Pareto optimality (1906)

Named after Italian sociologist and economist Vilfredo Pareto (1848-1923), Pareto optimality is a situation which exists when economic resources and output have been allocated in such a way that no-one can be made better off without sacrificing the well-being of at least one person. Also see: social welfare function, compensation principle, cost-benefit analysis, scitovsky paradox Source: V Pareto, Manuale d’economia

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Partial equilibrium theory (19TH CENTURY- )

Developed by French economist Antoine Augustin Cournot (1801-1877) and English political economist Alfred Marshall (1892-1924), partial equilibrium theory examines the conditions of equilibrium in an individual market or in part of a national economy. Partial equilibrium theory usually looks at the relationship between two economic variables, assuming other variables are constant in value. Also see: general equilibrium theory, classical macroeconomic

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Peak load pricing

Peak-load pricing is a policy of raising prices when the demand for a service is at its highest. The most recent analysis of this pricing policy stems from American research in the 1960s and 1970s. Peak-load pricing is often used by electricity and telephone utilities as a means of reflecting the investment they have

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Perfect competition (20TH CENTURY)

Perfect competition is a competitive system in which a large number of firms produce a homogenous product for a large number of buyers. All the firms share the same product/market knowledge and enjoy free entry/exit to and from the industry. They are price-takers and sell as much of the product as possible at the

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Permanent income hypothesis (1957)

Developed by American economist Milton Friedman (1912-1992), in its simplest form, permanent income hypothesis states that the choices consumers make regarding their consumption patterns are determined not by current income but by their longer-term income expectations. Measured income and measured consumption contain a permanent (anticipated and planned) element and a transitory (windfall/unexpected) element. Friedman concluded that the individual

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Physiocracy (18TH CENTURY)

The French school of economics, led by physician and economist Francois Quesnay (1694-1774), whose theory maintained that a natural order existed and it was the duty of the state to preserve this order. The Physiocrats believed that land was the only source of wealth and, therefore, agriculture was the only sector that should be taxed. Industry and commerce

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Pigou effect (1943)

Named after English economist Arthur Cecil Pigou (1877-1959), Pigou effect was firmly rooted in the classical school of economics and was subsequently overshadowed by the work of English economist John Maynard Keynes (1883-1946). The term may be defined as the impact of a change in the money supply on consumption. Pigou maintained lower prices would encourage consumption, thereby boosting

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Political business cycle (1867)

Initially attributed to German political economist Karl Marx (1818-1883) but later revised by, among others, Polish-born engineer and economist Michal Kalecki (1899-1970); political business cycle attributes economic fluctuations to politicians who manipulate fiscal and monetary policies (choosing between employment or inflation) in order to get elected/re-elected. It is argued that in the period leading up to an election,

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Prebisch Singer thesis (1960S)

Named after Argentine economist Raul Prebisch (1901-1986) and German-born British economist Hans Singer (1910- ); Prebisch-Singer thesis asserts that, given the permanent tendency for the terms of trade to go against agricultural products, it is in the interest of developing countries to erect protective tariffs behind which they can industrialize. Source: R Prebisch, The Economic Development of Latin

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Price discrimination (20TH CENTURY)

Early analysis of this phenomenon was undertaken by English economist Arthur Cecil Pigou (1877-1959). Price discrimination describes the sale of identical goods or services in different markets at different prices. Pricing is usually linked to ability-to-pay; thus, students or pensioners may pay less than others for social services. On a larger scale, modern pharmaceuticals companies frequently

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Privatization (20TH CENTURY)

Explanation and/or justification of shift of functions from government to market. Services are better provided and functions better carried out by market enterprises than by public bodies. At the same time the expectations of citizens are shifted from political solutions – which are collective – to economic ones, which are individual. Also see: nationalization, laissez-faire, physiocracy, mercantilism Source:

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Product Development Strategy

Product development strategy – one of growth strategies associated with the Ansoff Matrix refers to the methods and actions used to bring new products to a market or modify existing products to create new business. Developing a product has several steps, from producing an idea of distributing products to customers. Each stage requires a

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Product life-cycle theory (20TH CENTURY)

Long-term patterns of international trade are influenced by product innovation and subsequent diffusion. A country that produces technically superior goods will sell these first to its domestic market, then to other technically advanced countries. In time, developing countries will import and later manufacture these goods, by which stage the original innovator will have produced

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Property

Account of rights over the material world. Justifications of property rights vary, as do recommendations on the obligations and restraints which should accompany such rights. Disagreement exists as to whether such rights belong in the first place to individuals or to society. Source: David Miller et al., eds, The Blackwell Encyclopaedia of Political Thought (Oxford, 1987)

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Public utility pricing (1938)

First raised as an economic issue by American economist Harold Hotelling (1895-1973), public utility pricing refers to the setting of prices for goods and services in order to maximize the benefit to the community. Such pricing for rail, telephone, water and electricity (which could not be carried out in normal market conditions) takes into account future

Purchasing power parity (1916)

With its roots in 17th century mercantilism, purchasing power parity was developed by Swedish economist Karl Gustav Cassel (1866-1945). It asserts that exchange rates are in equilibrium when the domestic purchasing power of currencies are the same. A FFrlO = £1 rate would be in equilibrium if FFrlO bought the same quantity of goods and services in

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Quantity theory of money (1885)

Developed by the Americans SIMON NEWCOMB (1835-1909) and Irving Fisher (1867-1947), the latter of whom’s original equation stated in simple terms that the amount of money in circulation equals money national income; that is, MV = PT where M is money stock, V is velocity of circulation, P is average price level and T the number of

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Queuing theory (1970S)

Developed as an extension of probability theory, queuing theory deals with the analysis of congestion and delay in economic modeling. Queuing theory features in stock control in the shape of the Lifo (Last in first out) and Fifo (First in first out) principles, and in financial markets. Also see: information theory Source: D Gross and

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Ramsey pricing (1927)

Named after English economist Frank Ramsey (1903-1960), Ramsey pricing is concerned with prices that maximize the sum of industry consumer surplus and profits. Also see: average cost pricing, marginal cost pricing, cost-push inflation Source: F Ramsey, ‘A Contribution to the Theory of Taxation’, Economic Journal, 37 (March, 1927), 47-61 Description In a first-best world, without the need to earn

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Random walk hypothesis (1900)

First identified by French economist Louis Bachelier (1870-1946) from the study of the French commodity markets, random walk hypothesis asserts that the random nature of commodity or stock prices cannot reveal trends and therefore current prices are no guide to future prices. The short-term unpredictability of factors means that they appear to walk randomly on a

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