Phillips curve

Named after British economist WILLIAM PHILLIPS (1914-1975), Phillips curve charts the significant relationship between the percentage change in money wages and the rate of unemployment. Its main implication is that low inflation and low unemployment are incompatible, and so governments have to choose the best combination of both. PHILLIPS also showed that at an

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portfolio selection theory

Mathematical model Risk and expected return MPT assumes that investors are risk averse, meaning that given two portfolios that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher expected returns

production, theory of

Analysis concerned with transforming factor inputs into outputs according to a production function. Production is dependent on technology, the mix of factor inputs, factor prices and marginal productivity. The Modern Cambridge School envisages an economic model which encompasses sociological, historical and psychological factors as well as pure economic ones. It attacks neo-classical economics for

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profits, theories of

The early classical economists believed that profits would eventually decline. The Scottish economist Adam Smith (1723-1790) viewed the growth rate of capital accumulation (which took place at a rate higher than total output) as the cause. The English economist David Ricardo (1772-1823) argued that a decline in the general rate of profit was caused by the diminishing marginal

public choice

Application of economic models to politics. Political and governmental decisions can be understood as rational choices of persons and institutions seeking to maximize their self-interest. Source: Patrick Dunleavy, Democracy, Bureaucracy and Public Choice (Brighton, 1991) Background and development An early precursor of modern public choice theory was the work of Swedish economist Knut Wicksell (1896),[7] which treated

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second best, theory of

Proposed by Canadian economist RICHARD LIPSEY (1928-1980) and Australian economist KELVIN LANCASTER (1924-1999), theory of second best assumes that if one of the conditions necessary to achieve Pareto-optimality is missing then the ‘second best’ position can only be reached by departing from all the other Paretian conditions. Also see: pareto efficiency Source: R G Lipsey and K

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St Petersburg paradox

The paradox A casino offers a game of chance for a single player in which a fair coin is tossed at each stage. The initial stake begins at 2 dollars and is doubled every time heads appears. The first time tails appears, the game ends and the player wins whatever is in the pot. Thus the player wins

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Thatcherism

Thatcherism is the name given to the laissez-faire policy of Margaret Thatcher (1925-), British prime minister from 1979 to 1990. An advocate of supply-side economics, among Thatcher’s policies were: reductions in tax; manipulation of the money supply to reduce inflation; privatization of public industry; reduction of trade union power; reduction of government’s role in the economy; and encouragement of

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variable proportions, law of

In chemistry, the law of definite proportion, sometimes called Proust’s law, or law of constant composition states that a given chemical compound always contains its component elements in fixed ratio (by mass) and does not depend on its source and method of preparation. For example, oxygen makes up about 8/9 of the mass of any sample of pure water, while hydrogen makes up the remaining 1/9 of the mass: the

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Blue ocean strategy

The Blue ocean strategy was developed by W. Chan Kim and Renée Mauborgne in their research in 2005. By analyzing 150 business strategies during over 100 years in 30 different industrial sectors, Kim and Mauborgne (2005) propose that firms succeed not because of fighting with their rivals, but because they have created “blue ocean”

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