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124-405: Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focuses on the study of individual markets, sectors, or industries as opposed to the economy as a whole, which is studied in macroeconomics . One goal of microeconomics

248-462: A p {\displaystyle ap} and a I {\displaystyle aI} are exactly the same quantities measured in cents. When prices and wealth go up by a factor a, the purchasing pattern of an economic agent remains constant. Obviously, expressing in different unit of measurement for prices and income should not affect the demand. Marshall's theory exploits that demand curve represents individual's diminishing marginal values of

372-560: A budget constraint . Economists use the extreme value theorem to guarantee that a solution to the utility maximization problem exists. That is, since the budget constraint is both bounded and closed, a solution to the utility maximization problem exists. Economists call the solution to the utility maximization problem a Walrasian demand function or correspondence. The utility maximization problem has so far been developed by taking consumer tastes (i.e. consumer utility) as primitive. However, an alternative way to develop microeconomic theory

496-433: A budget set of affordable packages where p ⋅ x = ∑ i L p i x i {\displaystyle p\cdot x=\sum _{i}^{L}p_{i}x_{i}} is the dot product of the price and quantity vectors. The consumer has a utility function The consumer's Marshallian demand correspondence is defined to be Marshall's theory suggests that pursuit of utility

620-406: A change in the price of a productive input or a technical improvement. The "Law of Supply" states that, in general, a rise in price leads to an expansion in supply and a fall in price leads to a contraction in supply. Here as well, the determinants of supply, such as price of substitutes, cost of production, technology applied and various factors of inputs of production are all taken to be constant for

744-406: A continuous utility function is a homogeneous function with degree zero. This means that for every constant a > 0 , {\displaystyle a>0,} This is intuitively clear. Suppose p {\displaystyle p} and I {\displaystyle I} are measured in dollars. When a = 100 {\displaystyle a=100} ,

868-702: A definition of economics as a study of human behaviour, subject to and constrained by scarcity, which forces people to choose, allocate scarce resources to competing ends, and economise (seeking the greatest welfare while avoiding the wasting of scarce resources). According to Robbins: "Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses". Robbins' definition eventually became widely accepted by mainstream economists, and found its way into current textbooks. Although far from unanimous, most mainstream economists would accept some version of Robbins' definition, even though many have raised serious objections to

992-451: A distinct field. The book focused on determinants of national income in the short run when prices are relatively inflexible. Keynes attempted to explain in broad theoretical detail why high labour-market unemployment might not be self-correcting due to low " effective demand " and why even price flexibility and monetary policy might be unavailing. The term "revolutionary" has been applied to the book in its impact on economic analysis. During

1116-463: A given market are inversely related. That is, the higher the price of a product, the less of it people would be prepared to buy (other things unchanged ). As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the substitution effect ). In addition, purchasing power from the price decline increases ability to buy (the income effect ). Other factors can change demand; for example an increase in income will shift

1240-420: A lower relative cost of production, rather relying only on its own production. It has been termed a "fundamental analytical explanation" for gains from trade . Coming at the end of the classical tradition, John Stuart Mill (1848) parted company with the earlier classical economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a distinct difference between

1364-467: A market with perfect competition , which includes the condition of no buyers or sellers large enough to have price-setting power . For a given market of a commodity , demand is the relation of the quantity that all buyers would be prepared to purchase at each unit price of the good. Demand is often represented by a table or a graph showing price and quantity demanded (as in the figure). Demand theory describes individual consumers as rationally choosing

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1488-449: A more comprehensive theory of costs on the supply side. In the 20th century, neoclassical theorists departed from an earlier idea that suggested measuring total utility for a society, opting instead for ordinal utility , which posits behaviour-based relations across individuals. In microeconomics , neoclassical economics represents incentives and costs as playing a pervasive role in shaping decision making . An immediate example of this

1612-460: A more important role in mainstream economic theory. Also, heterogeneity among the economic agents, e.g. differences in income, plays an increasing role in recent economic research. Other schools or trends of thought referring to a particular style of economics practised at and disseminated from well-defined groups of academicians that have become known worldwide, include the Freiburg School ,

1736-586: A proportion of the value their work had created. Marxian economics was further developed by Karl Kautsky (1854–1938)'s The Economic Doctrines of Karl Marx and The Class Struggle (Erfurt Program) , Rudolf Hilferding 's (1877–1941) Finance Capital , Vladimir Lenin (1870–1924)'s The Development of Capitalism in Russia and Imperialism, the Highest Stage of Capitalism , and Rosa Luxemburg (1871–1919)'s The Accumulation of Capital . At its inception as

1860-409: A rapidly growing population against a limited amount of land meant diminishing returns to labour. The result, he claimed, was chronically low wages, which prevented the standard of living for most of the population from rising above the subsistence level. Economist Julian Simon has criticised Malthus's conclusions. While Adam Smith emphasised production and income, David Ricardo (1817) focused on

1984-461: A rational rise in individual utility . With the necessary tools and assumptions in place the utility maximization problem (UMP) is developed. The utility maximization problem is the heart of consumer theory . The utility maximization problem attempts to explain the action axiom by imposing rationality axioms on consumer preferences and then mathematically modeling and analyzing the consequences. The utility maximization problem serves not only as

