Naked Economics: Undressing the Dismal Science

This occurs when incentives cause one group to participate selectively or to opt out of a transaction, often because they have information others do not. An example Wheelan gives is teachers’ pay being tied to seniority rather than productivity. People who would be the most talented teachers would also be good in other, more lucrative professions where the pay is based on productivity. Because they know they can be productive (and thus earn more), they choose professions other than teaching, and teaching as a profession loses some of the best candidates.

This term is used often today and means that a company’s products or services have garnered a level of trust that makes consumers choose them. One example is when someone choses McDonald’s over a local restaurant because it is a known quantity with no guesswork about what it offers. In other instances, a certain brand might be known for its high quality, so consumers would choose it even when they have no direct knowledge or experience with one of its products they are buying.

This is the well-known cycle of boom and bust, in which an economic downturn creates a recession or depression, then recovery takes place, a boom occurs, followed again by recession, and so on.