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Economics Explained

Economics Explained: Price Discrimination

Price discrimination is a way that companies can make more money by understanding how much different consumers will pay for the same good. Here's how it works.

Economics Explained: Deflation, Central Banking, and Quantitative Easing

Do you ever forget the difference between nominal and real? Do you wonder why financiers analyze Yellen's words like a text from a crush? If so, this is the article for you!

Setting the Standard: Horizontal & Vertical Integration

You may hear the terms horizontal and vertical integration tossed around in business (Businesspeople love fancy strategy terms). Learn how Standard Oil used integration to become a monopoly and how one might benefit from integration today.

Economics Explained: Indifference Curves

Indifference curves are not graphs of who cares less, rather, they show different combinations of goods that can give a person a certain level of utility, or well-being.

Economics Explained: Complements, Substitutes, and Elasticity of Demand

Does this man look like he is substituting or complementing these apples? Trick question: apples are inanimate, and can't be complimented.

Economics Explained: Negative Externalities and Pigovian Taxes

Did you know that higher gas prices might be better for us all? Industrialism is great, but creates negative externalities, such as pollution. Pigovian taxes reduce negative externalities and aim to also reduce distortionary taxes, like income tax. Win-win!

Economics Explained: Income and Substitution Effects

When you're rolling in cash (or broke as a joke), how does your behavior change? The income and substitution effect explain reactions to almost any change in price or income.

Economics Explained: Human Capital

From production functions to early childhood development, human capital is a recipe for success. Learn about its applications, implications, and determinants.

Economics Explained: Death and Taxes (But Mainly Taxes)

A lesson in how not to create taxes, and explanations about a few kinds of taxes. Fun fact - a progressive tax is not a tax "favoring social reform", as the word "progressive" might imply.

Economics Explained: Production-Possibility Frontier

You have died of dysentery! Wait. Not that kind of frontier... The production possibility frontier shows different trade-offs in production.

Economics Explained: Gini Index

Inequality is quite the hot topic these days, and one of the best ways to measure it is the Gini Index. The Gini index was created by Corrado Gini in...

Economics Explained: Pareto Efficiency

When evaluating proposed or existing policy measures, economists & government officials typically aim to improve the lives of others. The objective of any given tax, welfare, or law change...

Food for Thought

Thoughts on the Rapidly Changing Landscape of Cultural Consumption

Some musings on the benefits of the changing cultural consumption landscape (including the shift to streaming of music and TV).

There's No Room For Emotion in Capitalism

Females are prescribed psychiatric drugs at much higher rates than men. Females also tend to be more emotional (wide generalization). Processing emotions takes time, and time spent on emotional work is time NOT spent generating revenue. Ultimately, the trend of medicating female emotion (and emotion in general) is a money-driven one.

Surge Price My Latte

We all hate surge pricing, but it's a great way for Uber and its drivers to capture more value. What if GrubHub, Starbucks, etc. charged customers more during peak hours in order to pay service workers better? Could we ever break the cycle of reliance on cheap labor?

The Economics of Being Basic

What's the economic explanation behind the rise of the term "basic"? Is this a new phenomenon, or merely a quality of human nature evident due to economic and technical changes?

We Need More Raspberry Pi

Would you pay $35 for a Raspberry Pi? No, not the food, it's a miniature computer! This device can be revolutionary for the 75 million Americans without internet access.

A Case for Heirloom Harvests

When fruit flies, it fails. Industrial agricultural practices have brought us berries in January, but at the cost of quality. Read about why harvesting heirloom varieties is important for taste, small farmers, and the environment.

The Evolution of Human Worth

It used to be that the strongest hunter had the most value in society. Today, the nerdy ideas man has the most worth. What happened?

What Ice Cube Trays Say About Innovation and Change

Innovation is cyclical and inspired by other innovation. For example, this article was inspired by my purchase of innovative new ice cube trays. Read about how product variety is created, and how it can be a bad thing.