2108-815: A regulatory mechanism for market systems, with government providing regulations where the market cannot be expected to regulate itself. Regulations help to mitigate negative externalities of goods and services when the private equilibrium of the market does not match the social equilibrium. One example of this is with regards to building codes , which if absent in a purely competition regulated market system, might result in several horrific injuries or deaths to be required before companies would begin improving structural safety, as consumers may at first not be as concerned or aware of safety issues to begin putting pressure on companies to provide them, and companies would be motivated not to provide proper safety features due to how it would cut into their profits. The concept of "market type"

2232-469: A set of stable preferences, a definite overall guiding objective, and the capability of making a choice. There exists an economic problem, subject to study by economic science, when a decision (choice) is made by one or more players to attain the best possible outcome. Keynesian economics derives from John Maynard Keynes , in particular his book The General Theory of Employment, Interest and Money (1936), which ushered in contemporary macroeconomics as

2356-435: A short time period (few months), most costs are fixed costs as the firm will have to pay for salaries, contracted shipment and materials used to produce various goods. Over a longer time period (2-3 years), costs can become variable. Firms can decide to reduce output, purchase fewer materials and even sell some machinery. Over 10 years, most costs become variable as workers can be laid off or new machinery can be bought to replace

2480-409: A single tax on income of land owners. In reaction against copious mercantilist trade regulations, the physiocrats advocated a policy of laissez-faire , which called for minimal government intervention in the economy. Adam Smith (1723–1790) was an early economic theorist. Smith was harshly critical of the mercantilists but described the physiocratic system "with all its imperfections" as "perhaps

2604-452: A social science, economics was defined and discussed at length as the study of production, distribution, and consumption of wealth by Jean-Baptiste Say in his Treatise on Political Economy or, The Production, Distribution, and Consumption of Wealth (1803). These three items were considered only in relation to the increase or diminution of wealth, and not in reference to their processes of execution. Say's definition has survived in part up to

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2728-435: A sought after end). Some subsequent comments criticised the definition as overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, however, such comments abated as the economic theory of maximizing behaviour and rational-choice modelling expanded the domain of the subject to areas previously treated in other fields. There are other criticisms as well, such as in scarcity not accounting for

2852-449: A specific time period of evaluation of supply. Market equilibrium occurs where quantity supplied equals quantity demanded, the intersection of the supply and demand curves in the figure above. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This is posited to bid the price up. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. This pushes

2976-442: A synthesis emerged by the 2000s, often given the name the new neoclassical synthesis . It integrated the rational expectations and optimizing framework of the new classical theory with a new Keynesian role for nominal rigidities and other market imperfections like imperfect information in goods, labour and credit markets. The monetarist importance of monetary policy in stabilizing the economy and in particular controlling inflation

3100-496: Is a market structure in which a market or industry is dominated by a small number of firms (oligopolists). Oligopolies can create the incentive for firms to engage in collusion and form cartels that reduce competition leading to higher prices for consumers and less overall market output. Alternatively, oligopolies can be fiercely competitive and engage in flamboyant advertising campaigns. Economics Economics ( / ˌ ɛ k ə ˈ n ɒ m ɪ k s , ˌ iː k ə -/ )

3224-853: Is a social science that studies the production , distribution , and consumption of goods and services . Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyses what is viewed as basic elements within economies , including individual agents and markets , their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyses economies as systems where production, distribution, consumption, savings , and investment expenditure interact, and factors affecting it: factors of production , such as labour , capital , land , and enterprise , inflation , economic growth , and public policies that have impact on these elements . It also seeks to analyse and describe

3348-499: Is a function and it is called the Marshallian demand function . If the consumer has strictly convex preferences and the prices of all goods are strictly positive, then there is a unique utility-maximizing bundle. To prove this, suppose, by contradiction, that there are two different bundles, x 1 {\displaystyle x_{1}} and x 2 {\displaystyle x_{2}} , that maximize

3472-442: Is a market structure in which a market or industry is dominated by a single supplier of a particular good or service. Because monopolies have no competition, they tend to sell goods and services at a higher price and produce below the socially optimal output level. However, not all monopolies are a bad thing, especially in industries where multiple firms would result in more costs than benefits (i.e. natural monopolies ). An oligopoly

3596-450: Is a motivational factor to a consumer which can be attained through the consumption of goods or service. The amount of consumer's utility is dependent on the level of consumption of a certain good, which is subject to the fundamental tendency of human nature and it is described as the law of diminishing marginal utility . As utility maximum always exists, Marshallian demand correspondence must be nonempty at every value that corresponds with

3720-421: Is a term for the "way (nomos) to run a household (oikos)", or in other words the know-how of an οἰκονομικός ( oikonomikos ), or "household or homestead manager". Derived terms such as "economy" can therefore often mean "frugal" or "thrifty". By extension then, "political economy" was the way to manage a polis or state. There are a variety of modern definitions of economics ; some reflect evolving views of

3844-438: Is also applied to such diverse subjects as crime , education , the family , feminism , law , philosophy , politics , religion , social institutions , war , science , and the environment . The earlier term for the discipline was "political economy", but since the late 19th century, it has commonly been called "economics". The term is ultimately derived from Ancient Greek οἰκονομία ( oikonomia ) which

