Economics & Markets

Asymmetric Payoffs

Nassim Nicholas Taleb

Seek situations where the upside is uncapped and the downside is limited. The expected value of a decision depends not just on probability but on the magnitude of outcomes in each direction.

Barriers to Entry

Joe Bain / Michael Porter

Structural obstacles preventing new competitors from entering a market.

Collective Action Problem

Mancur Olson

Individual incentives to free-ride undermine cooperation for shared benefit.

Comparative Advantage

David Ricardo

Specialize where your opportunity cost is lowest, not where you are best.

Creative Destruction

Joseph Schumpeter

Innovation destroys established industries to create new, more valuable ones.

Economies of Scale

Larger scale drives lower unit costs, creating compounding cost advantages.

First-Mover

Marvin Lieberman / David Montgomery

Being first creates switching costs and brand recognition but bears exploration risk.

Game Theory

John von Neumann / Oskar Morgenstern

Strategic interaction where outcomes depend on all participants choices.

Increasing Returns

W. Brian Arthur

Early advantages compound through positive feedback into winner-take-most outcomes.

Information Asymmetry

George Akerlof

Unequal information between parties creates adverse selection and moral hazard.

Jevons Paradox

William Stanley Jevons

Efficiency improvements increase total consumption rather than reducing it.

Moral Hazard

Kenneth Arrow

Insulation from consequences encourages excessive risk-taking.

Nash Equilibrium

John Nash

No player can improve by unilaterally changing strategy.

Opportunity Cost

Frédéric Bastiat

The true cost of any decision is what you gave up to get it.

Prisoner's Dilemma

Merrill Flood / Melvin Dresher / Albert Tucker

Individual self-interest produces worse outcomes than cooperation.

Skin in the Game

Nassim Nicholas Taleb

Decision-makers must bear consequences to align incentives.

Supply and Demand

Prices adjust to balance what producers supply and consumers buy.

The Agency Problem

Adam Smith / Michael Jensen / William Meckling

Agents with different incentives make suboptimal decisions for principals.

Tragedy of the Commons

William Forster Lloyd / Garrett Hardin

Individual self-interest depletes shared resources, harming everyone.

Winner Take All Market

Sherwin Rosen

Small advantages lead to disproportionate concentration of rewards.

Adverse Selection

George Akerlof

In 1970, George Akerlof published "The Market for Lemons," a thirteen-page paper that nearly didn't get published — three journals rejected it as trivial — and that won him the...

Bertrand Paradox

Joseph Bertrand

In 1883, the French mathematician Joseph Bertrand reviewed Antoine Augustin Cournot's work on duopoly theory and identified a devastating implication that Cournot had missed. If...

Bottlenecks

Eliyahu Goldratt

In 1984, an Israeli physicist named Eliyahu Goldratt published a business novel called The Goal. The protagonist, Alex Rogo, manages a failing manufacturing plant. His mentor,...

Coase Theorem

Ronald Coase

In 1937, a 27-year-old British economist named Ronald Coase asked a question that no one in his profession had bothered to answer: why do firms exist? If markets are the most...

Common Knowledge

Robert Aumann / David Lewis

In Hans Christian Andersen's "The Emperor's New Clothes," every citizen privately knows the emperor is naked. The swindlers' con has already failed at the individual level — no...

Competitive Destruction

Warren Buffett once observed that the airline industry has destroyed more shareholder value than it has created since the Wright Brothers flew at Kitty Hawk. That sentence...

Complements & Substitutes

Two products are complements when consuming more of one increases demand for the other. They are substitutes when consuming more of one decreases demand for the other. The...

Conspicuous Consumption

Thorstein Veblen

Thorstein Veblen coined the term "conspicuous consumption" in The Theory of the Leisure Class (1899) to describe spending that signals status rather than satisfies material need....

Counterfactuals

A counterfactual is a "what if" — a scenario that did not happen but could have. "If Kennedy had lived, would the Vietnam War have ended differently?" "If Blockbuster had acquired...

