Oligopoly___A market structure dominated by a small number of large firms, selling either identical or differentiated products, and significant barriers to entry into the industry. This is one of four basic market structures. The other three are perfect competition, monopoly, and monopolistic competition.
Opportunity Cost___Opportunity cost is the value of the next best choice that one gives up when making a decision.
Organization of Petroleum Exporting Countries (OPEC)___An international organization of more than a dozen nations located primarily in the Middle East, Africa, and Central America that controls a sizeable portion of the world’s petroleum reserves
Organized Labor___The general term used when referring to the collection of labor unions representing the interests of workers. Of course, to be “organized” labor, labor needs to “organized,” which is what labor unions are all about. Prior to the onset of the labor union movement in the mid-1800’s, labor was not organized, meaning that each and every worker acted independently in the pursuit of wages, fringe benefits, or improved working conditions. Even in modern times, organized labor represents only a fraction of the total labor force in the United States, something less than a fourth.
Overdraft___An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. When an overdraft occurs a bank fee is typically charged the account holder unless prior “in the event” arrangements have been made.
Over-the-Counter Market___A market that trades corporate stocks and other securities using a computerized network of dealers rather than an organized exchange. Over-the-counter market is most often used in reference to the National Association of Securities Dealers. Stocks traded over the counter tend to be smaller, less well-known, technology based firms. Start-up firms often begin offering their stock over the counter, then once established they move to organized exchanges, especially the New York Stock Exchange or the American Stock Exchange.
Par Value___The stated, or face, value of a legal claim or financial asset. For debt securities, such as corporate bonds or U. S. Treasury securities, this is amount to be repaid at the time of maturity. For an equity security (corporate stock) this is the initial value at the time it is issued.
Participating Insurance___Insurance that allows the policyholders to share in the insurer’s profits through dividends after the close of the policy period.
Partnership___One of the three basic forms of business organization (the other two are corporation and proprietorship). A partnership is a business that’s owned and operated more or less equally by two or more people. The owners and the business are legally considered one and the same. As such, each owner has unlimited liability, which means that an owner is held personally responsible for any and all of the business’s debts, including those made by a partner.
Payday Loan___A payday loan (also called a paycheck advance) is a small, short-term loan that is intended to cover a borrower’s expenses until his or her next payday. Many consider payday loans an example of predatory lending due to the typically high interest rates charged.
Payroll Tax___A tax levied on the wage earnings, or payroll, of workers. The most notable being the Social Security tax.
Peril___Cause of loss—for example, fire, windstorm, collision.
Personal Income___The total income received by the members of the domestic household sector, which may or may not be earned from productive activities during a given period of time, usually one year. The primary use of personal income is to measure the income actually paid out to the household sector. After adjusting for income taxes, personal income forms the basis for consumption expenditures on gross domestic product.
Personal Insurance___Insurance purchased by an individual (as opposed to an organization) to provide protection on personal needs.
Phishing___E-mails that claim to be from legitimate companies in order to induce individuals to reveal personal information, such as credit-card numbers, online bank account numbers, etc.
Picketing___This is the traditional method of demonstrating that a labor union is on strike against an employer, whereby union members carry picket signs and walk in a line in front of the employers plant, factory, or place of business. The pickets carried by the striking workers contain messages documenting their striking status and some of their grievances with the employer. The act of walking in an orderly fashion means that they are not engaged in other activities that might be illegal. Crossing the “picket line” is symbolic of attempts to break a streak and to disagree with the goals of the striking workers.
Poverty___A condition in which a person lacks many of the basic necessities of life and the income needed to buy them. If these seems like a fuzzy concept, it is. Poverty is often a subjective notion, because the notion of basic necessities is also subjective. While everyone needs food for life, will a handful of wild grain do the trick or do you need an evening of fine dining? While there are no once-and-for-all, clear-cut answers, our good friends with the government have developed a so-called poverty line used as an official measure of who’s in poverty and who’s not. Most importantly, this poverty line is used to determine who’s eligible to receive welfare and other forms of public assistance.
