The subdivision of the discipline of economics that studies and strives to explain the functioning of the economy as a whole -- the total output of the economy, the overall level of employment or unemployment, movements in the average level of prices (inflation or deflation), total savings and investment, total consumption and so on. The focus of much of macroeconomic theory is analysis of the ways in which conscious government policies (and the unintended secondary consequences of these policies) can influence the overall "economic health" of the country for good and for ill.
[See also: microeconomics, aggregate demand, aggregate supply, gross national product, gross domestic product, fiscal policy, monetary policy, business cycle, inflation, unemployment rate, savings, investment, economics, political economy]
A concept employed constantly in microeconomic theory (and quite frequently in macroeconomic theory as well) is that of the marginal change in some economic variable (such as quantity of a good produced or consumed), or even the ratio of the marginal change in one variable to the marginal change in another variable. A marginal change is a proportionally very small addition or subtraction to the total quantity of some variable. Marginal analysis is the analysis of the relationships between such changes in related economic variables. Important ideas developed in such analysis include marginal cost, marginal revenue, marginal product, marginal rate of substitution, marginal propensity to save, and so on. In microeconomic theory, "marginal" concepts are employed primarily to explicate various forms of "optimizing" behavior. (Consumers are seen as striving to maximize their utility or satisfaction. Firms are seen as striving to maximize their profits.) The maximum value of such a variable is found by identifying a value of the independent variable such that either a marginal increase or a marginal decrease from that value causes the value of the dependent variable being maximized to fall. (The student of mathematics may recognize the opportunity to apply concepts from differential calculus here, with the various marginal concepts being special names given to first derivatives of particular functions.) The valuation of the benefits (utility) and the costs of any good is determined "at the margin." For the (individual or collective) decision maker pondering how many units of a good to consume or provide to the market, net total benefits (benefits minus costs) will always be maximized at that level of consumption (or provision to the market) where the marginal benefit derived from adding the last unit equals the marginal addition to total costs of producing or acquiring that last additional unit.
See entry under productivity.
In its original meaning, a physical coming together of a sizable number of merchants and prospective customers at a pre-arranged time and place (in medieval Europe, typically once a week on the main square of the largest village in the vicinity) for the purpose of striking deals to buy and sell a variety of goods and services. Large numbers of customers came to such organized markets because they found it convenient to be able to make many of their necessary purchases on the same day in one central location (minimizing their total travel time and other travel costs) and because the presence of many merchants offering similar wares made it much more practical to comparison shop for the best deals in terms of quality and price. Merchants were often attracted from considerable distances to participate in such markets because of the opportunity to sell so many of their wares to such large numbers of potential customers in such a short time. Modern day flea markets, farmers' markets, gun shows and crafts fairs are fairly close to the original concept.
In the language of modern industrial society, and especially in the language of professional economists, the concept of a market has been generalized and abstracted far beyond the original rather concrete and localized meaning of the term. In the more modern sense of the term, a market is the generalized name tag for the whole process that gets under way whenever a sizable number of people free to buy and/or sell a particular kind of good or service are in more or less close communication with each other (either personally and directly or else through the mediation of advertising, catalogs, news reports, postal carriers, telephone systems, computer networks, etc.) so that information about the terms of recent transactions and current offers to buy or sell is generally available to a large number of interested parties at relatively low cost -- regardless of the participants' physical proximity or distance. Such technological innovations of the industrial age as ever cheaper and more rapid transportation and communications over increasing distances both have dramatically increased the size of the areas from which buyers and sellers may be brought together to do business and have greatly reduced the need for them actually to meet face-to-face in one place in order to strike a bargain. The markets for many consumers' durable goods like automobiles or TVs and major agricultural and industrial commodities like oil, natural gas, wheat, beef, steel, forest products and computer chips are now literally world-wide in extent. (Of course, for many markets there do still exist central gathering places or locations that play an especially important role in the local, national or even worldwide networks of buyers and sellers -- for example, the New York Stock Exchange, the Chicago Commodities Exchange, the seasonal women's fashions shows in Paris and Milan, regional baseball card collectors conventions and so on -- but in nearly all such cases, it is not really necessary for an individual buyer or seller actually to travel to the relevant marketplace in order to participate in the broader markets of which these are nowadays only a part.)
Where markets exist and are allowed to function reasonably freely, there are certain predictable consequences for the way the economy will operate. Elaboration of these consequences is the primary purpose of most of the research in the theoretical subfield of microeconomics.