Deadweight Loss

Deadweight loss is the value that disappears when a market is distorted — the trades that would have happened at the equilibrium price but do not happen when a tax, subsidy, price...

Diminishing Utility

The first unit of something you consume gives you more satisfaction than the second. The second gives more than the third. Each additional unit adds less utility than the one...

Division of Labour

Adam Smith / Karl Marx

Adam Smith opened The Wealth of Nations (1776) with a pin factory. One worker making pins from start to finish could produce twenty per day. Ten workers, each specialising in one...

Economic Rent

David Ricardo

Economic rent is income above opportunity cost. David Ricardo defined it in 1817: farmers pay for land's productivity, not the landlord's effort. The landlord collects rent...

Elasticity

How responsive is quantity to price? Price elasticity of demand answers that question with a single ratio: the percentage change in quantity demanded divided by the percentage...

Evolutionarily Stable Strategy

John Maynard Smith

John Maynard Smith introduced the concept in 1973: a strategy that, once adopted by a population, cannot be invaded by an alternative. Game theory meets evolution. An...

Expected Utility Theory

Von Neumann & Morgenstern

Von Neumann and Morgenstern (1944) formalised rational choice under uncertainty: maximise expected utility, not expected value. The formula is Σ (probability × utility). A 50%...

Free-rider Problem

Paul Samuelson

When a benefit is shared and your contribution is hard to observe, the rational move is to contribute nothing and take the benefit anyway. That is the free-rider problem. The good...

Gresham's Law

Sir Thomas Gresham

When two forms of money are legally required to be accepted at the same face value but have different intrinsic values, the bad money circulates and the good money disappears....

Income & Substitution Effects

John Hicks / Roy Allen

When a price changes, demand doesn't just move — it splits. The substitution effect is the shift between goods caused by changed relative prices: as one good becomes cheaper...

Keynesian Beauty Contest

John Maynard Keynes

In The General Theory (1936), John Maynard Keynes described a newspaper contest: readers pick the six prettiest faces from a hundred photos. The prize goes to whoever matches the...

Law of Diminishing Returns

Turgot / Ricardo / Marshall

Adding more of one input, while holding others fixed, eventually yields smaller and smaller increments of output. The first worker on an empty factory floor adds a lot. The...

Marginal Cost/Benefit

Decisions are made at the margin. The question is never "should we do this at all?" in the abstract — it is "should we do one more unit?" Marginal benefit is the extra benefit...

Market Power

Market power is the ability to set price above marginal cost without losing so much volume that the move destroys value. In perfect competition, price equals marginal cost and...

Market for Lemons Problem

George Akerlof

When sellers know more about quality than buyers, and buyers can't tell good from bad before purchase, the market can collapse toward low quality. Sellers of good products can't...

Matthew Effect

Robert K. Merton

The rich get richer; the poor get poorer. Success breeds success; failure compounds. The name comes from the Gospel of Matthew: "For to everyone who has, more will be given; but...

Perfect Competition

Perfect competition is a benchmark: many buyers and sellers, identical products, free entry and exit, full information. No single participant can move price. Each firm faces a...

Positive & Negative Externalities

An externality is a cost or benefit that falls on parties outside a transaction. The buyer and seller do not bear — or do not capture — the full social impact. Negative...

Price Discrimination

Price discrimination is charging different prices to different customers for the same or similar product based on willingness to pay, not cost. The goal is to capture more of the...

Public Goods

Paul Samuelson

A public good is non-rival and non-excludable. Non-rival: your consumption does not reduce mine. Non-excludable: the provider cannot practically exclude non-payers from enjoying...

Ratchet Effect

A ratchet only turns one way. In economics, the ratchet effect is the tendency for levels of effort, cost, or commitment to move up and then stick. Past performance becomes the...

Rent-Seeking

Anne Krueger / Gordon Tullock

Rent-seeking is the use of resources to capture existing value rather than to create new value. Instead of producing more, you try to secure a larger share of what is already...

Resource Curse

Countries rich in oil, minerals, or other extractive resources often grow slower, suffer more corruption, and experience more conflict than resource-poor countries. The resource...

