Adaptive expectations

phillips-curve-monetarist-long-run

Adaptive expectations is an economic theory which gives importance to past events in predicting future outcomes. A common example is for predicting inflation. Adaptive expectations state that if inflation increased in the past year, people will expect a higher rate of inflation in the next year. A simple formula for adaptive expectations is Pe = …

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Adjustable peg exchange rate

Definition adjustable peg An adjustable peg exchange rate is a system where a currency is fixed to a certain level against another strong currency such as the Dollar or Euro. Usually, the peg involves a degree of flexibility of 2% against a certain level. However, if the exchange rate fluctuates by more than the agreed …

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Adjustment costs

Definition of adjustment costs This is the cost to a firm of altering its level of output. For example, it may be desirable for a firm to cut down on its output, but doing this will create adjustment costs such as redundancy payments and lower staff morale. On reflection of its adjustment costs, it may …

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Adverse selection explained

adverse-selection

Definition of adverse selection Adverse selection occurs when there is asymmetric (unequal) information between buyers and sellers. This unequal information distorts the market and leads to market failure. For example, buyers of insurance may have better information than sellers. Those who want to buy insurance are those most likely to make a claim. Therefore firms …

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After sales service

After sales service refers to the treatment of customers in the aftermath of a sale. For example, after being sold a bike, after sales service may involve free bike maintenance for a number of weeks. After sales service is an important part of non-price competition often found in oligopoly. After sales service can be a …

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After tax income

After tax income is the income remaining after the government has subtracted income tax (and other related income taxes like national insurance) It does not take into account indirect taxes like VAT. These taxes are paid when consuming goods. Another term for after tax income is disposable income. Disposable income is often confused with discretionary …

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Agglomeration economies

Agglomeration economies or external economies of scale refer to the benefits from concentrating output and housing in particular areas. If an area specialises in the production of a certain type of good, all firms can benefit from various factors such as: Good supply networks Supply of trained workers Infrastructure built specifically for the industry Good …

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Aggregate supply

LRAS-keynsian-classical

Aggregate supply is the total value of goods and services produced in an economy. The aggregate supply curve shows the amount of goods that can be produced at different price levels. When the economy reaches its level of full capacity (full employment – when the economy is on the production possibility frontier) the aggregate supply …

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