The Beechmont Crest Guide to Economics
ECONOMIC GLOSSARY
Absolute Advantage
An absolute advantage exists when one entity (a person, firm, or nation) is more efficient at producing the same good or service than another entity with the same labor and resources.
Absolute advantage is the simplest measure of economic performance.
Even if a producer has an absolute advantage at something, there may be better ways for the producer to expend scarce resources.
Comparative advantage is a better way of determining a.) any entity’s ideal specialty and c.) how a nation maximize the benefits gained from international trade
Absolute and comparative advantage are not fixed; both are subject to change over time.
Adaptive expectations
An economic theory of how people form their expectations about the future. Key assumptions: a.) people use past predictive methods and trends, and b.) people continue to make the same predictive mistakes that characterized past predictions.
Adverse selection
A form of market failure that occurs when there is unequal information between two economic entities. Adverse selection was first proposed by George Akerlof in 1970.
The most commonly cited example is the insurance field.
Ideally, insurance premiums should be based on the assumption of the “average” level of risk in any given population (such as 35-year-old males).
When there is adverse selection, only higher risk members of the population will purchase insurance, while those who have a lower level of risk will not.
The result is a shortfall between the premiums that an insurance provider collects and the claims that it must pay out.
Adverse selection cannot be remedied with higher premiums, as this will make coverage even less attractive to low-risk customers.
A Fortiori
From the Latin for "even stronger". Used when comparing two economic theories “in the same manner.”
After Tax Income
Total income of a household after taxes are paid
Sales taxes and property taxes typically not included, though payroll taxes (such as FICA) are included.