Scarcity (Economics)

Scarcity is the condition that human wants exceed the means to satisfy them. Not everything can be had in unlimited quantity at zero cost; therefore choices must be made....

Social vs Market Norms

Dan Ariely

People operate in two kinds of exchange: social norms and market norms. Social norms are gift-based, relationship-driven, and governed by reciprocity, fairness, and identity. You...

Specialization

Adam Smith

Specialization is the allocation of resources — labour, capital, attention — to a narrow set of activities where they yield more output per unit of input than generalist...

Spillover Effects

Spillover effects are costs or benefits that flow from one activity or decision to parties who are not directly involved in the transaction or choice. A factory's pollution harms...

Sunk Costs (Economics)

Sunk costs are past expenditures of time, money, or effort that cannot be recovered. In economic logic, they are irrelevant to the current decision. What matters is the marginal...

The Experience Curve

Each time cumulative output doubles, unit cost falls by a predictable percentage. That is the experience curve: cost declines as experience accumulates. The effect was quantified...

The Invisible Hand

Adam Smith

Individuals pursuing their own interest can produce collective outcomes that no one intended. Adam Smith called this the invisible hand: self-interested choices, coordinated by...

Thinking at the Margin

Decisions are made at the margin. The relevant question is not "Is this good or bad in total?" but "What happens if I do one more unit, or one less?" Marginal thinking compares...

Tit-for-tat

Robert Axelrod

Cooperate first. Then do whatever the other player did last. That is tit-for-tat: one round of cooperation, then mirror your counterpart's previous move. In repeated games —...

Trade-offs

Every choice surrenders something. Trade-offs are the structure of that surrender: to gain X you give up Y. Economics treats scarcity as the binding constraint — finite resources,...

Transaction Costs

Ronald Coase

Markets do not run for free. Every exchange — buying, selling, contracting, coordinating — consumes resources beyond the nominal price: search, negotiation, enforcement, and the...

Tullock Paradox

Gordon Tullock

When people compete for a fixed prize, they can spend more in the aggregate than the prize is worth. That is the Tullock paradox. Gordon Tullock showed that rent-seeking — the...

Two-sided Market

A two-sided market has two distinct user groups that need each other: buyers and sellers, riders and drivers, advertisers and viewers. The platform sits in the middle and creates...

Ultimatum Game

Werner Güth / Rolf Schmittberger / Bernd Schwarze

One party proposes how to split a fixed pie. The other accepts or rejects. If rejected, both get nothing. Rational self-interest says the responder should accept any positive...

Utility

Utility is the satisfaction or benefit an agent gets from an outcome. It is not directly observable — we infer it from choices. Economists model decision-making as utility...

Winner's Curse

Capen / Clapp / Campbell

In a common-value auction, the object has the same value to everyone, but bidders don't know it. Each bids on an estimate. The winner is the bidder who estimated highest — and...

Zero Price Effect

Dan Ariely

Zero is not just another price. When the price drops from a small positive amount to zero, demand jumps by more than the same-sized drop from a higher price. The zero-price...

Zero vs Positive-Sum

Zero-sum: one party's gain equals the other's loss. The pie is fixed. Positive-sum: the pie can grow; both parties can gain. The distinction shapes strategy, negotiation, and how...

Abdication of Responsibility

Abdication of responsibility occurs when a party with decision rights or obligations shifts blame, cost, or accountability onto others while retaining the upside. In economics and...

Bribery

Bribery is the use of payment or favours to distort a decision in the payer's favour. In economics it appears as a transfer that bypasses normal price or merit: the briber pays...

Cancer Surgery Formula

The cancer surgery formula is a decision heuristic: cut out the bad with clean margins and do not try to save the tumour. In business and strategy it means exiting losing...

Cap-and-trade Systems

Cap-and-trade is a market-based policy that sets a total limit (cap) on emissions or use of a resource and issues tradeable permits so that the right to emit or use can be bought...

Controlling the Center

Controlling the center is a strategic idea from chess and game theory: the player who dominates the central squares gains flexibility, threat range, and options. In markets and...

