Jargon Du Jour - Utils

Many economists believe that the goal of the economy is to increase people's utility. Money is only worth its purchasing power, and the goods and services it can provide are only worth how much people truly enjoy them. However, you can't actually measure happiness so economists often use a proxy they call "utils" as a measure of utility.

Utils: an arbitrary measure of relative satisfaction from consumption of goods and services. They are usually ordinal numbers, but some models use cardinal numbers to measure utils.

You know you are a true economics nerd when you start describing your emotions in terms of utils. "Those flowers increased my utility by 400 points." "A cold beer would be about a 1000 utils right now."

Jargon Du Jour

Macro Economics: The study of the economy as a whole.

Micro Economics: The study of individual markets and decisions makers.

For example, in micro economics we study what factors determine demand in a particular market like ice cream. In macro economics, we study what factors determine aggregate demand  - the sum of demand for all goods and services.

Jargon Du Jour - Constant Returns to Scale (CRS)

Constant Returns to Scale: in a production function, it is when you increase your inputs by some amount m, then output increases by exactly m. It implies that a prdoucer would be just as efficent producing a small number of goods as they would be producing a large number of goods.

CRS is a common underlying assumption of many economic models, even if it is not a realistic one. For example,  if you have an industry that takes advantage of economies of scale then you would have increasing returns to scale. If however you are in an industry that has diseconomies of scale, then you would have decreasing returns to scale.

Jargon Du Jour - Recession and Depression

There is an old Bob Hope joke that goes, "a recession is when your neighbor loses his job, a depression is when I lose my job." All kidding aside, there are some technical definitions for recessions and depressions, and you will get dinged on your homework if you use these terms incorrectly.

Recession: When real GDP declines for two consecutive quarters. Recessions are a part of the natural business cycle, where we have expansion followed by periods of retraction.

Depression: When real GDP declines by more than 10%, and typically lasts for more than three quarters. Unlike recessions, the economy requires some economic interventions such as fiscal or monetary stimulus in order to dig itself out of a depression.

For example, the Great Depression started in August of 1929 that lasted to March 1933 - real US GDP fell over 30%.  There was a brief recovery period followed by a second depression from 1937-1938 when the government reinstated austerity measures to pay down the debt. Since then, the US economy has suffered several recessions but has not experienced a depression.

Jargon du Jour - Factors of Production

Factors of Production: A phrase used to refer to the combination of the land, labor, and capital used to produce finished goods which are then bought and sold in the economy. This is the view held by classical economists Adam Smith and David Riccardo.

For example, to produce one table I am going to need a workshop (land), some tools (capital), and a carpenter to put it together (labor).

Some economists like to add technology to their list of factors of production, as it helps make the allocation of land, labor, and capital more efficient. Others like to add entrepreneurship as a factor, and consider it a catalyst of all production. However, many economists argue that entrepreneurship is just a type of labor.

Recently, more economists are including human capital into their list of production factors, which accounts for the knowledge base of the laborers. This is becoming increasingly relevant in a service based economy.

Jargon Du Jour - Economies of Scale

Economies of Scale: In microeconomics, these are the cost advantages that a business obtains due to expansion. They are factors that cause a producer’s average cost per unit to fall as scale is increased.

For example, producing one car is very expensive due to all the fixed costs, such as equipment, associated with producing just one car. However, once a car company can produce tens of thousands of cars then the average cost per car drops significantly.

Related Concept: Natural Monopolies

Jargon Du Jour - Opportunity Cost

Opportunity Cost: The next best choice that someone must give up when choosing between several mutually exclusive things. This is because of scarcity; there are not infinite supplies of everything we wish to consume and what we can produce with our limited resources of time, land, labor, capital and technology.

For example, by waking up early and going to the gym my opportunity cost is an hour of sleep. By choosing to work as a teacher, I am giving up potential opportunities (for now) of pursuing a more lucrative career.

Opportunity Cost is a very key concept in economics and is the foundation of all production and consumption models.