Adam Smith (16 June 1723 – 17 July 1790) was a Scottish economist, philosopher and author. Also known as ''The Father of Economics'' or ''The Father of Capitalism", Smith wrote two classic works, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The Wealth of Nations, is considered his magnum opus and the first modern work of economics.
a resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide a future benefit. In general, assets can include cash, inventory, supplies, equipment, and buildings.
A measure of how productively a firm is using its assets. The asset turnover ratio takes on key item from the profit and loss statement (sales or revenue), and one key item from the balance sheet (total assets). Asset turnover is computed as total sales or revenue divided by total assets. If for example, a firm has $100,000 in sales and $25,000 in assets, then its asset turnover is 4.0. This means that for each dollar of assets, the firm generates $4 in sales or revenue. Firms generally strive for high asset turnover. Asset turnover is one of the ratios used in the Dupont Model of financial performance.
Shows the assets, liability, and equity of a business. It is referred to as a balance sheet because the total value of the assets must balance, or equal the liabilities and equity. The basic accounting equation is: A = L+E, where A= assets, L= liabilities, and E= equity.
A financial institution licensed to receive deposits and make loans. Banks may also provide financial services, such as wealth management, currency exchange, and safe deposit boxes. There are two types of banks: commercial/retail banks and investment banks.
the existence of high start-up costs or other obstacles that prevent new competitors from easily entering an industry or area of business. Barriers to entry can be manmade or naturally occurring.
Represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.
The fallacious belief that destruction is good for the economy. The parable of the broken window was introduced by Frédéric Bastiat in his 1850 essay "That Which We See and That Which We Do Not See," to illustrate why destruction, and the money spent to recover from destruction, is not actually a net benefit to society.
In economics, capital is a stock of resources that may be employed in the production of goods and services and the price paid for the use of credit or money, respectively. In classical economics, the three factors of production are land, labor, and capital.
A centrally planned economy is an economy where decisions on what to produce, how to produce and for whom are taken by the government in a centrally managed bureaucracy. In such a society, the government is the "Central Planner."
The central location where commodities are traded. Commodities traders exchange futures contracts for specific goods, like (for example) gold, wheat, and corn.
The cultural and natural resources accessible to all members of a society, including natural materials such as air, water, and a habitable earth. These resources are held in common, not owned privately.
The ability to produce goods and services at a lower opportunity cost than that of trade partners. If someone has a lower opportunity cost of producing a given service, that person enjoys a comparative advantage in the production of that service.
A number or quantity of something, especially that required to make a group complete. In economics, A complementary good is a good whose use is related to the use of an associated or paired good. Two goods (A and B) are complementary if using more of good A requires the use of more of good B. For example, the demand for one good (printers) generates demand for the other (ink cartridges).
A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.
A process through which something new brings about the demise of whatever existed before it. The standard example is the buggy-whip manufacturers who went out of business as automobiles overtook the horse and buggy.
Also known as excess burden or allocative inefficiency. A loss of economic efficiency that can occur when the free market equilibrium for a good or a service is not achieved.
The economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a good or service will decrease the quantity demanded, and vice versa.
The relationship between quantity demanded and own price, holding all other factors constant. The demand schedule is a way to show the relationship between quantity demanded and own price.
People who disengage from the labor market, either by not working, or by not actively seeking employment. Discouraged workers are not counted as unemployed, nor are they counted as employed.
The assignment of different parts of a manufacturing process or task to different people in order to improve efficiency. Under this regime each worker becomes an expert in one isolated area of production, thus increasing his efficiency. The fact that laborers do not have to switch tasks during the day further saves time and money. Adam Smith was one of the first people to write about the division of labor.
Indicators that tell us what the economy is up to, and what direction it is likely to take in the future. The unemployment rate is an example of an economic indicator.
A way of thinking that serves entrepreneurs in the processes of opportunity identification and new venture creation. Effectuation includes a set of decision-making principles expert entrepreneurs are observed to employ in situations of uncertainty.
In economics, efficiency implies an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency. When an economy is economically efficient, any changes made to assist one entity would harm another. In terms of production, goods are produced at their lowest possible cost, as are the variable inputs of production.
The market price when markets are in a state of equilibrium. This means that equilibrium price is the market price where the quantity of goods supplied is equal to the quantity of goods demanded.