Microeconomics - Misplaced Pages Continue

3968-409: Is by taking consumer choice as primitive. This model of microeconomic theory is referred to as revealed preference theory. The theory of supply and demand usually assumes that markets are perfectly competitive . This implies that there are many buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods and services. In many real-life transactions,

4092-661: Is closely related to the idea of time constraints. One can do only one thing at a time, which means that, inevitably, one is always giving up other things. The opportunity cost of any activity is the value of the next-best alternative thing one may have done instead. Opportunity cost depends only on the value of the next-best alternative. It does not matter whether one has five alternatives or 5,000. Opportunity costs can tell when not to do something as well as when to do something. For example, one may like waffles, but like chocolate even more. If someone offers only waffles, one would take it. But if offered waffles or chocolate, one would take

4216-532: Is devoted to cases where market failures lead to resource allocation that is suboptimal and creates deadweight loss . A classic example of suboptimal resource allocation is that of a public good . In such cases, economists may attempt to find policies that avoid waste, either directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating " missing markets " to enable efficient trading where none had previously existed. This

4340-410: Is different from the concept of "market structure". Nevertheless, there are a variety of types of markets . The different market structures produce cost curves based on the type of structure present. The different curves are developed based on the costs of production, specifically the graph contains marginal cost, average total cost, average variable cost, average fixed cost, and marginal revenue, which

4464-433: Is for firms to enter and exit the market, and forms of competition in the market. A market structure can have several types of interacting market systems . Different forms of markets are a feature of capitalism and market socialism , with advocates of state socialism often criticizing markets and aiming to substitute or replace markets with varying degrees of government-directed economic planning . Competition acts as

4588-414: Is lower than the benefits of the chocolate. Opportunity costs are unavoidable constraints on behavior because one has to decide what's best and give up the next-best alternative. Microeconomics is also known as price theory to highlight the significance of prices in relation to buyer and sellers as these agents determine prices due to their individual actions. Price theory is a field of economics that uses

4712-404: Is no guarantee that the resulting utility function would be differentiable . Microeconomic theory progresses by defining a competitive budget set which is a subset of the consumption set . It is at this point that economists make the technical assumption that preferences are locally non-satiated . Without the assumption of LNS (local non-satiation) there is no 100% guarantee but there would be

4836-434: Is not achievable due to a high level of producers causing high levels of competition. Therefore, prices are brought down to a marginal cost level. In a monopoly, market power is achieved by one firm leading to prices being higher than the marginal cost level. Between these two types of markets are firms that are neither perfectly competitive or monopolistic. Firms such as Pepsi and Coke and Sony, Nintendo and Microsoft dominate

4960-667: Is not emphasized in price theory. Price theorists focus on competition believing it to be a reasonable description of most markets that leaves room to study additional aspects of tastes and technology. As a result, price theory tends to use less game theory than microeconomics does. Price theory focuses on how agents respond to prices, but its framework can be applied to a wide variety of socioeconomic issues that might not seem to involve prices at first glance. Price theorists have influenced several other fields including developing public choice theory and law and economics . Price theory has been applied to issues previously thought of as outside

5084-413: Is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it

Microeconomics - Misplaced Pages Continue

5208-457: Is sometimes equal to the demand, average revenue, and price in a price-taking firm. Perfect competition is a situation in which numerous small firms producing identical products compete against each other in a given industry. Perfect competition leads to firms producing the socially optimal output level at the minimum possible cost per unit. Firms in perfect competition are "price takers" (they do not have enough market power to profitably increase

5332-537: Is studied in the field of collective action and public choice theory . "Optimal welfare" usually takes on a Paretian norm, which is a mathematical application of the Kaldor–Hicks method . This can diverge from the Utilitarian goal of maximizing utility because it does not consider the distribution of goods between people. Market failure in positive economics (microeconomics) is limited in implications without mixing

5456-403: Is suitable for use, gift -giving in a gift economy , or exchange in a market economy . This can include manufacturing , storing, shipping , and packaging . Some economists define production broadly as all economic activity other than consumption . They see every commercial activity other than the final purchase as some form of production. The cost-of-production theory of value states that

5580-598: Is the consumer theory of individual demand, which isolates how prices (as costs) and income affect quantity demanded. In macroeconomics it is reflected in an early and lasting neoclassical synthesis with Keynesian macroeconomics. Neoclassical economics is occasionally referred as orthodox economics whether by its critics or sympathisers. Modern mainstream economics builds on neoclassical economics but with many refinements that either supplement or generalise earlier analysis, such as econometrics , game theory , analysis of market failure and imperfect competition , and

5704-407: Is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations. It also analyzes market failure , where markets fail to produce efficient results. While microeconomics focuses on firms and individuals, macroeconomics focuses on

5828-510: Is unique, then it is a continuous function of p {\displaystyle p} and I {\displaystyle I} . Combining with the previous subsection, if the consumer has strictly convex preferences, then the Marshallian demand is unique and continuous. In contrast, if the preferences are not convex, then the Marshallian demand may be non-unique and non-continuous. The optimal Marshallian demand correspondence of

5952-430: Is used to explain the behavior of perfectly competitive markets, but as a standard of comparison it can be extended to any type of market. It can also be generalized to explain variables across the economy , for example, total output (estimated as real GDP ) and the general price level , as studied in macroeconomics . Tracing the qualitative and quantitative effects of variables that change supply and demand, whether in

