating and distributing wealth throughout the economy.
Loan
The term loan refers to a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or principal amount. In many cases, the lender also adds interest and/or finance charges to the principal value which the borrower must repay in addition to the principal balance. Loans may be for a specific, one-time amount, or they may be available as an open-ended line of credit up to a specified limit. Loans come in many different forms including secured, unsecured, commercial, and personal loans.
Consumption
The use of goods and services by households.
Value
Value is the monetary, material, or assessed worth of an asset, good, or service. "Value" is attached to a myriad of concepts including shareholder value, the value of a firm, fair value, and market value. Some of the terms are well-known business jargon, and some are formal terms for accounting and auditing standards of reporting to the Securities and Exchange Commission (SEC).
Wealth
Wealth measures the value of all the assets of worth owned by a person, community, company, or country. Wealth is determined by taking the total market value of all physical and intangible assets owned, then subtracting all debts. Essentially, wealth is the accumulation of scarce resources. Specific people, organizations, and nations are said to be wealthy when they are able to accumulate many valuable resources or goods. Wealth can be contrasted to income in that wealth is a stock and income is a flow, and it can be seen in either absolute or relative terms.
Working Capital
Working capital, also known as net working capital (NWC), is the difference between a company's current assets, such as cash, accounts receivable (customers' unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable. Net operating working capital is a measure of a company's liquidity and refers to the difference between operating current assets and operating current liabilities. In many cases these calculations are the same and are derived from company cash plus accounts receivable plus inventories, less accounts payable and less accrued expenses. Working capital is a measure of a company's liquidity, operational efficiency and its short-term financial health. If a company has substantial positive working capital, then it should have the potential to invest and grow. If a company's current assets do not exceed its current liabilities, then it may have trouble growing or paying back creditors, or even go bankrupt.
Yield
Yield refers to the earnings generated and realized on an investment over a particular period of time. It's expressed as a percentage based on the invested amount, current market value, or face value of the security. It includes the interest earned or dividends received from holding a particular security.
Aggregate Supply Function
Z = aggregate supply price of output from employing (N) men; Z = (N) --> Aggregate supply function