The Marginalist:

This is a glossary of the terms I’ve used in my posts so far.

Adverse Selection: A vicious cycle in which asymmetric information filters out the profitable customers of a risk-based business until only the most risk-intensive customers are left.

Asymmetric Information: Asymmetry occurs when one side of a trade or bet knows information that the other side does not. Occurs in insurance, buffets, and college admissions.

Cake-cutting problem: The problem of deciding how to divide limited resources fairly and efficiently.

Correlation: Two variables are correlated if there is a strong linear relationship between the two variables. If both variables increase together, they are directly correlated. If one increases while the other decreases, they are inversely correlated. Closely correlated variables can be used to predict each other, but extrapolation far beyond the known data is often unreliable.

Cost: The cost of something is what you have to give up to get it.

Cum hoc ergo propter hoc: A Latin term meaning “with this, therefore because of this”, this phrase refers to the fallacy of assuming that because two events happen together, one must have caused the other. If someone commits this fallacy, remind him or her that correlation does not entail causation.

Deadweight Loss: Deadweight loss is the loss created by an inefficiency in a market, esp. a pareto inefficiency.

Decision Tree: A tree-like diagram that models the different choices that an individual must make.

Dominant Strategy: A dominant strategy is the strategy that a player should take if the outcome for that strategy is always better than choosing other strategies, regardless what strategies the other person chooses.

Expected Value: Imagine if you played a risk-based game an infinite number of times. Your expected value of that game is the average payout of the game. Think of it as a weighted average of all the possible outcomes of a game.

Externality: The externality of a good is the external cost (or benefit) borne by a third party (one who is not involved in the transaction).

Game: A situation in which there are a) multiple players, b) different strategies that each player can play, and c) the outcomes of the situations are dependent on what strategies you choose and the strategies of the other player(s).

Garbage in, garbage out: Garbage data creates garbage results.

GDP: Gross Domestic Product, or the total value of all final goods and services produced in one fiscal year.

Incentive: Something that makes someone do something, or at least want to do something.

Interest rate: The price of money now in terms of money later.

Internalizing: Internalizing an externality makes someone bear the cost of the externalities they create.

Law of Large Numbers：As the number of plays on a bet get larger, the average payout of those bets gets closer and closer to the average expected value of the bet.

Law of demand: When the price of something increases, people want less of it. When the price is lowered, people want to buy more of it.

Law of supply: When the price of something increases, people will make more of it. When the price is lowered, people will make less of it.

Law of unintended consequences: Any economic policy has effects beyond what is apparent and obvious. Good economic analysis relies on foreseeing these unintended consequences — thinking beyond stage one.

Pareto Efficient: No more pareto improvements are possible.

Pareto Improvement: An action that makes at least one person better off without making anyone worse off.

Price Discrimination: When a business charges different demographic groups different prices based on their willingness to pay different prices. Not the same as discriminating against people because you don’t like them.

Sunk Cost: A sunk cost is basically a cost that has already been incurred, and therefore has little importance in marginal decision making.

Time Preference: Mises’s theory of time preference states that, all other things equal, people prefer consumption now over consumption later.

Tradeoffs: In order to get something, something must be given up. Nothing in life is free.

Tragedy of the Commons: When individuals acting in their own self-interests in a free market creates crappy outcomes for everyone.

Utility: How much benefit a person gets from something.