Some Economic Terms - Daily Current Affair Article

1. PARETO'S EFFICIENCY

  • Definition: Pareto's efficiency is defined as the economic situation when the circumstances of one individual cannot be made better without making the situation worse for another individual. Pareto's efficiency takes place when the resources are most optimally used. Pareto's efficiency was theorized by the Italian economist and engineer Vilfredo Pareto.
  • Description: It is a purely economic concept and has no relationship with the concept of equal or fair utilization of resources. It has wide applications in the field of economics and engineering.
  • It is the final optimum solution beyond which any change would directly lead to loss in the allocation of resources. Pareto's efficiency is, thus, the complete solution in itself. However, it is almost impossible to achieve.

2. PREDATORY PRICING

  • Predatory pricing is the illegal act of setting prices low in an attempt to eliminate the competition. Predatory pricing violates antitrust law, as it makes markets more vulnerable to a monopoly.
  • A price war spurred by predatory pricing can be favorable for consumers in the short run. The heightened competition may create a buyers’ market in which the consumer enjoys not only lower prices but also increased leverage and wider choice.

3. PRICE ELASTICITY

  • Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price.
  • The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price.
  • The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.

4. PUBLIC GOODS

  • Public goods are commodities or services that benefit all members of society, and which are often provided for free through public taxation.
  • Public goods are the opposite of private goods, which are inherently scarce and are paid for separately by individuals.
  • Societies will disagree about which goods should be considered public goods; these differences are often reflected in nations’ government spending priorities.
  • Public goods are non-excludable and non-rival. They include public parks and the air we breathe.
  • Key Terms
  • Rival: A good whose consumption by one consumer prevents simultaneous consumption by other consumers
  • Excludable: A good for which it is possible to prevent consumers who have not paid for it from having access to it.

5. MACROECONOMICS AND MICROECONOMICS

  • Economics is divided into two categories: microeconomics and macroeconomics. Microeconomics is the study of individuals and business decisions, while macroeconomics looks at the decisions of countries and governments.
  • Though these two branches of economics appear different, they are actually interdependent and complement one another. Many overlapping issues exist between the two fields.
  • Microeconomics focuses on supply and demand, and other forces that determine price levels, making it a bottom-up approach.
  • Macroeconomics takes a top-down approach and looks at the economy as a whole, trying to determine its course and nature.
  • Investors can use microeconomics in their investment decisions, while macroeconomics is an analytical tool mainly used to craft economic and fiscal policy.

6. MIXED ECONOMY

  • A mixed economy is a system that combines characteristics of market, command, and traditional economies. It benefits from the advantages of all three while also experiencing some of the disadvantages.
  • Characteristics
  • Mixed economy has three of the following characteristics of a market economy. First, it protects private property. Second, it allows the free market and the laws of supply and demand to determine prices. Third, it is driven by the motivation of the self-interest of individuals.
  • Most mixed economies have some characteristics of a command economy in strategic areas. It allows the federal government to safeguard its people and its market. The government has a large role in the military, international trade, and national transportation.

7. DEBT- EQUITY RATIO

  • Definition: The debt-equity ratio is a measure of the relative contribution of the creditors and shareholders or owners in the capital employed in business. Simply stated, ratio of the total long term debt and equity capital in the business is called the debt-equity ratio.
  • Description: This financial tool gives an idea of how much borrowed capital (debt) can be fulfilled in the event of liquidation using shareholder contributions. It is used for the assessment of financial leverage and soundness of a firm and is typically calculated using previous fiscal year's data.
  • A low debt-equity ratio is favorable from investment viewpoint as it is less risky in times of increasing interest rates. It therefore attracts additional capital for further investment and expansion of the business.

8. DISCOUNT RATE

  • Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal Reserve Bank through the discount window loan process. Second, the discount rate refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.
  • The term discount rate can refer to either the interest rate that the Federal Reserve charges banks for short-term loans or the rate used to discount future cash flows in discounted cash flow (DCF) analysis.
  • In a banking context, discount lending is a key tool of monetary policy and part of the Fed's function as the lender-of-last resort.
  • In DCF, the discount rate expresses the time value of money and can make the difference between whether an investment project is financially viable or not.

9. DUMPING

  • Dumping occurs when a country's businesses lower the sales price of their exports to gain market share. By flooding the target export market with drastically lowered prices, it often puts that nation's competing firms out of business.
  • With dumping, a country's businesses drop their product's price on the foreign market below what it would sell for at home. They may even push the price below the actual cost to produce. Then they raise the price once they've destroyed the other nation's competition.
  • For example, if France exported tires to the U.S. for less than their normal value, it could make it difficult for American tire manufacturers to compete. A prolonged "dumping" of cheap tires could force American tire manufacturers out of business. While this could also be costly to France, once it eliminated American competition for its tires, it could hike the price again and recoup some of the lost revenue.
  • Dumping is legal under World Trade Organization (WTO) rules unless the foreign country can reliably show the negative effects the exporting firm has caused its domestic producers.
  • Countries use tariffs and quotas to protect their domestic producers from dumping.

10. EXTERNALITY

  • An externality is a cost or benefit caused by a producer that is not financially incurred or received by that producer. An externality can be both positive or negative and can stem from either the production or consumption of a good or service. The costs and benefits can be both private—to an individual or an organization—or social, meaning it can affect society as a whole.
  • A demonstration of the negative externality is the pollution that is emitted by a factory which disturbs the surrounding environment and affects the health of nearby residents. An example of a positive externality is the influence of a well-educated workforce on a firm's productivity.
  • Externalities often happen when the production or consumption of the own price equilibrium of a product or service can not reflect the actual costs or benefits of that product or service for the society as a whole. The difference leads to an inequality of competitive equilibrium of externality with that of Pareto Optimality.

Sources

  • Indian Express
  • Economic Times
  • The Business Line
  • Economics.help.org
  • The Balance
General Studies Paper 3
  • Economy