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Economic Terms

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Retention scheme

This is a method for supporting market prices by retaining or withholding production during periods of excess supply. Any retained supply is released during times of supply shortages e.g. OPEC.

Returns to Scale

Illustrates what happens to the level of output if the firm increases their inputs by a proportionate scale. There are three types of return to scale: Increasing, Decreasing or Constant. It is an indicator for a firm of how productive the scaling up of inputs has been.


Occurs when a portion of a company's assets or profits are financially separated without necessarily being operated as a separate entity, normally for regulatory purposes.

For instance in the banking world ringfencing is carried out in universal banks to prevent losses on the investment bank activities affecting customers in the commerical bank side of the bank i.e. it is a succint way of structuring the bank to isolate risks and loses in each of the seperate activities that banks undertake. This is highlighted in the diagram below as the ringfence prevents losses from one subsidary of the bank affecting the others.

Risk averse

A person who actively seeks to avoid or reduce risks.

Risk taker

A person who who is not averse to taking risks and actively takes them.

Rose Effect

Is the perceived increase in intra-union trade that should occur when a country decides to become part of a single currency.

Below is the logical chain of reasoning for how the rose effect comes about for a country. The adoption of a single currency removes any instability by eliminating foreign exchange risk and therefore this encourages countries to invest and trade with each other, eventually making the net benefits for that country of joining a single currency greater. It was argued by Andrew Rose (the founder of this theory) that this effect could be as large as a 40% of GDP increase in trade.

Below is a diagram to show the net benefits increase that comes with higher intra-union trade.

Rule of Thumb

A mental shortcut which enables fast computation of a decision. For instance a decision that all agents have to make is 'how much to save?'. Clearly this depends on lots of different individual characteristics suc as income, future income, investment risks and so on. But if the individual had a rule of thumb to always save 10% of income this would remove any uncertainty in this decision process.


Satisficing is a decision-making strategy or cognitive heuristic that entails searching through the available alternatives until an acceptability threshold is met.

Below is an illustration that satisficing always leads to a choice which lies somewhere between a satisfying outcome and one which will suffice i.e. making the best decision a person can make. For instance, an individual wishing to purchase a high quality good with a low price will often find it very difficult to achieve this aim and therefore will often have to buy a high quality product at a price that will suffice or buy a lower quality version of the product that is still satisfactory.


Any household income that isn’t spent over a given period of time. This can be used to reduce debts or placed with financial institutions to create wealth for use at a future date.

Saving function

An equation that explains the relative influence of different factors on the savings of households.

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