6076-747: The School of Lausanne , the Stockholm school and the Chicago school of economics . During the 1970s and 1980s mainstream economics was sometimes separated into the Saltwater approach of those universities along the Eastern and Western coasts of the US, and the Freshwater, or Chicago school approach. Within macroeconomics there is, in general order of their historical appearance in

6200-419: The demand curve is one of the most closely studied relations in economics. It is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility subject to consumer budget constraints . Production theory is the study of production, or the economic process of converting inputs into outputs. Production uses resources to create a good or service that

6324-484: The elasticity (responsiveness) of the supply curve in the short and long runs and corresponding differences in the price-quantity change from a shift on the supply or demand side of the market. Marginalist theory , such as above, describes the consumers as attempting to reach most-preferred positions, subject to income and wealth constraints while producers attempt to maximize profits subject to their own constraints, including demand for goods produced, technology, and

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6448-433: The macroeconomics of high unemployment. Gary Becker , a contributor to the expansion of economics into new areas, described the approach he favoured as "combin[ing the] assumptions of maximizing behaviour, stable preferences , and market equilibrium , used relentlessly and unflinchingly." One commentary characterises the remark as making economics an approach rather than a subject matter but with great specificity as to

6572-467: The neoclassical model of economic growth for analysing long-run variables affecting national income . Neoclassical economics studies the behaviour of individuals , households , and organisations (called economic actors, players, or agents), when they manage or use scarce resources, which have alternative uses, to achieve desired ends. Agents are assumed to act rationally, have multiple desirable ends in sight, limited resources to obtain these ends,

6696-415: The societal to the microeconomic level: Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man. Lionel Robbins (1932) developed implications of what has been termed "[p]erhaps the most commonly accepted current definition of

6820-481: The supply and demand framework to explain and predict human behavior. It is associated with the Chicago School of Economics . Price theory studies competitive equilibrium in markets to yield testable hypotheses that can be rejected. Price theory is not the same as microeconomics. Strategic behavior, such as the interactions among sellers in a market where they are few, is a significant part of microeconomics but

6944-400: The "choice process and the type of social interaction that [such] analysis involves." The same source reviews a range of definitions included in principles of economics textbooks and concludes that the lack of agreement need not affect the subject-matter that the texts treat. Among economists more generally, it argues that a particular definition presented may reflect the direction toward which

7068-486: The 1970s and 1980s, when several major central banks followed a monetarist-inspired policy, but was later abandoned because the results were unsatisfactory. A more fundamental challenge to the prevailing Keynesian paradigm came in the 1970s from new classical economists like Robert Lucas , Thomas Sargent and Edward Prescott . They introduced the notion of rational expectations in economics, which had profound implications for many economic discussions, among which were

7192-897: The Marshallian demand function: 2. The utility function is a CES utility function : Then x ∗ ( p 1 , p 2 , I ) = ( I p 1 ϵ − 1 p 1 ϵ + p 2 ϵ , I p 2 ϵ − 1 p 1 ϵ + p 2 ϵ ) , with ϵ = δ δ − 1 . {\displaystyle x^{*}(p_{1},p_{2},I)=\left({\frac {Ip_{1}^{\epsilon -1}}{p_{1}^{\epsilon }+p_{2}^{\epsilon }}},{\frac {Ip_{2}^{\epsilon -1}}{p_{1}^{\epsilon }+p_{2}^{\epsilon }}}\right),\quad {\text{with}}\quad \epsilon ={\frac {\delta }{\delta -1}}.} In both cases,

7316-422: The amount of goods that will bring them the highest profit. Supply is typically represented as a function relating price and quantity, if other factors are unchanged. That is, the higher the price at which the good can be sold, the more of it producers will supply, as in the figure. The higher price makes it profitable to increase production. Just as on the demand side, the position of the supply can shift, say from

7440-407: The analysis of wealth: how wealth is created (production), distributed, and consumed; and how wealth can grow. But he said that economics can be used to study other things, such as war, that are outside its usual focus. This is because war has as the goal winning it (as a sought after end ), generates both cost and benefits; and, resources (human life and other costs) are used to attain the goal. If

7564-479: The area of inquiry or object of inquiry rather than the methodology. In the biology department, it is not said that all biology should be studied with DNA analysis. People study living organisms in many different ways, so some people will perform DNA analysis, others might analyse anatomy, and still others might build game theoretic models of animal behaviour. But they are all called biology because they all study living organisms. According to Ha Joon Chang, this view that

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7688-424: The assumption fails because some individual buyers or sellers have the ability to influence prices. Quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the theory works well in situations meeting these assumptions. Mainstream economics does not assume a priori that markets are preferable to other forms of social organization. In fact, much analysis

7812-443: The author believes economics is evolving, or should evolve. Many economists including nobel prize winners James M. Buchanan and Ronald Coase reject the method-based definition of Robbins and continue to prefer definitions like those of Say, in terms of its subject matter. Ha-Joon Chang has for example argued that the definition of Robbins would make economics very peculiar because all other sciences define themselves in terms of