[See also: market economy, capitalism, property rights, contract, microeconomics, transaction costs, competition]
An economy in which scarce resources are all (or nearly all) allocated by the interplay of supply and demand in free markets, largely unhampered by government rationing, price-fixing or other coercive interference. In classifying real historical economies, the level of "marketization" is not primarily an either/or issue but rather a matter of degree. The greater the proportion of the goods and services produced in the society that are allocated by market processes (rather than by government edict or the operation of unchangeable custom), the more meaningful it is to refer to its economy as a market economy -- and the more useful is the abstract economic theory of the operation of markets likely to be for understanding and even predicting economic behavior within that society.
Probably the most critical single distinction between "basically market" and "basically non-market" (socialist, feudal, hunter-gatherer, etc.) economies is whether or not the determinations of what is to be produced and of the corresponding allocation of producers' goods (land, raw materials, machinery, and other "capital," as well as the services of labor) are accomplished primarily through free markets rather than primarily through government command or unalterable custom.
The concept of a market presupposes the existence of certain sorts of property relations in the society involved. At least some goods and services must be legally or socially regarded as alienable property -- that is, there must be ascertainable individuals (or group representatives) who are recognized as having not just the right to use particular scarce economic resources for their own purposes but also the discretionary authority permanently to transfer such rights of use to someone else in exchange for some mutually agreeable quid pro quo, such as money or other goods or services. Not all human societies have recognized any such rights to transfer ownership, and most historical human societies have forbidden or placed stringent limits on the transferability of at least certain kinds of recognized property rights. In many societies (including most of Europe during the Middle Ages), individual or family rights to the perpetual use of particular plots of land were well established and protected by law -- but such rights only rarely could legally be sold to someone else because the land was socially regarded as fundamentally the inalienable property of either the local community as a whole or of the tribe or clan or church or perhaps of the reigning royal family. And even in the USA since 1865, while each person's ownership of his or her own body is well established, the law will still not allow you to make a binding contract to sell yourself into slavery or even to auction off your spare bodily organs for purposes of a surgical transplant.)
It is worth noting for clarity's sake that the concept of a market does not logically presuppose the existence of "private property in the means of production" in the sense that private individuals or family households are the owners of land and capital and thus the recipients of profits, interest, rent etc. One may at least theoretically conceive of an economy of market socialism, in which workers' collectives, consumers' cooperatives, village communes or even autonomous state agencies leased from the state or held actual title to land, mines, factories, machinery and so forth -- so long as the socialist production organizations were free to buy and sell their output and and the use of their assigned land or capital assets to each other at freely negotiated prices responsive to conditions of supply and demand (assuming, of course, they are allowed to keep effective control of the bulk of the proceeds). There are, of course, both theoretical and practical problems with market socialism, and the costs and benefits of capitalist markets cannot be uncritically attributed to such a system. The larger point is that socialist economies have historically included varying proportions of "remnant" market elements in their make-up, and the theoretical possibilities for additional "hybrid" forms are numerous.
[See also: market, property rights, factors of production, contract, microeconomics, transaction costs, competition, capitalism, socialist]
A good (or service) which some "outside analyst" considers to be intrinsically desirable, uplifting or socially valuable for other people to consume, independently of the actual desires or preferences of the consumer himself. In the case of such goods, it is sometimes held that free consumer choice is inappropriate, and therefore that if many consumers left to themselves are unwilling to purchase "appropriate" quantities of such goods, they should be encouraged or even compelled to consume them anyway. Such arguments are often employed in an effort to justify government intervention in the market place to provide such alleged merit goods to the citizenry, either through direct government provision of the good at no cost to the consumer or through payment of tax-financed government subsidies that enable private providers to sell the good far below its true costs of production. Typical examples of alleged merit goods might include various forms of "higher culture" often ignored by "lowbrows" (grand opera and ballet performances, museums, uplifting documentaries or talking heads shows on PBS TV stations), the services of the clergy of The One True Religion, schoolroom instruction for children, etc.
[See also: demerit good, subsidy]
The subdivision of the discipline of economics that studies the behavior of individual households and firms interacting through markets, how prices and levels of output of individual products are determined in these markets, the interconnections by which different markets affect each other, and how the price mechanism allocates resources and distributes income.