Cooperative/Non-cooperative

In game theory, games are cooperative when players can make binding agreements and share payoffs; they are non-cooperative when each player acts independently and no enforceable...

Costs: Sunk/Transaction/Switching/Search

Four cost types shape decisions and markets. Sunk costs are already spent and irrecoverable — they shouldn't influence future decisions but almost always do. Transaction costs are...

Factors of Production

Output requires inputs: in economics these are labour, capital, land, and often entrepreneurship. Labour is human effort; capital is produced goods used to produce more (machines,...

GDP

GDP (gross domestic product) is the total value of final goods and services produced in an economy over a period — usually a year or a quarter. It can be measured as output (value...

Game Theory: Combinatorial

Combinatorial game theory studies games with a finite set of positions, perfect information, and no chance — e.g. chess, go, nim. The key idea: under certain conditions, the game...

Game Theory: Discrete & Continuous

In discrete games, players choose from a finite set of actions (e.g. cooperate or defect, enter or stay out). In continuous games, they choose from a continuum (e.g. price,...

Game Theory: Evolutionary

Evolutionary game theory studies how strategies spread in a population when payoffs determine reproductive or imitation success. There are no rational, calculating players — only...

Game Theory: Infinitely Long

When a game is repeated indefinitely (no known last period), the set of equilibria expands. In the one-shot prisoner's dilemma, defection dominates. In an infinitely repeated...

Game Theory: Mean Field

Mean-field game theory studies settings with very many players where each player's payoff depends on their own action and on the aggregate distribution of others' actions — not on...

Game Theory: Metagames

A metagame is a game about which game to play — or how to change the rules, the players, or the payoffs. Instead of taking the game as given and choosing a strategy, you ask: can...

Game Theory: Perfect & Imperfect Information

John von Neumann / Oskar Morgenstern

In perfect-information games, every player knows the full history and current state when they move; in imperfect-information games, some moves or types are hidden. Chess is...

Game Theory: Pooling Games

In signalling games, different "types" (e.g. high vs low quality) can send the same signal — a pooling equilibrium — or separate — a separating equilibrium. Pooling means the...

Game Theory: Stochastic Outcomes

In many games, the link between strategy and outcome is probabilistic: you choose an action, but the result depends on chance (nature’s move) or mixed strategies. Analysing such...

Inflation

Inflation is a sustained rise in the general level of prices — the value of money in terms of goods falls. It's usually measured by a price index (e.g. CPI, PCE) over a period....

Iron Law of Civilization

The "iron law" (in some formulations) is that civilisation advances when the returns to productive behaviour exceed the returns to predation or extraction — and decays when the...

NIMBY

NIMBY — "Not In My Back Yard" — is the pattern where people support a policy or project in the abstract but oppose it when it affects their own locale. Benefits are diffuse or...

One Variable

"One variable" thinking is the discipline of changing or analysing one factor at a time while holding others constant — the experimental and mental equivalent of ceteris paribus....

Product Lifecycle

The product lifecycle is the sequence from introduction through growth, maturity, and decline. Demand and competition shift across stages: early, few competitors and often high...

Purchasing Power Parity

Purchasing power parity (PPP) is the idea that, in the long run, exchange rates should move so that a given basket of goods costs the same across countries when expressed in one...

Seizing the Middle

Seizing the middle means positioning at the centre of a value chain or network so that participants on either side must pass through you. The middle player becomes the default...

Simultaneous/Sequential

Games — in markets, negotiations, or competition — are either simultaneous (players act without knowing others' choices) or sequential (players move in order, observing earlier...

Symmetry of Ignorance

The symmetry of ignorance holds that in complex or novel problems, no single participant — designer, user, engineer, or executive — has sufficient knowledge to define the solution...

TANSTAAFL

TANSTAAFL — "There Ain't No Such Thing As A Free Lunch" — is the principle that every benefit has a cost, even when it isn't visible. Someone always pays: in money, time,...

Tiered Pricing

Tiered pricing offers a product or service at multiple price-and-feature levels so that different customer segments self-select into the tier that matches their willingness to...