7936-559: The belief of the economist and their theory. The demand for various commodities by individuals is generally thought of as the outcome of a utility-maximizing process, with each individual trying to maximize their own utility under a budget constraint and a given consumption set. Individuals and firms need to allocate limited resources to ensure all agents in the economy are well off. Firms decide which goods and services to produce considering low costs involving labor, materials and capital as well as potential profit margins. Consumers choose

8060-411: The chocolate. The opportunity cost of eating waffles is sacrificing the chance to eat chocolate. Because the cost of not eating the chocolate is higher than the benefits of eating the waffles, it makes no sense to choose waffles. Of course, if one chooses chocolate, they are still faced with the opportunity cost of giving up having waffles. But one is willing to do that because the waffle's opportunity cost

8184-512: The cola and video game industry respectively. These firms are in imperfect competition Monopolistic competition is a situation in which many firms with slightly different products compete. Production costs are above what may be achieved by perfectly competitive firms, but society benefits from the product differentiation . Examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. A monopoly

8308-517: The colonies. Physiocrats , a group of 18th-century French thinkers and writers, developed the idea of the economy as a circular flow of income and output. Physiocrats believed that only agricultural production generated a clear surplus over cost, so that agriculture was the basis of all wealth. Thus, they opposed the mercantilist policy of promoting manufacturing and trade at the expense of agriculture, including import tariffs. Physiocrats advocated replacing administratively costly tax collections with

8432-485: The cost of production, the short-run total cost is equal to fixed cost plus total variable cost . The fixed cost refers to the cost that is incurred regardless of how much the firm produces. The variable cost is a function of the quantity of an object being produced. The cost function can be used to characterize production through the duality theory in economics, developed mainly by Ronald Shephard (1953, 1970) and other scholars (Sickles & Zelenyuk, 2019, ch. 2). Over

8556-486: The demand curve for a normal good outward relative to the origin, as in the figure. All determinants are predominantly taken as constant factors of demand and supply. Supply is the relation between the price of a good and the quantity available for sale at that price. It may be represented as a table or graph relating price and quantity supplied. Producers, for example business firms, are hypothesized to be profit maximizers , meaning that they attempt to produce and supply

8680-488: The design of modern monetary policy and are now standard workhorses in most central banks. After the 2007–2008 financial crisis , macroeconomic research has put greater emphasis on understanding and integrating the financial system into models of the general economy and shedding light on the ways in which problems in the financial sector can turn into major macroeconomic recessions. In this and other research branches, inspiration from behavioural economics has started playing

8804-506: The distribution of income among landowners, workers, and capitalists. Ricardo saw an inherent conflict between landowners on the one hand and labour and capital on the other. He posited that the growth of population and capital, pressing against a fixed supply of land, pushes up rents and holds down wages and profits. Ricardo was also the first to state and prove the principle of comparative advantage , according to which each country should specialise in producing and exporting goods in that it has

8928-464: The economy can and should be studied in only one way (for example by studying only rational choices), and going even one step further and basically redefining economics as a theory of everything, is peculiar. Questions regarding distribution of resources are found throughout the writings of the Boeotian poet Hesiod and several economic historians have described Hesiod as the "first economist". However,

9052-730: The first large-scale macroeconometric model , applying the Keynesian thinking systematically to the US economy . Immediately after World War II, Keynesian was the dominant economic view of the United States establishment and its allies, Marxian economics was the dominant economic view of the Soviet Union nomenklatura and its allies. Monetarism appeared in the 1950s and 1960s, its intellectual leader being Milton Friedman . Monetarists contended that monetary policy and other monetary shocks, as represented by

9176-536: The following decades, many economists followed Keynes' ideas and expanded on his works. John Hicks and Alvin Hansen developed the IS–LM model which was a simple formalisation of some of Keynes' insights on the economy's short-run equilibrium. Franco Modigliani and James Tobin developed important theories of private consumption and investment , respectively, two major components of aggregate demand . Lawrence Klein built

9300-509: The global economy . Other broad distinctions within economics include those between positive economics , describing "what is", and normative economics , advocating "what ought to be"; between economic theory and applied economics ; between rational and behavioural economics ; and between mainstream economics and heterodox economics . Economic analysis can be applied throughout society, including business , finance , cybersecurity , health care , engineering and government . It

9424-535: The good and services they want that will maximize their happiness taking into account their limited wealth. The government can make these allocation decisions or they can be independently made by the consumers and firms. For example, in the former Soviet Union, the government played a part in informing car manufacturers which cars to produce and which consumers will gain access to a car. Economists commonly consider themselves microeconomists or macroeconomists. The difference between microeconomics and macroeconomics likely

9548-407: The good stop. For movement to market equilibrium and for changes in equilibrium, price and quantity also change "at the margin": more-or-less of something, rather than necessarily all-or-nothing. Other applications of demand and supply include the distribution of income among the factors of production , including labor and capital, through factor markets. In a competitive labor market for example

9672-403: The good. The theory insists that the consumer's purchasing decision is dependent on the gainable utility of a goods or services compared to the price since the additional utility that the consumer gain must be at least as great as the price. The following suggestion proposes that the price demanded is equal to the maximum price that the consumer would pay for an extra unit of good or service. Hence,