[See also: macroeconomics, economics, political economy]
A form of rule in which there is a single head of state, a monarch, with the title of King (or Queen) or its equivalent; in which the monarch holds his or her office for life; in which the position of monarch normally descends by rules of heredity only to members of a specific royal family; and where the monarch is popularly believed to be possessed of a religious or similar symbolic significance for the state and its institutions that legitimate his or her privileges. When the monarch rules with full or nearly full executive, legislative and judicial powers practically unlimited by constitutional or legal restrictions, the system is often referred to as an "absolute monarchy." When the powers of the monarch are effectively limited and restricted by law (at least to insure respect for the subjects' recognized rights to personal freedom and property and often also to limit the monarch's powers of legislation and taxation), the system is normally referred to as "constitutional monarchy."
[See also: republic, autocracy, oligarchy, aristocracy, monarchy, state, dictatorship, theocracy]
That part of the government's economic policy which tries to control the size of the total stock of money (and other highly liquid financial assets that are close substitutes for money) available in the national economy in order to achieve policy objectives that are often partly contradictory: controlling the rate of increase in the general price level (inflation), speeding up or slowing the overall rate of economic growth (mainly by affecting the interest rates that constitute such a large share of suppliers' costs for new investment but partly by influencing consumer demand through the availability of consumer credit and mortgage money), managing the level of unemployment (stimulating or retarding total demand for goods and services by manipulating the amount of money in the hands of consumers and investors), or influencing the exchange rates at which the national currency trades for other foreign currencies (mainly by pushing domestic interest rates above or below foreign interest rates in order to attract or discourage foreign savings from entering or leaving domestic financial markets). Monetary policy is said to be "easy," "loose," or "expansionary" when the quantity of money in circulation is being rapidly increased and short-term interest rates are thus being pushed down. Monetary policy is said to be "tight" or "contractionary" when the quantity of money available is being reduced (or else allowed to grow only at a slower rate than in the recent past) and short-term interest rates are thus being pushed to higher levels.
The government's ability to control the size of the money stock and the levels of interest rates is only partial, not absolute. This is because monetary policy makers must rely mainly on influencing the privately-owned banking system's supply schedule for loaned funds. Monetary policy makers are much less able to affect the private sector's demand schedule for such funds, yet both supply and demand for money interact to determine the quantity of money created and its price, the interest rate. Even in trying to control the supply side of the loan market, it is easier for the Fed to force the banks to tighten credit and make fewer new loans (by raising the legal reserve requirements, for example) than it is to convince them to extend a larger volume of loans when bankers have become worried about their prospects for being repaid (or fear rapid inflation will cause their repayments to be worth less than the original value of the their loans). Government monetary policy-makers are generally much more successful in manipulating short-term interest rates (rates on loans for periods of less than a year) than they are in manipulating medium-term interest rates (1 to 5 years) and long-term interest rates (more than five years). This is because demand and supply for medium-term and long-term loans tend to be both much more elastic and much more affected by the public's expectations about future rates of inflation than the supply and demand for short-term loans are. A very expansionary monetary policy may well lower short-term interest rates by flooding the banks and financial markets with loanable funds and yet at the same time may actually raise longer-term interest rates by prompting fears among lenders that inflation will soon be accelerating. Unfortunately, medium and long-term interest rates have much more influence on the rate of growth of the economy and on levels of unemployment than short-term interest rates do, because major new investment spending like research and development for new products or the construction of whole new factories are long-term projects that require long-term financing, and they are much less likely to be undertaken if long-term interest costs are high than if they are low.
[See also: Federal Reserve System, money, money stock, inflation, interest rate, discount rate, reserve requirement, open market operations, elasticity, banking, unemployment]
Any generally accepted medium of exchange -- that is, anything which is generally acceptable in a particular society as a means of payment or of settling debts arising out of exchanges on credit. Put slightly differently, money is a very special sort of good for which a very large proportion of the demand (at the extreme, all of the demand) is derived from people's (realistic) expectations that it can be quickly and easily re-exchanged for some other more immediately desired good or service (rather than the demand arising from a desire to personally consume the money-good itself).
The earliest forms of money arose spontaneously in barter economies when experienced traders identified certain commodities that were so widely desired for actual use in the society that they could reasonably count on their acceptability as payment in almost any trade. Monetary demand for such commodities was further enhanced if they also had other physical properties making them especially convenient to use for trade -- such as durability, portability, ease of storage, uniformity of quality, easy divisibility, and so on. That is, demand for these goods derived from their desireability as a medium of exchange was gradually "added on" to the pre-existing demand for them as objects of direct utility. Historical monetary systems have flourished on the basis not only of useful metals such as gold, silver, copper, bronze and iron but also on the basis of salt, tobacco, cattle and other livestock, furs and other animal hides, grain, gourds, beads, sea shells, feathers, and even transferable titles to particular coconut trees.
