On the heels of a really bad decision — like the one that came out of City Council last week — we’re going to assume that our elected officials simply don’t understand the consequences of their actions. In a small community like Minot, where we all know and trust each other, the idea of ‘bounded rationality‘ is a lot easier to accept than the idea of ‘crony capitalism‘.
But whatever the cause, we need to be equally concerned with the consequences. And so as we discuss these issues over the coming weeks, it seemed important to get everyone on the same page in terms of language. Not everyone thinks like a business owner, not everyone has a background in economics. But here’s the good news, those are solvable problems!
So below you’ll find the big list of economic terms. And over the course of the summer, we’ll be pulling each term out for a more in-depth exploration of its meaning and how it impacts life in Minot.
And if you’re wondering where the definitions came from, it was a pretty even split between a Google search for ‘define the-term’ and the dicitonary of economic terms provided by The Economist. When there was a difference, I chose the term that most closely matched my own thinking.
As I said, we’ll be going through each term individually as well, but if you’re curious about how Minot’s liquor license laws are a mess of really terrible policy, check out the terms oligopoly, regulatory capture, and trust.
Minot’s A, B, C’s of Liquor License Economics
Barrier to Entry: In theories of competition in economics, barriers to entry, also known as a barrier to entry, are obstacles that make it difficult to enter a given market.
Bounded Rationality: The idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.
Business Confidence: An economic indicator that measures the amount of optimism or pessimism that business managers feel about the prospects of their companies/ organizations. It also provides an overview of the state of the economy.
Capital: Wealth in the form of money or other assets owned by a person or organization or available or contributed for a particular purpose such as starting a company or investing.
Capitalism: The winner, at least for now, of the battle of economic ‘isms’. Capitalism is a free-market system built on private ownership, in particular, the idea that owners of capital have property rights that entitle them to earn a profit as a reward for putting their capital at risk in some form of business or economic activity.
Capital Flight: When capital flows rapidly out of a country (or geographic area), usually because something happens which causes investors suddenly to lose confidence in its economy.
Capital Intensive: A business or industrial process requiring the investment of large sums of money.
Cartel: An association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition.
Competition: In economics, competition is the rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume by varying the elements of the marketing mix: price, product, distribution, and promotion.
Complementary Goods: Complementary goods are items which are used together. For example: DVD player and DVD disks to play in it. Tennis balls and tennis rackets. Another example might be food sold and restaurant and the drinks that go along with it.
Crony Capitalism: Crony capitalism is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism.
Demand: An economic principle that describes a consumer’s desire and willingness to pay a price for a specific good or service. Holding all other factors constant, the price of a good or service increases as its demand increases and vice versa.
Deregulation: The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry.
Economics: The branch of knowledge concerned with the production, consumption, and transfer of goods and services.
Economic Development: This is the sustained, concerted actions of policymakers and communities that promote the standard of living and economic health of a specific area.
Efficiency: The simple definition, getting the most out of resources used. In more economic terms, a broad term that implies an economic state in which every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency. When an economy is economically efficient, any changes made to assist one person would harm another.
Fixed Cost: Production costs that do not change when the quantity of output produced changes, for instance, the cost of renting an office or factory space.
Free Market: an economic system in which prices are determined by unrestricted competition between privately owned businesses.
Free Trade: The ability of people to undertake economic transactions with people free from any restraints imposed by governments or other regulators.
Growth: In economics, it’s the thing we’re always trying to do. An increase in the amount of goods and services produced per head of the population over a period of time.
Information: The oil that keeps the economy working smoothly. Economic efficiency is likely to be greatest when information is comprehensive, accurate and cheaply available. Many of the problems facing economies arise from people making decisions without all the information they need.
Innovation: A vital contributor to economic growth. The big challenge for firms and governments is to make it happen more often. To encourage innovation, innovators must be allowed to make a decent profit, otherwise they will not incur the risk and expense of trying to come up with useful innovations.
Intangible Asset: Valuable things, even though you cannot drop them on your foot – an idea, say, especially one protected by a patent; an effective corporate culture; human capital; a popular brand.
Investment: Putting money to work, in the hope of making even more money.
Invisible Hand: A term used by Adam Smith to describe his belief that individuals seeking their economic self-interest actually benefit society more than they would if they tried to benefit society directly. Put another way, the term used to describe the free market’s innate ability to allocate factors of production like land, labor, capital, and enterprise to their most valuable use.
Labor Intensive: Needing a large workforce or a large amount of work in relation to output.
Laissez-faire: Let-it-be economics. Put another way — the belief that an economy functions best when there is no interference by government.
Loss-Leader: A product sold at a loss to attract customers.
Macroeconomics: Big picture economics like analyzing economy-wide phenomena such as growth and unemployment.
Microeconomics: The study of the individual pieces that together make an economy. Microeconomics considers issues such as how households reach decisions about consumption and saving, how businesses set a price for their output, whether privatisation improves efficiency, whether a particular market has enough competition in it and how the market for labour works.
Monopoly: When the production of a good or service with no close substitutes is carried out by a single firm with the market power to decide the price of its output.
Multiplier: An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.
Oligopoly: a state of limited competition, in which a market is shared by a small number of producers or sellers.
Opportunity Cost: The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits that you did without because you bought (or did) that particular something and thus can no longer buy (or do) something else. For example, the opportunity cost of choosing to train as a lawyer is not merely the tuition fees, price of books, and so on, but also the fact that you are no longer able to spend your time holding down a salaried job or developing your skills as a musician.
Profit Center: A branch or division of a company that is accounted for on a standalone basis for the purposes of profit calculation. Profit centers are crucial in determining which units are the most and least profitable within an organization.
Protectionism: Government actions or policies that restrict or restrain free trade.
Quota: A form of protectionism. A limited quantity of a particular product that under official controls can be produced, exported, or imported.
Rational Expectations: An economic idea that the people in the economy make choices based on their rational outlook, available information and past experiences. The theory suggests that the current expectations in the economy are equivalent to what the future state of the economy will be.
Regulation: Rules governing the activities of private-sector enterprises. Regulation is often imposed by government. Even when introduced for sound economic reasons, regulation can generate more costs than benefits. Regulated firms or individuals may face substantial compliance costs.
: Exploiting loopholes in regulation, and perhaps making the regulation useless in the process. Here’s our expanded coverage of Regulatory Arbitrage.
Regulatory Capture: A form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating.
Regulatory Failure: When regulation generates more economic costs than benefits.
Regulatory Risk: A risk faced by private-sector firms that regulatory changes will hurt their business. To ensure that regulatory risk does not deter private firms from offering their services, a government wishing to change its regulations may have good reason to compensate private firms that suffer losses as a result of the change.
Risk: The chance of things not turning out as expected. Risk taking lies at the heart of capitalism and is responsible for a large part of the growth of an economy. In general, economists assume that people are willing to be exposed to increased risks only if, on average, they can expect to earn higher returns than if they had less exposure to risk.
Scarcity: In economic terms, it means simply that needs and wants exceed the resources available to meet them, which is as common in rich countries as in poor ones.
Social Capital: The amount of community spirit or trust that an economy has gluing it together. The more social capital there is, the more productive the economy will be.
Sunk Cost: In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered.
Transparency: The idea that the more information is disclosed about an economic activity the better. Some economists reckon that transparency is one of the most effective methods of regulation. Rather than risk regulatory capture, why not simply maximize disclosure and leave it to the market to decide whether what the information reveals is acceptable?
Trust: One of the most valuable economic assets, hard to create but easy to destroy – a crucial ingredient of a country’s social capital. People are more likely to do business together when they trust each other.