Preferred Stock___The ownership shares in a corporation that have legal claim to the corporation’s assets. Stock is usually dividend into two types, common stock and preferred stock. Preferred stock has first claim to the corporations net assets, and common stock comes in second. However, if a corporation has no preferred stock, the common stock has exclusive claim.
Premium___The amount of money an insurer charges to provide the coverage described in the policy.
Price-to-Earnings Ratio (PE Ratio)___Also termed the price-earnings ratio, this is the ratio of the current price for one share of corporate stock to the earnings (profit) per share of stock. This is used by many financial analysts and investors as an indicator of a company’s performance and potential for future growth. A relatively high price-earnings ratio suggests that investors think the company has a great deal of future growth potential. It can also be a sign, however, that the company is seriously overpriced and due for a big drop.
Prime Rate___The interest rate banks charge their best, most credit-worthy customers. This is one of the key interest rates in the economy, and it is watched closely by financial types, government policy makers, and businesses. It’s also an interest rate that should be watched closely by consumers who have loans with adjustable rates, like credit cards, that are “pegged” to the prime rate. Any movement in the prime rate triggers an automatic change in these adjustable rates.
Private Sector___A short-cut term that combines the households and businesses in the economy into a single group. This term should be contrasted directly with public sector, which is a comparable short-cut term for government.
Producer___A person, company, or country that makes, grows, or supplies goods or commodities for sale.
Productive Resource___Natural resources, human resources, capital resources and entrepreneurship used to make goods and services.
Productivity___The rate at which goods or services are produced, especially measure of output per unit of labor.
Progressive Tax___A tax in which people with more income pay a larger percentage in taxes. A progressive tax is given by this example — You earn $10,000 a year and your boss gets $20,000. You pay $1,000 in taxes (10 percent) and your boss pays $4,000 in taxes (20 percent). Our income tax system is designed to be progressive, but assorted loopholes and deductions keep it from being as progressive in practice as it is on paper.
Property Insurance___Insurance that indemnifies the owner or user of property for its loss, or the loss of its income-producing ability, when the loss or damage is caused by a covered peril, such as fire or explosion. In this sense, property insurance encompasses inland marine, boiler and machinery (BM), and crime insurance.
Property Tax___A tax on property. This is a popular tax at the local level for cities, counties, and school districts. In many places it has been a primary source of funding for public schools. Because this invariably leads to tremendous differences in school funding, with wealthy areas getting the most funding, schools have moved toward income taxes and sales taxes for revenue.
Proportional Tax___A tax in which people pay the same percentage of income in taxes regardless of their incomes. Here’s an example of a proportional tax — You earn $10,000 a year and your boss gets $20,000. You pay $1,000 in taxes (10 percent) and your boss pays $2,000 in taxes (10 percent). While a proportional tax would seem to make a lot of sense, very few taxes are designed to be proportional and even fewer come out that way in practice.
Prospectus___A printed document that advertises or describes a business enterprise in order to attract or inform clients or investors.
Public Sector___A term for government, which for the United States includes all three levels- federal, state, and local. The term public sector is most useful as a contrast to the term private sector, which includes households and businesses.
Qualitative Measure___A measurement of the quality of something.
Quantitative Measure___A measurement of the quantity of something.
Quota___A limit, or expectation, on the quantity of some sort of activity. Some of the more noted quotas are for production, employment, and imports.
Real Time Quote___The actual price of a given security at a specific moment in time.
Rebate___The return of a portion of a purchase price by a seller to a buyer. Rebates are considered an incentive and typically offered to reduce specific inventories, move older products, introduce new products, etc.
Recession___The common term used for the contraction phase of the business cycle. A general period of declining economic activity, usually three consecutive quarters.
Redistribution___An economic theory or policy that advocates reducing inequalities in the distribution of wealth
Red-Lining___The refusal to offer a loan or provide insurance to someone because they live in an area deemed to be a poor financial risk.