9796-424: The growth in the money stock, was an important cause of economic fluctuations, and consequently that monetary policy was more important than fiscal policy for purposes of stabilisation . Friedman was also skeptical about the ability of central banks to conduct a sensible active monetary policy in practice, advocating instead using simple rules such as a steady rate of money growth. Monetarism rose to prominence in

9920-463: The importance of various market failures for the functioning of the economy, as had Keynes. Not least, they proposed various reasons that potentially explained the empirically observed features of price and wage rigidity , usually made to be endogenous features of the models, rather than simply assumed as in older Keynesian-style ones. After decades of often heated discussions between Keynesians, monetarists, new classical and new Keynesian economists,

10044-601: The literature; classical economics , neoclassical economics , Keynesian economics , the neoclassical synthesis , monetarism , new classical economics , New Keynesian economics and the new neoclassical synthesis . Marshallian demand function According to the utility maximization problem, there are L {\displaystyle L} commodities with price vector p {\displaystyle p} and choosable quantity vector x {\displaystyle x} . The consumer has income I {\displaystyle I} , and hence

10168-449: The market's two roles: allocation of resources and distribution of income. The market might be efficient in allocating resources but not in distributing income, he wrote, making it necessary for society to intervene. Value theory was important in classical theory. Smith wrote that the "real price of every thing ... is the toil and trouble of acquiring it". Smith maintained that, with rent and profit, other costs besides wages also enter

10292-401: The mathematical foundation of consumer theory but as a metaphysical explanation of it as well. That is, the utility maximization problem is used by economists to not only explain what or how individuals make choices but why individuals make choices as well. The utility maximization problem is a constrained optimization problem in which an individual seeks to maximize utility subject to

10416-437: The most famous passages in all economics," Smith represents every individual as trying to employ any capital they might command for their own advantage, not that of the society, and for the sake of profit, which is necessary at some level for employing capital in domestic industry, and positively related to the value of produce. In this: He generally, indeed, neither intends to promote the public interest, nor knows how much he

10540-414: The most preferred quantity of each good, given income, prices, tastes, etc. A term for this is "constrained utility maximization" (with income and wealth as the constraints on demand). Here, utility refers to the hypothesized relation of each individual consumer for ranking different commodity bundles as more or less preferred. The law of demand states that, in general, price and quantity demanded in

10664-534: The old machinery Sunk Costs – This is a fixed cost that has already been incurred and cannot be recovered. An example of this can be in R&;D development like in the pharmaceutical industry. Hundreds of millions of dollars are spent to achieve new drug breakthroughs but this is challenging as its increasingly harder to find new breakthroughs and meet tighter regulation standards. Thus many projects are written off leading to losses of millions of dollars Opportunity cost

10788-410: The optimality of x 1 , x 2 {\displaystyle x_{1},x_{2}} . The maximum theorem implies that if: then x ∗ ( p , I ) {\displaystyle x^{*}(p,I)} is an upper-semicontinuous correspondence. Moreover, if x ∗ ( p , I ) {\displaystyle x^{*}(p,I)}

10912-503: The pessimistic analysis of Malthus (1798). John Stuart Mill (1844) delimited the subject matter further: The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object. Alfred Marshall provided a still widely cited definition in his textbook Principles of Economics (1890) that extended analysis beyond wealth and from

11036-419: The preferences are strictly convex, the demand is unique and the demand function is continuous. 3. The utility function has the linear form : The utility function is only weakly convex, and indeed the demand is not unique: when p 1 = p 2 {\displaystyle p_{1}=p_{2}} , the consumer may divide his income in arbitrary ratios between product types 1 and 2 and get

11160-483: The present, modified by substituting the word "wealth" for "goods and services" meaning that wealth may include non-material objects as well. One hundred and thirty years later, Lionel Robbins noticed that this definition no longer sufficed, because many economists were making theoretical and philosophical inroads in other areas of human activity. In his Essay on the Nature and Significance of Economic Science , he proposed

11284-420: The price down. The model of supply and demand predicts that for given supply and demand curves, price and quantity will stabilize at the price that makes quantity supplied equal to quantity demanded. Similarly, demand-and-supply theory predicts a new price-quantity combination from a shift in demand (as to the figure), or in supply. For a given quantity of a consumer good, the point on the demand curve indicates

11408-409: The price of a commodity. Other classical economists presented variations on Smith, termed the ' labour theory of value '. Classical economics focused on the tendency of any market economy to settle in a final stationary state made up of a constant stock of physical wealth (capital) and a constant population size . Marxist (later, Marxian) economics descends from classical economics and it derives from

11532-406: The price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production (including labor , capital , or land ) and taxation. Technology can be viewed either as a form of fixed capital (e.g. an industrial plant ) or circulating capital (e.g. intermediate goods ). In the mathematical model for

11656-437: The price of inputs. For the consumer, that point comes where marginal utility of a good, net of price, reaches zero, leaving no net gain from further consumption increases. Analogously, the producer compares marginal revenue (identical to price for the perfect competitor) against the marginal cost of a good, with marginal profit the difference. At the point where marginal profit reaches zero, further increases in production of

11780-457: The price of their goods or services). A good example would be that of digital marketplaces, such as eBay , on which many different sellers sell similar products to many different buyers. Consumers in a perfect competitive market have perfect knowledge about the products that are being sold in this market. Imperfect competition is a type of market structure showing some but not all features of competitive markets. In perfect competition, market power