In present day industrialized economies, money normally consists mostly of abstract claims on government or on heavily government-regulated banks ("fiat money") -- claims such as token coins and paper currency or central bank notes or even magnetic tape entries representing one's checking account balance at a government insured bank that theoretically entitles one to withdraw cash on demand. Historically such government sponsored currency usually originated as "IOU's" in which the government (or its central bank) promised to redeem the tokens on demand (perhaps only after some future deadline) with "real money" -- i.e., fixed quantities of gold, silver or what have you. However, government promises of redemption have by the 20th century largely been withdrawn or downwardly adjusted, and these tokens have very little (or no) intrinsic or use value. Nevertheless, in relatively "stable" countries (like the United States, Great Britain, Switzerland, Japan or Germany) fiat currencies remain generally acceptable as a means of payment because people think that they "know for sure" the currency can be used to satisfy their tax bills, because legal tender laws usually require private creditors to accept them to discharge contractual debts, and because people generally have come to believe through favorable past experience that the official government money will continue to be widely acceptable in exchange for an at least moderately predictable quantity of goods and services in the private markets in the foreseeable future. Unfortunately, the confidence with which people hold their expectations about the future value of any given variety of fiat money is extremely fragile. Confidence in the value of fiat money is easily and quickly undermined under conditions of political or economic instability, especially when the government has already been observed reneging on some of its many other solemn promises and obligations and when the money stock is clearly being expanded at an extremely rapid rate -- with the result that a number of such national currencies have become worthless virtually overnight in the course of the 20th century's all too numerous war- and revolution-related hyperinflations.
[See also: barter, transaction costs, money stock, monetary policy, inflation, hyperinflation, deflation, banking]
(Also sometimes loosely referred to as the money supply, a term that, strictly speaking, should be reserved for the entire supply schedule of associated interest rates and the quantities of money that would be created at those rates.) The money stock is the total amount of money available in a particular economy at a particular point in time. Since many different things may serve more or less well as money (or close money substitutes), and since several different sorts of things may be serving as money at the same time in any particular economy, precise definition and measurement of the money stock presents some serious practical problems for the policy maker who wishes to use manipulation of the growth (or contraction) of the money stock as a tool of economic policy.
The narrowest definition of the money stock in common use by the advanced industrial countries today ("M1") includes only the paper currency and coinage in circulation among the public plus the total balances instantly available to depositors in privately held checking accounts ("demand deposits" or "sight deposits") in the country's commercial banks and similar depository institutions (like savings and loans, credit unions, etc.). (A very large proportion of checking account money, of course, is simply created by the banks themselves as they extend loans to borrowers by simply crediting their borrowers' checking account balances with the amounts loaned). Travelers' checks are also included in M1 in some countries, including the US.
"M2," the next broadest measure of the money stock, adds on to the totals included in M1 the total amount of deposits in short-term savings accounts and small certificates of deposit. There are a number of still broader definitions of the money stock ("M3," "M4," "L," etc.) that go on to add in such only slightly less liquid money-like assets as checkable money market mutual funds, larger denomination bank certificates of deposit, credit card credit limits, pre-approved lines of credit, and so on.
[See also: money, monetary policy, banking]
Literally, "single seller." A situation in which a single firm or individual produces and sells the entire output of some good or service available within a given market. If there are no close substitutes for the good or service in question, the monopolist will be able to set both the level of output and the price at such a level as to maximize profits without worrying about being undercut by competitors (at least in the short run). If demand for the good or service being sold by the monopolist is highly inelastic, prices and the rate of profit in the industry will tend to be higher (and output lower) than under competitive conditions and prices may in fact be noticeably higher than the marginal costs of production for substantial periods of time. To keep new competitors from entering the industry and flooding the market with additional supply in response to the unusually high rate of profit, monopolists historically have typically had to rely in the long run upon some sort of legal barriers to entry erected by government -- either an open grant of protected monopoly that legally forbids competitors to enter the market, or a regulatory regime that in practice makes it almost impossible for new competitors to meet required standards, or perhaps only such more transient barriers to entry as legally protected patent rights or copyrights for essential technology. However, see also entries under barriers to entry, cartel, natural monopoly and competition.
Literally, single buyer. A situation in which a single firm or individual is the only buyer of a particular good or service within a given market.
[See also: monopoly, competition]