America Has a Cheap Labor Problem

America is in trouble if the cost of Third World labor increases. As has been the tradition for all of human history, our economic success depends on the accessibility cheap and near-slave labor. How can we grow when this ends?

How Perfect Substitutes Became a Myth

The rise of American affluence gave us the luxury of choice and ability to be picky about what we like. Combined with newly formed marketing and advertising industries, consumer preferences developed that made perfect substitutes an economic unicorn. (If you don't know what a perfect substitute is, no worries, read on!)

Positive vs. Normative Statements, and Learning to Admit You are Wrong

Count von Count is never wrong, because he loves numbers!

A Beginner's Guide to Investing

Don't be like this guy and let your money sit in the bank. Start investing with some simple tips!

Who Is The Stock Market For?

Regulation in the last few years has made the stock market much less profitable, much to the chagrin of finance professionals (such as the pictured men). Is this a good or bad thing? To answer, we must decide who the stock market exists for.

The Philosophical Nature of Economics: The Lucas Critique

How is Noble award winning economist Robert Lucas similar to the philosopher Hegel? Both recogonized that policy and theory are intrinsically rooted in their time.

The Philosophical Nature of Economics: An Introduction

When you take a hard science (mathematics) and a soft science (philosophy) and mash them together, what do you get? Economics, the hardest of the soft sciences!

Correlation, Causation, and Why the Study You're Citing is Probably Wrong

Correlation does not equal causation

is a great rule of thumb.

If you always follow it,

you'll avoid looking dumb!

Oil Futures Are Hurting Your Wallet

Anyone who has ever filled up gas (or driven by a gas station… or followed the news) can tell you that prices tend to change unpredictably. So, why...

Philosophical Economics

The Evolution of Human Worth

It used to be that the strongest hunter had the most value in society. Today, the nerdy ideas man has the most worth. What happened?

The Philosophical Nature of Economics: The Lucas Critique

How is Noble award winning economist Robert Lucas similar to the philosopher Hegel? Both recogonized that policy and theory are intrinsically rooted in their time.

The Philosophical Nature of Economics: An Introduction

When you take a hard science (mathematics) and a soft science (philosophy) and mash them together, what do you get? Economics, the hardest of the soft sciences!

Food for Thought: Delineating Competition's Place in Society

I recently read an article by Will Davies that brought up an interesting question: How did mounting inequality succeed in proving culturally and politically attractive for as long...

Definitions

EBITDA

EBITDA is earnings before interest, taxes, depreciation, and amortization. EBITDA serves as an indicator of financial performance and comparative metric. EBITDA is a non-GAAP metric (GAAP = generally accepted accounting principles), partially because it is not calculated in a defined way for all companies.

EBITDA = Revenue - Expenses (not including taxes, interest, depreciation, and amortization)

Basis Point

A basis point is 1/100th of a percent. That is, one basis point is equal to .01%. Basis points are the method for communicating interest rates in finance. If the interest rate on a loan is 4.75%, an individual would say the loan has a rate of 475 bps (basis points). This unit of measurement is especially convenient when rates of less than 1% are being discussed, as it is more convenient to say 53 bps than .53%.

LIBOR

LIBOR, or the London Interbank Offered Rate, is a benchmark interest rate intended to represent the cost of short-term lending between banks. That is, the LIBOR rate is what banks would charge each other to borrow money - presumably, a lower rate than what they would charge companies or individuals. LIBOR is the most widely used benchmark rate in the world - over $360 trillion of financial products are tied to it.

Net Asset Value (NAV)

The net asset value (NAV) of something is its actualized value, that is, total assets minus total liabilities. This can also be known as book value.

NAV = [Assets - Liabilities]

For example, if you own a home worth $300,000, but have $50,000 of debt outstanding on the home, the NAV is $250,000.

