Market failureIn neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point of view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick.
Combinatorial optimizationCombinatorial optimization is a subfield of mathematical optimization that consists of finding an optimal object from a finite set of objects, where the set of feasible solutions is discrete or can be reduced to a discrete set. Typical combinatorial optimization problems are the travelling salesman problem ("TSP"), the minimum spanning tree problem ("MST"), and the knapsack problem. In many such problems, such as the ones previously mentioned, exhaustive search is not tractable, and so specialized algorithms that quickly rule out large parts of the search space or approximation algorithms must be resorted to instead.
EfficiencyEfficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time while performing a task. In a more general sense, it is the ability to do things well, successfully, and without waste. In more mathematical or scientific terms, it signifies the level of performance that uses the least amount of inputs to achieve the highest amount of output. It often specifically comprises the capability of a specific application of effort to produce a specific outcome with a minimum amount or quantity of waste, expense, or unnecessary effort.
Convex optimizationConvex optimization is a subfield of mathematical optimization that studies the problem of minimizing convex functions over convex sets (or, equivalently, maximizing concave functions over convex sets). Many classes of convex optimization problems admit polynomial-time algorithms, whereas mathematical optimization is in general NP-hard.
Rational pricingRational pricing is the assumption in financial economics that asset prices – and hence asset pricing models – will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments. Arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets. Where this mismatch can be exploited (i.
Consumption-based capital asset pricing modelThe consumption-based capital asset pricing model (CCAPM) is a model of the determination of expected (i.e. required) return on an investment. The foundations of this concept were laid by the research of Robert Lucas (1978) and Douglas Breeden (1979). The model is a generalization of the capital asset pricing model (CAPM). While the CAPM is derived in a static, one-period setting, the CCAPM uses a more realistic, multiple-period setup.
Constrained optimizationIn mathematical optimization, constrained optimization (in some contexts called constraint optimization) is the process of optimizing an objective function with respect to some variables in the presence of constraints on those variables. The objective function is either a cost function or energy function, which is to be minimized, or a reward function or utility function, which is to be maximized.
Risk aversionIn economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more certain outcome. Risk aversion explains the inclination to agree to a situation with a more predictable, but possibly lower payoff, rather than another situation with a highly unpredictable, but possibly higher payoff.
Duality (optimization)In mathematical optimization theory, duality or the duality principle is the principle that optimization problems may be viewed from either of two perspectives, the primal problem or the dual problem. If the primal is a minimization problem then the dual is a maximization problem (and vice versa). Any feasible solution to the primal (minimization) problem is at least as large as any feasible solution to the dual (maximization) problem.
WelfareWelfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifically to social insurance programs which provide support only to those who have previously contributed (e.g. most pension systems), as opposed to social assistance programs which provide support on the basis of need alone (e.g. most disability benefits).
Representative agentEconomists use the term representative agent to refer to the typical decision-maker of a certain type (for example, the typical consumer, or the typical firm). More technically, an economic model is said to have a representative agent if all agents of the same type are identical. Also, economists sometimes say a model has a representative agent when agents differ, but act in such a way that the sum of their choices is mathematically equivalent to the decision of one individual or many identical individuals.
Welfare stateA welfare state is a form of government in which the state (or a well-established network of social institutions) protects and promotes the economic and social well-being of its citizens, based upon the principles of equal opportunity, equitable distribution of wealth, and public responsibility for citizens unable to avail themselves of the minimal provisions for a good life. There is substantial variability in the form and trajectory of the welfare state across countries and regions.