11904-429: The purest approximation to the truth that has yet been published" on the subject. The publication of Adam Smith 's The Wealth of Nations in 1776, has been described as "the effective birth of economics as a separate discipline." The book identified land, labour, and capital as the three factors of production and the major contributors to a nation's wealth, as distinct from the physiocratic idea that only agriculture

12028-403: The purview of economics such as criminal justice, marriage, and addiction. Supply and demand is an economic model of price determination in a perfectly competitive market . It concludes that in a perfectly competitive market with no externalities , per unit taxes , or price controls , the unit price for a particular good is the price at which the quantity demanded by consumers equals

12152-474: The quantity of labor employed and the price of labor (the wage rate) depends on the demand for labor (from employers for production) and supply of labor (from potential workers). Labor economics examines the interaction of workers and employers through such markets to explain patterns and changes of wages and other labor income, labor mobility , and (un)employment, productivity through human capital , and related public-policy issues. Demand-and-supply analysis

12276-433: The quantity supplied by producers. This price results in a stable economic equilibrium . Prices and quantities have been described as the most directly observable attributes of goods produced and exchanged in a market economy . The theory of supply and demand is an organizing principle for explaining how prices coordinate the amounts produced and consumed. In microeconomics, it applies to price and output determination for

12400-429: The same utility. 4. The utility function exhibits a non-diminishing marginal rate of substitution: The utility function is not convex, and indeed the demand is not continuous: when p 1 < p 2 {\displaystyle p_{1}<p_{2}} , the consumer demands only product 1, and when p 2 < p 1 {\displaystyle p_{2}<p_{1}} ,

12524-412: The scope and method of economics, emanating from that definition. A body of theory later termed "neoclassical economics" formed from about 1870 to 1910. The term "economics" was popularised by such neoclassical economists as Alfred Marshall and Mary Paley Marshall as a concise synonym for "economic science" and a substitute for the earlier " political economy ". This corresponded to the influence on

12648-401: The short or long run, is a standard exercise in applied economics . Economic theory may also specify conditions such that supply and demand through the market is an efficient mechanism for allocating resources. Market structure refers to features of a market, including the number of firms in the market, the distribution of market shares between them, product uniformity across firms, how easy it

12772-486: The so-called Lucas critique and the presentation of real business cycle models . During the 1980s, a group of researchers appeared being called New Keynesian economists , including among others George Akerlof , Janet Yellen , Gregory Mankiw and Olivier Blanchard . They adopted the principle of rational expectations and other monetarist or new classical ideas such as building upon models employing micro foundations and optimizing behaviour, but simultaneously emphasised

12896-444: The source of the word economy. Joseph Schumpeter described 16th and 17th century scholastic writers, including Tomás de Mercado , Luis de Molina , and Juan de Lugo , as "coming nearer than any other group to being the 'founders' of scientific economics" as to monetary , interest , and value theory within a natural-law perspective. Two groups, who later were called "mercantilists" and "physiocrats", more directly influenced

13020-472: The standard budget set. x ∗ ( p , I ) {\displaystyle x^{*}(p,I)} is called a correspondence because in general it may be set-valued - there may be several different bundles that attain the same maximum utility. In some cases, there is a unique utility-maximizing bundle for each price and income situation; then, x ∗ ( p , I ) {\displaystyle x^{*}(p,I)}

13144-406: The state or commonwealth with a revenue for the publick services. Jean-Baptiste Say (1803), distinguishing the subject matter from its public-policy uses, defined it as the science of production, distribution, and consumption of wealth . On the satirical side, Thomas Carlyle (1849) coined " the dismal science " as an epithet for classical economics , in this context, commonly linked to

13268-449: The study of a single rational and utility maximizing individual. To economists, rationality means an individual possesses stable preferences that are both complete and transitive . The technical assumption that preference relations are continuous is needed to ensure the existence of a utility function . Although microeconomic theory can continue without this assumption, it would make comparative statics impossible since there

13392-408: The subject of mathematical methods used in the natural sciences . Neoclassical economics systematically integrated supply and demand as joint determinants of both price and quantity in market equilibrium, influencing the allocation of output and income distribution. It rejected the classical economics' labour theory of value in favour of a marginal utility theory of value on the demand side and

13516-402: The subject or different views among economists. Scottish philosopher Adam Smith (1776) defined what was then called political economy as "an inquiry into the nature and causes of the wealth of nations", in particular as: a branch of the science of a statesman or legislator [with the twofold objectives of providing] a plentiful revenue or subsistence for the people ... [and] to supply

13640-471: The subject": Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. Robbins described the definition as not classificatory in "pick[ing] out certain kinds of behaviour" but rather analytical in "focus[ing] attention on a particular aspect of behaviour, the form imposed by the influence of scarcity ." He affirmed that previous economists have usually centred their studies on

13764-822: The subsequent development of the subject. Both groups were associated with the rise of economic nationalism and modern capitalism in Europe. Mercantilism was an economic doctrine that flourished from the 16th to 18th century in a prolific pamphlet literature, whether of merchants or statesmen. It held that a nation's wealth depended on its accumulation of gold and silver. Nations without access to mines could obtain gold and silver from trade only by selling goods abroad and restricting imports other than of gold and silver. The doctrine called for importing inexpensive raw materials to be used in manufacturing goods, which could be exported, and for state regulation to impose protective tariffs on foreign manufactured goods and prohibit manufacturing in