The quantity supplied when markets are in a state of equilibrium. This means that equilibrium quantity is the quantity supplied where the quantity of goods supplied is equal to the quantity of goods demanded.
The act of a country shipping goods and services out of the port of a country. In international trade, an export refers to the selling of goods and services produced in the home country to other markets (other countries).
Also commonly known as "The Fed", the Federal Reserve is the central bank of the United States. The Fed regulates the U.S. monetary and financial system.
The system of political organization prevailing in Europe from the 9th to about the 15th centuries, having as its basis the relation of lord to vassal with all land held in fee, and as chief characteristics homage, the service of tenants under arms and in court, wardship, and forfeiture.
The legal term describing the relationship between two parties that obligates one to act solely in the interest of the other. The party designated as the fiduciary owes the legal duty to a principal, and strict care must be taken to ensure no conflict of interest arises between the fiduciary and his principal.
The ratio of total assets divided by equity. When a firm has no liabilities (debt), then its financial leverage is 1.0, because all the assets are accounted for as equity. Stated alternatively, for each $1 of equity the firm has, the firm also has $1 of assets. A financial leverage of 1.0 means the firm is not financially leveraged at all, or it does not use debt to finance assets.
Formal freedom can be thought of as "freedom-from." That is to say, freedom from being interfered with. This can be juxtaposed against "freedom-to," which is the freedom to do something. A law saying Person A cannot buy a home is a law that infringes on A's formal freedom.
A system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending.
One way of analyzing commercial activity. Humans took the land and other natural resources and applied labor or human capital to transform natural resources into manufactured products.
A broad measure of economic activity that is commonly used to gauge the economic performance of a whole country or region, and to make international comparisons.
A similar economic indicator as GDP. GNP sums all production owned by citizens of a country, whether they are inside or outside of that country’s borders.
In economics, labor is the general body of wage earners. In a more special and technical sense, however, labour means any valuable service rendered by a human agent in the production of wealth, other than accumulating and providing capital or assuming the risks that are a normal part of business undertakings. In classical economics, the three factors of production are land, labor, and capital.
In economics, land is the resource that encompasses the natural resources used in production. In classical economics, the three factors of production are land, labor, and capital.
The system of rules which a particular country or community recognizes as regulating the actions of its members and which it may enforce by the imposition of penalties.
What the firm owes to others. Debt is also another term used for liability. The entities that are owed could be individuals, suppliers, banks, bondholders, the government, or any entity that is owed financial resources.
Refers to how quickly an asset can be converted to cash. The most liquid assets are called current assets, which means that they can be converted into cash or cash equivalents within a year.
A conceptual time period which will vary depending on the business or industry in question. In the long run, there are no fixed factors of production. In other words, every factor is variable. For example, there are no binding contracts, no set suppliers, no production capacities of a specific factory. There are no constraints on changing the output level by changing the capital stock, workforce or even entering or exiting an industry.
The economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism. Mercantilism is a national economic policy that is designed to maximize the exports, and minimize the imports, of a nation.
Consists of management of money supply and interest rates, aimed at achieving macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity.
a market condition in which there is only one buyer. A single buyer dominates a monopsonized market while an individual seller controls a monopolized market.
Also known as an external cost, a negative externality is the cost of a transaction paid by third parties who were not consulted, and whose interests weren't accounted for.
The Federal Reserve purchases and sells U.S. Treasury securities on the open market in order to regulate the supply of money that is on deposit in U.S. banks, and therefore available to loan out to businesses and consumers. It purchases Treasury securities to increase the supply of money and sells them to reduce the supply of money. By using this system of open market purchasing, the Federal Reserve can produce the target federal funds rate it has set. It calls this process its open market operations.
The value of the next-highest-valued alternative use of that resource. Example: If you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cannot spend the money on something else.
A quantity or amount of something, especially as dealt with in one commercial transaction. To divide something into parcels is to divide it into discrete sections.
the situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers.
The lowest legal price a commodity can be sold at. Price floors are used by the government to prevent prices from being too low. The most common price floor is the minimum wage.
An entity, such as a firm, with a monopoly that gives it the power to influence the price it charges as the good it produces does not have perfect substitutes.
