What are Explicit Costs? We can distinguish between two types of cost: explicit and implicit. Explicit costs are out-of-pocket costs, that is, actual payments. Wages that a firm pays its employees or rent that a firm pays for its office are explicit costs. Implicit costs are more subtle, but just as important. They represent the opportunity cost of ...

What is a Homestead Exemption? In the United States, a homestead exemption is a legal protection that safeguards the value of a home from taxes and creditors given the death of the homeowner spouse or following the declaration of bankruptcy. A homestead exemption is a form of law in many states that helps protect the value of a home after the demise...

What is the Efficient Wage Theory? Efficiency   wage   theory  argues that workers' productivity depends on their pay, and so employers will often find it worthwhile to pay their employees somewhat more than market conditions might dictate. One reason is that employees who receive better pay than others will be more productive because they recognize...

What is Elasticity of Savings? Elasticity of savings is the percentage change in the quantity of savings divided by the percentage change in interest rates. That is: If the government passes laws that cut taxes on savings (allowing the return on savings to rise), the individuals are incentivized to save more.  If the supply curve for financial capit...

What is the First Rule of Labor Markets? The labor market, like all markets, has a demand and a supply. Why do firms demand labor? Why is an employer willing to pay you for your labor? It’s not because the employer likes you or is socially conscious. Rather, it’s because your labor is worth something to the employer--your work brings in revenues to ...

What are Excess Reserves? Banks are legally required to hold a minimum level of reserves, but no rule prohibits them from holding additional excess reserves above the legally mandated limit. For example, during a recession banks may be hesitant to lend, because they fear that when the economy is contracting, a high proportion of loan applicants beco...

How Do Banks Create Money? Banks and money are intertwined. It is not just that most money is in the form of bank accounts. The banking system can literally create money through the process of making loans.  Start with a hypothetical bank called Bank. The bank has $10 million in deposits.  At this stage, Bank is simply storing money for depositors a...

What is the Fundamental Law of Insurance? The major additional costs to insurance companies, other than the payment of claims, are the costs of running a business: the administrative costs of hiring workers, administering accounts, and processing insurance claims. For most insurance companies, the insurance premiums coming in and the claims payments...

What is Intra-Industry Trade? Comparative advantage, however, at least at first glance, does not seem especially well-suited to explain other common patterns of international trade. The theory of comparative advantage suggests that trade should happen between economies with large differences in opportunity costs of production. Roughly half of all wo...

What is the International Monetary Fund (IMF)? The International Monetary Fund(IMF) is an international organization with 189 member countries, formed with the objective of promoting international trade and commerce, employment, sustained economic growth, financial security, and reducing poverty across the globe. It functions like a bank that formul...