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85-471: PPB can stand for: Production possibility boundary , a concept in economics Parts per billion , describing small values of miscellaneous dimensionless quantities Portland Police Bureau , in Portland, Oregon, U.S. Partido Progressista Brasileiro , former name of Progressive Party of Brazil Pleuropulmonary blastoma , a type of lung cancer PPB Group ,

170-561: 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

255-546: A Malaysian company See also [ edit ] Point Pleasant Beach, New Jersey List of Pirate Parties Topics referred to by the same term [REDACTED] This disambiguation page lists articles associated with the title PPB . If an internal link led you here, you may wish to change the link to point directly to the intended article. Retrieved from " https://en.wikipedia.org/w/index.php?title=PPB&oldid=1114099492 " Category : Disambiguation pages Hidden categories: Short description

340-451: A PPF is commonly drawn as concave to the origin to represent increasing opportunity cost with increased output of a good. Thus, MRT increases in absolute size as one moves from the top left of the PPF to the bottom right of the PPF. The marginal rate of transformation can be expressed in terms of either commodity. The marginal opportunity costs of guns in terms of butter is simply the reciprocal of

425-406: 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

510-463: 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

595-399: A good determines its opportunity cost (say from mass production methods or specialization of labor ). From a starting point on the frontier, if there is no increase in productive resources, increasing the production of a first good entails decreasing the production of a second, because resources must be transferred to the first and away from the second. Points along the curve describe

680-455: A linear PPF: if there was only one factor of production to consider or if the factor intensity ratios in the two sectors were constant at all points on the production-possibilities curve. With varying returns to scale, however, it may not be entirely linear in either case. With economies of scale , the PPF would curve inward, with the opportunity cost of one good falling as more of it is produced. Specialization in producing successive units of

765-467: 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

850-459: A point beneath the curve (such as A) indicates inefficiency, and a point beyond the curve (such as X) indicates impossibility. PPFs are normally drawn as bulging upwards or outwards from the origin ("concave" when viewed from the origin), but they can be represented as bulging downward (inwards) or linear (straight), depending on a number of assumptions. An outward shift of the PPC results from growth of

935-463: 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

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1020-815: 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"

1105-435: 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

1190-449: 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

1275-506: Is 4. The production-possibility frontier can be constructed from the contract curve in an Edgeworth production box diagram of factor intensity. The example used above (which demonstrates increasing opportunity costs, with a curve concave to the origin) is the most common form of PPF. It represents a disparity, in the factor intensities and technologies of the two production sectors. That is, as an economy specializes more and more into one product (such as moving from point B to point D ),

1360-444: 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

1445-409: 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,

1530-450: Is called the marginal rate of transformation ( MRT ). The slope defines the rate at which production of one good can be redirected (by reallocation of productive resources) into production of the other. It is also called the (marginal) "opportunity cost" of a commodity, that is, it is the opportunity cost of X in terms of Y at the margin. It measures how much of good Y is given up for one more unit of good X or vice versa. The shape of

1615-661: 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

1700-532: 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

1785-399: Is different from Wikidata All article disambiguation pages All disambiguation pages Production possibility boundary This tradeoff is usually considered for an economy , but also applies to each individual, household, and economic organization. One good can only be produced by diverting resources from other goods, and so by producing less of them. Graphically bounding

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1870-411: 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

1955-435: Is directly related to the shape of the curve (see below). If the shape of the PPF curve is a straight-line, the opportunity cost is constant as the production of different goods is changing. But, opportunity cost usually will vary depending on the start and end points. In Figure 7, producing 10 more packets of butter, at a low level of butter production, costs the loss of 5 guns (shown as a movement from A to B ). At point C ,

