- Industry: Economy; Printing & publishing
- Number of terms: 15233
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Somewhere between perfect competition and monopoly, also known as imperfect competition. It describes many real-world markets. Perfectly competitive markets are extremely rare, and few firms enjoy a pure monopoly; oligopoly is more common. In monopolistic competition, there are fewer firms than in a perfectly competitive market and each can differentiate its products from the rest somewhat, perhaps by advertising or through small differences in design. These small differences form barriers to entry. As a result, firms can earn some excess profits, although not as much as a pure monopoly, without a new entrant being able to reduce prices through competition. Prices are higher and output lower than under perfect competition.
Industry:Economy
At the heart of economic theory is homo economicus, the economist’s model of human behavior. In traditional classical economics and in Neo-classical economics it was assumed that people acted in their own self-interest. Adam Smith argued that society was made better off by everybody pursuing their selfish interests through the workings of the invisible hand. However, in recent years, mainstream economists have tried to include a broader range of human motivations in their models. There have been attempts to model altruism and charity. Behavioral economics has drawn on psychological insights into human behavior to explain economic phenomena.
Industry:Economy
The price quoted for a transaction that is to be made on the spot, that is, paid for now for delivery now. Contrast spot markets with forward contracts and futures markets, where payment and/or delivery will be made at some future date. Also contrast with long-term contracts, in which a price is agreed for repeated transactions over an extended time period and which may not involve immediate payment in full.
Industry:Economy
The amount of money available in an economy. In the heyday of monetarism in the early 1980s, economists pounced upon the monthly (in some countries, even weekly) money-supply numbers for clues about future inflation. Central banks aim to manage demand by controlling the supply of money through open-market operations, reserve requirements and changing the rate of interest (to be exact, the discount rate). One difficulty for policymakers lies in how to measure the relevant money supply. There are several different methods, reflecting the different liquidity of various sorts of money. Notes and coins are completely liquid; some bank deposits cannot be withdrawn until after a waiting period. M3 (M4 in the UK) is known as broad money, and consists of cash, current account deposits in banks and other financial institutions, savings deposits and time-restricted deposits. M1 is known as narrow money, and consists mainly of cash in circulation and current account deposits. M0 (in the UK) is the most liquid measure, including only cash in circulation, cash in banks’ tills and banks’ operational deposits held at the Bank of England. Although it is a poor predictor of inflation, monetary growth can be a handy leading indicator of economic activity. In many countries, there is a clear link between the growth of the real broad-money supply and that of real GDP.
Industry:Economy
A statistic used for judging the health of an economy, such as GDP per head, the rate of unemployment or the rate of inflation. Such statistics are often subject to huge revisions in the months and years after they are first published, thus causing difficulties and embarrassment for the economic policymakers who rely on them.
Industry:Economy
The difference between one item and another. A much used term in financial markets. Examples are the differences between:
* the bid (what a dealer will pay) and ask or offer (what a dealer will sell for) price of a share or other security;
* the price an underwriter pays for an issue of bonds from a company and the price the underwriter charges the public;
* the yield on two different bonds.
Industry:Economy
Any market where money and other liquid assets (such as treasury bills) can be lent and borrowed for between a few hours and a few months. Contrast with capital markets, where longer-term capital changes hands.
Industry:Economy
In January 1999, 11 of the 15 countries in the European union merged their national currencies into a single European currency, the Euro. This decision was motivated partly by politics and partly by hoped-for economic benefits from the creation of a single, integrated European economy. These benefits included currency stability and low inflation, underwritten by an independent European central bank (a particular boon for countries with poor inflation records, such as Italy and Spain, but less so for traditionally low-inflation Germany). Furthermore, European businesses and individuals stood to save from handling one currency rather than many. Comparing prices and wages across the Euro zone became easier, increasing competition by making it easier for companies to sell throughout the Euro-zone and for consumers to shop around. Forming the single currency also involved big risks, however. Euro members gave up both the right to set their own interest rates and the option of moving exchange rates against each other. They also agreed to limit their budget deficits under a stability and growth pact. Some economists argued that this loss of flexibility could prove costly if their economies did not behave as one and could not easily adjust in other ways. How well the Euro-zone functions will depend on how closely it resembles what economists call an optimal currency area. When the Euro economies are not growing in unison, a common monetary policy risks being too loose for some and too tight for others. If so, there may need to be large transfers of funds from regions doing well to those doing badly. But if the effects of shocks persist, fiscal transfers would merely delay the day of reckoning; ultimately, wages or people (or both) would have to shift. In its first few years, the Euro fell sharply against the dollar, though it recovered during late 2002. Sluggish growth in some European economies led to intense pressure for interest rate cuts, and to the stability and growth pact being breached, though not scrapped. Even so, by 2003 12 countries had adopted the Euro, with the expectation of more to follow after the enlargement of the EU to 25 members in 2004.
Industry:Economy
Budgetary rules agreed to by Euro zone countries as a condition of joining the Euro. The pact stipulates that all the countries will run a balanced budget in normal times. A government that runs a fiscal deficit bigger than 3% of GDP must take swift corrective action. And if any country breaches the 3% limit for more than three years in a row, it becomes liable to fines of billions of euros. The pact was supposed to be a powerful political symbol that Euro-using countries would not cheat each other. However, Portugal became the first country to break the deficit limit by notching up 4. 1% in 2001. When, in 2002, France and Germany also exceeded the 3% limit, some EU members were outraged and others lobbied for the pact to be modified or even scrapped.
Industry:Economy
When people are misled by inflation into thinking that they are getting richer, when in fact the value of money is declining. Whether, and how much, people are fooled by inflation is much debated by economists. Money illusion, a phrase coined by Keynes, is used by some economists to argue that a small amount of inflation may not be a bad thing and could even be beneficial, helping to “grease the wheels” of the economy. Because of money illusion, workers like to see their nominal wages rise, giving them the illusion that their circumstances are improving, even though in real (inflation-adjusted) terms they may be no better off. During periods of high inflation double-digit pay rises (as well as, say, big increases in the value of their homes) can make people feel richer even if they are not really better off. When inflation is low, growth in real incomes may hardly register.
Industry:Economy