Reinsurance___The transfer of insurance risk (that is, the risk initially assumed by an insurer in selling coverage) to another insurer. Reinsurance allows the spread of risk across a broad set of institutions in an effort to make the industry more stable and secure.
Retirement Plan___A savings and/or investment plan that provides income during retirement when an individual is no longer earning an income.
Revenue___The total of all money received from the sale of a firm’s product or service during a given period.
Reward___The potential for gain from a particular investment.
Risk___The possibility of gain or loss associated with an investment.
Risk (2)___Many definitions of risk are possible. Some that might be encountered are: (1) Uncertainty arising from the possible occurrence of given events; (2) The insured or the property to which an insurance policy relates (we defined this as the “exposure”); (3) variability in outcomes; (4) chance of loss.
Risk Averse___A person who values a certain income more than an equal amount of income that involves risk or uncertainty.
Risk Management Process___The framework to set objectives, identify and assess situations that can affect objective attainment, evaluation of available strategies to manage the identified problems, selection among the available option, and their implementation.
Risk Pooling___The process in insurance of defining policyholder characteristics that yield similar loss potential and therefore similar pricing for a specified group (or “pool”) of policyholders. The intention is to try to define a pool large enough to use the law of large numbers for credible estimates while also defining the loss potential sufficiently precisely to limit the occurrence of adverse selection. An example is to define people who smoke as one pool for life and health insurance, separate from those individuals who do not smoke (other factors such as age, lifestyle, eating habits, etc. would be used to define the pool further).
Risk Tolerance___The amount or level of risk an individual is willing to accept concerning an investment.
Roth IRA (Individual Retirement Account)___A Roth IRA is a special type of retirement plan that is generally not taxed until proceeds are withdrawn for retirement purposes, usually at a lesser tax rate.
Rule of 72___A mathematical formula to determine the amount of time required for an investment to double given a specific interest rate. For example, an investment earning 6% interest would take approximately 12 years to double (72/6=12).
Safe Deposit Box___A fireproof, metal strongbox typically found in a bank or credit union used for storing customer valuables.
Salary___The total of wages earned over a period of usually one year.
Sales Tax___A tax on retail sales. This is major source of revenue for many state and local governments. Because poorer people tend to spend a larger share of their income on goods covered by sales taxes, it tends to be a regressive tax. To reduce this “regressiveness”, some state and local governments exclude items like food and medicine.
Savings Account___An account maintained by banks, savings and loan associations, credit unions, and mutual savings banks that pay interest but can not be used directly as money. These accounts, also termed transactions deposits, let customers set aside a portion of their liquid assets that COULD be used to make purchases. But to make those purchases, savings account balances must be transferred to checkable deposits or currency.
Savings Bond___A bond issued by the U.S. Government and sold to the general public. Savings bonds are offered in various denominations and sold at one-half face value.
Securities and Exchange Commission (SEC)___The abbreviation for Securities and Exchange Commission, which is a federal government agency that regulates the trading of corporate stock to protect investors against unscrupulous practices. Like a number of other federal regulatory agencies, the SEC was established in 1934. The reason for its formation was to prevent investors from manipulating the stock market and to prevent other practices that contributed to the 1929 stock market crash. The SEC has all sorts of rules governing the stock market, including information disclosure, insider trading, speculation, and use of credit.
Scarce Resource___A resource with an available quantity less than its desired use. Scarce resources are also called factors of production. Scarce goods are also termed economic goods. Scarce resources are used to produce scarce goods. Like the more general society-wide condition of scarcity, a given resource is scarce because it has a limited availability in combination with a greater (potentially unlimited) productive use. It’s both of these that make it scarce.
Scarcity___A pervasive condition of human existence that exists because society has unlimited wants and needs, but limited resources used for their satisfaction. In other words, we can’t have everything that we want. In slightly different words, this scarcity problem means: (1) that there’s never enough resources to produce everything that everyone would like produced; (2) that some people will have to do without some of the items that they want or need; (3) that doing one thing, producing one good, performing one activity, forces society to give up something else; and (4) that the same resources can not be used to produce two different goods at the same time.