13888-479: The supply side of the market, some factors of production are described as (relatively) variable in the short run , which affects the cost of changing output levels. Their usage rates can be changed easily, such as electrical power, raw-material inputs, and over-time and temp work. Other inputs are relatively fixed , such as plant and equipment and key personnel. In the long run , all inputs may be adjusted by management . These distinctions translate to differences in

14012-467: The term "microeconomics" in a published article was from Pieter de Wolff in 1941, who broadened the term "micro-dynamics" into "microeconomics". Consumer demand theory relates preferences for the consumption of both goods and services to the consumption expenditures; ultimately, this relationship between preferences and consumption expenditures is used to relate preferences to consumer demand curves . The link between personal preferences, consumption and

14136-977: The total of economic activity, dealing with the issues of growth , inflation , and unemployment —and with national policies relating to these issues. Microeconomics also deals with the effects of economic policies (such as changing taxation levels) on microeconomic behavior and thus on the aforementioned aspects of the economy. Particularly in the wake of the Lucas critique , much of modern macroeconomic theories has been built upon microfoundations —i.e., based upon basic assumptions about micro-level behavior. Microeconomic study historically has been performed according to general equilibrium theory, developed by Léon Walras in Elements of Pure Economics (1874) and partial equilibrium theory, introduced by Alfred Marshall in Principles of Economics (1890). Microeconomic theory typically begins with

14260-504: The utility is held constant along the demand curve. When the marginal utility of income is constant, or its value is the same across individuals within a market demand curve, generating net benefits of purchased units, or consumer surplus is possible through adding up of demand prices. In the following examples, there are two commodities, 1 and 2. 1. The utility function has the Cobb–Douglas form : The constrained optimization leads to

14384-472: The utility. Then x 1 {\displaystyle x_{1}} and x 2 {\displaystyle x_{2}} are equally preferred. By definition of strict convexity, the mixed bundle 0.5 x 1 + 0.5 x 2 {\displaystyle 0.5x_{1}+0.5x_{2}} is strictly better than x 1 , x 2 {\displaystyle x_{1},x_{2}} . But this contradicts

14508-463: The value, or marginal utility , to consumers for that unit. It measures what the consumer would be prepared to pay for that unit. The corresponding point on the supply curve measures marginal cost , the increase in total cost to the supplier for the corresponding unit of the good. The price in equilibrium is determined by supply and demand. In a perfectly competitive market , supply and demand equate marginal cost and marginal utility at equilibrium. On

14632-467: The war is not winnable or if the expected costs outweigh the benefits, the deciding actors (assuming they are rational) may never go to war (a decision ) but rather explore other alternatives. Economics cannot be defined as the science that studies wealth, war, crime, education, and any other field economic analysis can be applied to; but, as the science that studies a particular common aspect of each of those subjects (they all use scarce resources to attain

14756-505: The word Oikos , the Greek word from which the word economy derives, was used for issues regarding how to manage a household (which was understood to be the landowner, his family, and his slaves ) rather than to refer to some normative societal system of distribution of resources, which is a more recent phenomenon. Xenophon , the author of the Oeconomicus , is credited by philologues for being

14880-460: The work of Karl Marx . The first volume of Marx's major work, Das Kapital , was published in 1867. Marx focused on the labour theory of value and theory of surplus value . Marx wrote that they were mechanisms used by capital to exploit labour. The labour theory of value held that the value of an exchanged commodity was determined by the labour that went into its production, and the theory of surplus value demonstrated how workers were only paid

15004-518: Was introduced in 1933 by the Norwegian economist Ragnar Frisch , the co-recipient of the first Nobel Memorial Prize in Economic Sciences in 1969. However, Frisch did not actually use the word "microeconomics", instead drawing distinctions between "micro-dynamic" and "macro-dynamic" analysis in a way similar to how the words "microeconomics" and "macroeconomics" are used today. The first known use of

15128-421: Was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. The Reverend Thomas Robert Malthus (1798) used the concept of diminishing returns to explain low living standards. Human population , he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of

15252-892: Was productive. Smith discusses potential benefits of specialisation by division of labour , including increased labour productivity and gains from trade , whether between town and country or across countries. His "theorem" that "the division of labor is limited by the extent of the market" has been described as the "core of a theory of the functions of firm and industry " and a "fundamental principle of economic organization." To Smith has also been ascribed "the most important substantive proposition in all of economics" and foundation of resource-allocation theory—that, under competition , resource owners (of labour, land, and capital) seek their most profitable uses, resulting in an equal rate of return for all uses in equilibrium (adjusted for apparent differences arising from such factors as training and unemployment). In an argument that includes "one of

15376-437: Was recognised as well as the traditional Keynesian insistence that fiscal policy could also play an influential role in affecting aggregate demand . Methodologically, the synthesis led to a new class of applied models, known as dynamic stochastic general equilibrium or DSGE models, descending from real business cycles models, but extended with several new Keynesian and other features. These models proved useful and influential in

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