Exchange-Traded Fund (ETF)

An exchange-traded fund, typically known as an ETF, is a security that tracks a group of assets, a market index, currency, or commodity, but is traded like a stock. ETFs have grown to be a popular alternative to mutual funds within the last few years. ETFs can come in many different forms.

Mutual Fund

Contrary to my belief at a young age, a mutual fund is not when you and a friend decide to buy something together. A mutual fund is a professionally managed pool of securities (stocks) that investors can buy shares in. Mutual funds are not traded on a stock exchange, though their portfolios often are. Mutual funds pay out the money they make to investors via dividends or interest. Mutual funds come in many shapes and sizes, and can be focused on one industry area, or cover a wide range of global securities.

Prospectus

A prospectus is a legal document frequently seen in finance. Prospectuses contain all the information potential investors or existing investors need in order to make an educated investment decision. Depending on what the prospectus is for, this could include disclosure of what a mutual fund is invested in (or what their strategy is), information about an initial public offering, or details on a bond. Reading the prospectus before investing in a fund, offering, or bond is very important to ensure one makes an informed investment decision.

Capital

In finance (and most of the world), capital refers to wealth, whether it be stocks, bonds, cash, or gold. In economics, capital refers to any non-financial asset that can be used towards production. So what does that mean? A factory owner would possess capital like machinery, generators, and other technology.

Opportunity Cost

The opportunity cost of something is what you give up to get it. Economics is all about opportunity costs, that is, trade-offs that individuals face in their decision making. Opportunity costs can be factored into the cost of making a decision.

Spot Price

The spot price of something refers to the current price it can be bought at. This price is used to determine the pricing for some futures contracts.

When a futures contract is priced at the spot price, it is called a spot contract. This means the purchaser will pay based on the current price for goods they will receive at contract expiry. In contrast, a forward contract is a futures contract where the terms are agreed upon now, but the price payed will be the spot price at time of contract expiration.

Futures

A future (formally known as a futures contract) is a kind of derivative often used to take “bets” on the price of something increasing or decreasing. If an individual believed the price of something [a commodity or stock, for example] was going to change in the future, they could buy a future for that item and make money if the change in price occured.

Derivatives

A derivative is a financial product that functions very similarly to a stock. Anyone can buy a derivative, and the value of it depends on the value of the underlying asset. For example, the value of a gold derivative is derived from the price of gold. If the price of gold increases, the value of the gold derivative increases.

Commodities

A commodity is a common good, typically which people will buy regardless of who provides it. Few, if any, people demand a certain kind/brand of wheat or oil--they will accept this good from any producer, as it looks and functions exactly the same. There are different kinds of commodities...

Energy Economics

Does Improving Efficiency Actually Reduce Energy Use?

Efficient appliances seem like a great way to reduce our energy use, right? Wrong - in the long run, they end up causing massive increases in energy use due to cost reductions.

An Open Dialogue About Hubbert's Curve and Peak Oil

"Run out of oil? Never!"

In all likelihood, this won't transpire, but if you aren't familiar with the idea of peak oil (or like to deny it), answer all your questions here.

We Need to Break Up Economics

Most people could tell you that oil and energy is critical to our economy and planet. In fact, energy is the foundation of all growth, but it isn't included in our economic models. Here's why the discipline of economics needs to be re-organized.

Finance

The Evolution of Human Worth

It used to be that the strongest hunter had the most value in society. Today, the nerdy ideas man has the most worth. What happened?

The Theory Behind Opportunism: Arbitrage and Interest Rate Parity

Some would claim that it is human nature to capitalize upon opportunities. Arbitrage was born of this human urge to take advantage of money-making opportunities.

A Beginner's Guide to Investing

Don't be like this guy and let your money sit in the bank. Start investing with some simple tips!

Who Is The Stock Market For?

Oil Futures Are Hurting Your Wallet

Anyone who has ever filled up gas (or driven by a gas station… or followed the news) can tell you that prices tend to change unpredictably. So, why...