ZERO SUM GAME
When the gains made by winners in an economic transaction equal the losses suffered by the losers. It is identified as a special case in GAME THEORY. Most economic transactions are in some sense positive-sum games. But in popular discussion of economic issues, there are often examples of a mistaken zero-sum mentality, such as “PROFIT comes at the expense of WAGES”, “higher PRODUCTIVITY means fewer jobs”, and “IMPORTS mean fewer jobs here”.
GAME THEORY
How to win at Twister? No, but maybe at monopoly. Game theory is a technique for analysing how people, firms and governments should behave in strategic situations (in which they must interact with each other), and in deciding what to do must take into account what others are likely to do and how others might respond to what they do. For instance, competition between two firms can be analysed as a game in which firms play to achieve a long-term competitive advantage (perhaps even a monopoly). The theory helps each firm to develop its optimal strategy for, say, pricing its products and deciding how much to produce; it can help the firm to anticipate in advance what its competitor will do and shows how best to respond if the competitor does something unexpected. It is particularly useful for understanding behaviour in monopolistic competition.
In game theory, which can be used to describe anything from wage negotiations to arms races, a dominant strategy is one that will deliver the best results for the player, regardless of what anybody else does. One finding of game theory is that there may be a large first-mover advantage for companies that beat their rivals into a new market or come up with an innovation. One special case identified by the theory is the zero-sum game, where players see that the total winnings are fixed; for some to do well, others must lose. Far better is the positive-sum game, in which competitive interaction has the potential to make all the players richer. Another problem analysed by game theorists is the prisoners' dilemma.
PROFIT
The main reason firms exist. In economic theory, profit is the reward for risk taken by enterprise, the fourth of the factors of production - what is left after all other costs, including rent, wages & interest. Put simply, profit is a firm's total revenue minus total cost.
Economists distinguish between normal profit & excess profit. Normal profit is the opportunity cost of the ENTREPRENEUR, the amount of profit just sufficient to keep the firm in business. If profit is any lower than that, then enterprise would be better off engaged in some alternative economic activity. Excess profit, also known as super-normal profit, is profit above normal profit and is usually evidence that the firm enjoys some market power that allows it to be more profitable than it would be in a market with perfect competition.
WAGES
The price of labour. In theory, wages ought to change so that the supply and demand in the labour market are always in equilibrium. In practice, wages are often sticky, especially in a downward direction: when demand for labour falls, wages do not fall. In this situation, the fall in demand results in higher involuntary unemployment. Trade unions may use collective bargaining to keep wages above the market-clearing rate. Furthermore, many governments impose a minimum wage that employers must pay.
Firms may choose to pay above the equilibrium wage to increase the productivity of workers. Such so-called efficiency wages may make workers less likely to join another firm, so cutting the employer's hiring and training costs. They may encourage workers to do a better job. They may also attract a higher quality of worker than wages at the market-clearing rate; better workers may have a higher reservation wage (the lowest wage for which they are willing to work) than the market-clearing equilibrium.
In recent years, employers have tried to reduce wage stickiness by increasing the proportion of pay that is linked to the performance of their firm. Thus if falling demand reduces the employer's profit the pay of its employees falls automatically, so it does not have to lay off as many workers as it otherwise would. Performance-related wages can also reduce agency costs by giving hired hands a stronger incentive to do a good job.
PRODUCTIVITY
The relationship between inputs & output, which can be applied to individual factors of production or collectively labour productivity is the most widely used measure and is usually calculated by dividing total output by the number of workers or the number of hours worked. Total factor productivity attempts to measure the overall productivity of the inputs used by a firm or a country.
Alas ! the usefulness of productivity statistics is questionable. The quality of different inputs can change significantly over time. There can also be significant differences in the mix of inputs. Furthermore, firms and countries may use different definitions of their inputs, especially capital.
That said, much of the difference in countries' living standards reflects differences in their productivity. Usually, the higher productivity is the better, but this is not always so. In the UK during the 1980s, labour productivity rose sharply, leading some economists to talk of a 'productivity miracle'. Others disagreed, saying that productivity had risen because unemployment had risen - in other words, the least productive workers had been removed from the figures on which the average was calculated.
IMPORTS
Purchase of foreign goods and services; the opposite of exports.
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