Second Bank of the United States___The second attempt by the United States to created a central bank. The second bank was established in 1816 and when defunct in 1836, when it lost a political battle with President Andrew Jackson. The United States did not seek another central bank until the Federal Reserve System was established in 1913.
Services___Activities that provide direct satisfaction of wants and needs without the production of tangible products or goods. Examples include information, entertainment, and education. This term service should be contrasted with the term good, which involves the satisfaction of wants and needs with tangible items. You’re likely to see the plural combination of these two into a single phrase, “goods and services,” to indicate the wide assortment of economic production from the economy’s scarce resources.
Share Value___The value of one share at any given time.
Shortage___A condition in the market in which the quantity demanded is greater than the quantity supplied at the existing price. A shortage occasionally goes by the terms excess demand and sellers’ market. A shortage causes an increase in the equilibrium price.
Short Sale___The sale of securities or commodity futures not owned by the seller who hopes to buy them back at a later date at a lower price.
Small Business___The businesses in our economy that individually produce very little output, have little or no market control, but collectively produce about half of the total production of the U.S.
Small Business Administration (SBA)___An independent federal agency that was started in 1953 to help small business. It provides a variety of assistance, including financial, technical, and managerial help. It helps other agencies in the federal government direct contracts and spending in the direction of proprietorships and small corporations. It also provides low interest loans to small businesses that suffer from natural disasters.
Small Cap Stock___Stocks of small companies typically valued at less than $1 billion. Most of these stocks are growth or speculative stock.
Smith, Adam___A Scottish professor (1723-1790) who is considered the father of modern economics for his revolutionary book, entitled An Inquiry into the Nature and Causes of the Wealth of Nations published in 1776.
Socialism___In theory, an economy that is a transition between capitalism and communism. It is based on–(1) government, rather than individual, ownership of resources, (2) worker control of the government, such that workers, rather than capitalist, control capital and other productive resources, (3) income allocated on need rather than on resource ownership or contribution to production (using the needs standard rather than the contributive standard).
Social Security___A system for providing financial assistance to the poor, elderly, and disabled. The social security system in the United States was established by the Social Security Act (1935) in response to the devastating problems of the Great Depression. Our current Social Security system has several parts. The first part, Old Age and Survivors Insurance (OASI) is the one the usually comes to mind when the phrase “Social Security” comes up. It provides benefits to anyone who has reached a certain age and who has paid taxes into the program while employed. It also provides benefits to qualified recipients survivors or dependents. The second part of the system is Disability Insurance (DI), which provides benefits to workers and their dependents in the case of physical disabilities that keeps them from working. The third part is Hospital Insurance (HI), more commonly termed medicare. Medicare provides two types of benefits, hospital coverage for anyone in the OASI part of the system and optional supplemental medical benefits that require a monthly insurance premium. The last part of the social security system is Public Assistance (PA), which is the official term for welfare and is covered under it’s own heading.
Social Security Tax___A tax on wage earnings that’s used to fund the Social Security system. In principle, the Social Security tax is divided equally between employer and employee-your share is listed under the FICA heading of your paycheck. In practice, however, employees really end up paying both employee and employer contributes. The reason is that employers need to consider the entire cost of hiring an employee, including wages, fringe benefits, and assorted taxes. The more they pay in these non-wage items, like Social Security taxes, the less they pay in wages. In that the Social security tax is only on earnings, and excludes profit, interest, and rent, it tends to be a regressive tax.
Sovereign Bond___A sovereign bond is a bond issued by a national government. The term usually refers to bonds issued in foreign currencies, while bonds issued by national governments in the country’s own currency are referred to as government bonds.
Special Interest Group___A group that has more to gain or lose from some candidate, issue, or policy and thus tries extra hard to ensure that the political system is aware of their preferences. Some special interest groups can be fairly tame, merely voting in elections for their chosen candidate, while others are quite active. The more active ones form political action committees and undertake all forms of lobbying (legal and illegal).