A person or company that has no control to dictate prices for a good or service. A price-taking firm can only decide how much of a good to supply to the market at the going price.
The process of transferring an enterprise or industry from the public sector to the private sector. The public sector is the part of the economic system that is run by government agencies.
a curve which shows various combinations of the amounts of two goods which can be produced within the given resources and technology. It is a graphical representation showing all the possible options of output for two products that can be produced using all factors of production, where the given resources are fully and efficiently utilized per unit time. The PPF is a collection of points that shows the relationship between maximum possible production outcomes given a fixed set of resources over a period of time.
a summary for a period of time of all of the sales or revenue of a firm, its expenses, and the resulting profit (or loss). The time period is at the discretion of the firm, but most firms have monthly, quarterly, and annual profit and loss statements. Once again there is a basic equation that captures the profit and loss statement. This is: P = S – CGS – SGA – T
Where P = profit or loss, S = sales or revenue, CGS = cost of goods and services sold, SGA = selling and general administrative expenses, and T = taxes
Property rights are theoretical socially-enforced constructs in economics for determining how a resource or economic good is used and owned. Resources can be owned by (and hence be the property of) individuals, associations, collectives, or governments.
The abstract knowledge that informs us how things work in the natural or physical world, and also how people and groups of people behave in social settings.
the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations.
The idea that the people who run governments, courts, and legislatures are the same kind of people as those who run businesses or households. Some people want money. Some want power. But everyone who spends a lifetime competing for power wants to use it for something.
A term used in economics to describe the total amount of goods or services demanded at any given point in time. It depends on the price of a good or service in the marketplace, regardless of whether that market is in equilibrium.
Occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity. Typically, it revolves around government-funded social services and social service programs.
The amount of cash that banks must have, in their vaults or at the closest Federal Reserve bank, in line with deposits made by their customers. Set by the Fed's board of governors, reserve requirements are one of the main tools of monetary policy.
Takes the net profit (after taxes) from the profit and loss statement, and divides it into the total assets from the balance sheet. A firm with $25,000 in total assets and $3000 in net profits (after taxes) would have a return on assets (ROA) of $3000/$25000 or 12 percent. For each dollar of assets, the firm earns 12 cents in profit (after taxes). Return on Assets is one of the ratios used in the Dupont Model of financial performance.
Also known as ROE, return on equity is computed by taking net profit (after taxes) and dividing it by the total equity. Consider a firm with $3000 in net profit after taxes, and $12,500 in equity. It would have a ROE of $3,000/$12,500 or 24 percent. Return on Equity is one of the ratios used in the Dupont Model of financial performance.
the income that a firm receives from the sale of a good or service to its customers. Revenue is calculated by multiplying the price (p) of the good by the quantity produced and sold (q).
In one sense, being self-sufficient means needing no outside help in satisfying one's basic needs. However, very few people could ever come close to producing enough to to meet their own needs. In another sense, people are self-sufficient when they have earned the goods they need to sustain themselves.
One way of analyzing commercial activity. In contrast to goods-dominant logic, service-dominant logic is the belief that wealth occurred from the exchange of knowledge and skills rather than goods.
A conceptual time period, the length of which varies depending on the business or industry. The short run can be contrasted against the long run. In the short run, there are some factors of production that are variable, and some that are fixed. In the short run, a firm may be constrained from entering or exiting an industry.
The idea that the value of a good is not determined by any inherent property of the good, but instead value is determined by the importance an acting individual places on a good for the achievement of his desired ends
a benefit given to an individual, business, or institution, usually by the government. The subsidy is typically given to remove some type of burden, and it is often considered to be in the overall interest of the public, given to promote a social good or an economic policy
A person or thing acting or serving in place of another. In economics, substitute goods or substitutes are at least two products that could be used for the same purpose by the same consumers. If the price of one of the products rises or falls, then demand for the substitute goods or substitute good (if there is just one other) is likely to increase or decline.
Describes the total amount of a specific good or service that is available to consumers. Supply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph.
A means by which governments finance their expenditure by imposing charges on citizens and corporate entities. Governments use taxation to encourage or discourage certain economic decisions.
The economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties.
A situation in a shared-resource system where individual users, acting independently according to their own self-interest, behave contrary to the common good of all users, by depleting or spoiling that resource through their collective action.