Specialization___The condition in which resources are primarily devoted to specific tasks. This is one of the most important and most fundamental notions in the study of economics. Human beings have long recognized that human resources can be more effectively used in the production of goods and services that satisfy unlimited wants and needs if those resources specialize. For example, three ice cream parlor workers, can be, in total, more productive if one runs the cash register, another scoops the ice cream, and a third adds the hot fudge topping. By devoting their energies to learning how to do their respective tasks really, really well, these three workers can produce more hot fudge sundaes than if each performed all required tasks.
Stagflation___High inflation rates at the same time the economy has high unemployment rates. Throughout much of the economic history of the United States, we’ve seen a tradeoff between inflation and unemployment. During an expansion, inflation is usually higher and unemployment is lower. The opposite has tended to occur during a recession. In the 1970’s, however, inflation worsened at the same time the economy dropped into a recession. This led economists not only to coin the term stagflation (stagnation + inflation), but also to reevaluate the existing explanation of how the economy works.
Standard & Poor’s___Standard & Poor’s (S&P) is a United States-based financial services company that publishes financial research and analysis on stocks and bonds.
Standard & Poor’s 500 (S&P 500)___An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is used as a benchmark for the overall “health” of the U.S. Stock market.
State Tax___Taxes imposed by individual states.
State Unemployment Tax (SUTA)___State unemployment taxes paid by the employer which are not deducted from the employee’s wages. These taxes are in addition to any federal unemployment taxes owed.
Stock___A stock (also known as an equity or a share) is a portion of the ownership of a corporation. A share in a corporation gives the owner of the stock a stake in the company and its profits. If a corporation has issued 100 stocks in total, then each stock represents a 1% ownership in the company.
Stockbroker___An individual who provides investors assistance and guidance in the buying and selling of stock.
Stock Market___A financial market that trades ownership shares in corporations–corporate stock. The three best known, national stock markets in the United States are the New York Stock Exchange, the American Stock Exchange, and the National Association of Securities Dealers. There are also a few regional markets–the Chicago, Philadelphia, and Pacific exchanges are the most notable that trade stock on a smaller scale. Other countries that use corporations to produce stuff, all of the industrialized ones, also have stock markets. The biggest and most worthy of attention are in Tokyo, London, Toronto, Frankfurt, and Paris. Stock markets play a vital role in our economy, making it possible for businesses to raise the large sums of money needed for investment.
Stock Split___A corporate action in which a company’s existing shares are divided into multiple shares. For example, a 2-for-1 split would result in an investor owning two shares of XYZ Company for each single share he/she owned previously. A reverse stock split is just the opposite. For every “x” number of shares owned the investor receives a lesser number, e.g. 2-for-3 split (2 issued for every three previously owned).
Sub-prime Mortgage___A type of mortgage that is normally made available to borrowers with lower credit ratings that offers typically higher interest rates.
Subsidy___A payment from government to individuals or businesses without any expectations of production. The best way of thinking about a subsidy is as a negative tax. Government extends subsidies for many different reasons. They go to students, unemployed workers, the poor, farmers, wealthy friends of political leaders, businesses trying to fend off foreign competitors, and the list could go on. Subsidies are frequently used to redirect resources from one good to another. Sometimes this is justified on efficiency grounds and other times it’s just the result of political power.
Supply___The willingness and ability to sell a range of quantities of a good at a range of prices, during a given time period. Supply is one half of the market exchange process; the other is demand. This supply side of the market is directly connected to the limited resources dimension of the scarcity problem. Folks who have ownership and control over resources (labor, capital, land, and entrepreneurship) use them to produce the goods and services that satisfy other’s wants and needs. Ownership and control of resources is the ultimate source of supply.
Surplus___A condition in the market in which the quantity supplied is greater than the quantity demanded at the existing price. A surplus occasionally goes by the terms excess supply and buyers’ market. A surplus causes a decrease in the equilibrium price.