2040-435: 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

2125-415: 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

2210-404: 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

2295-435: 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

2380-667: 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

2465-493: Is operating on the PPF is said to be efficient , meaning that it would be impossible to produce more of one good without decreasing production of the other good. In contrast, if the economy is operating below the curve, it is said to be operating inefficiently because it could reallocate resources in order to produce more of both goods or some resources such as labor or capital are sitting idle and could be fully employed to produce more of both goods. For example, if one assumes that

2550-422: Is required. In the PPF, all points on the curve are points of maximum productive efficiency (no more output of any good can be achieved from the given inputs without sacrificing output of some good); all points inside the frontier (such as A ) can be produced but are productively inefficient ; all points outside the curve (such as X ) cannot be produced with the given, existing resources. Not all points on

2635-508: Is shown by a shift of the production-possibility frontier to the right. Conversely, a natural, military or ecological disaster might move the PPF to the left in response to a reduction in an economy's productive capability. Thus all points on or within the curve are part of the production set : combinations of goods that the economy could potentially produce. If the two production goods depicted are capital investment (to increase future production possibilities) and current consumption goods,

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2720-457: 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

2805-537: 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

2890-403: 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

2975-431: 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

3060-420: 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

3145-484: 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

3230-428: The marginal rate of transformation (slope of the frontier/opportunity cost of goods) is equal to all consumers' marginal rate of substitution . Similarly, not all Pareto efficient points on the frontier are Allocative efficient . Allocative efficient is only achieved when the economy produces at quantities that match societal preference. A PPF typically takes the form of the curve illustrated above. An economy that

3315-409: The production set for fixed input quantities, the PPF curve shows the maximum possible production level of one commodity for any given production level of the other, given the existing state of technology. By doing so, it defines productive efficiency in the context of that production set: a point on the frontier indicates efficient use of the available inputs (such as points B, D and C in the graph),

3400-481: 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

3485-402: The PPF shows the options open to an individual, household , or firm in a two-good world. By definition, each point on the curve is productively efficient, but, given the nature of market demand , some points will be more profitable than others. Equilibrium for a firm will be the combination of outputs on the PPF that is most profitable. From a macroeconomic perspective, the PPF illustrates

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3570-418: The PPF will shift inward if the labour force shrinks, the supply of raw materials is depleted, or a natural disaster decreases the stock of physical capital. However, most economic contractions reflect not that less can be produced but that the economy has started operating below the frontier, as typically, both labour and physical capital are underemployed , remaining therefore idle. In microeconomics ,

3655-692: 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 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

3740-422: 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

3825-424: 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

3910-479: The availability of inputs, such as physical capital or labour , or from technological progress in knowledge of how to transform inputs into outputs. Such a shift reflects, for instance, economic growth of an economy already operating at its full productivity (on the PPF), which means that more of both outputs can now be produced during the specified period of time without sacrificing the output of either good. Conversely,

3995-404: The available quantities of factors of production (materials, direct labor, and factory overhead). Only points on or within a PPF are actually possible to achieve in the short run. In the long run, if technology improves or if the supply of factors of production increases, the economy's capacity to produce both goods increases; if this potential is realized, economic growth occurs. That increase

4080-559: 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

4165-505: The capital-intensive good. Also a shift in the PPF could depict that there's an improvement in technology or good use of capital goods. Production-Possibility Frontier delineates the maximum amount/quantities of outputs (goods/services) an economy can achieve, given fixed resources ( factors of production ) and fixed technological progress. Points that are unattainable can be achieved through external trade and economic growth . Examples include importations of resources and technology, and

4250-411: 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

4335-513: 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

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4420-485: 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

4505-479: The curve are Pareto efficient , however; only in the case where the marginal rate of transformation is equal to all consumers' marginal rate of substitution and hence equal to the ratio of prices will it be impossible to find any trade that will make no consumer worse off. Any point that lies either on the production possibilities curve or to the left of it is said to be an attainable point : it can be produced with currently available resources. Points that lie to

4590-486: 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

4675-417: The economy is already close to its maximum potential butter output. To produce 10 more packets of butter, 50 guns must be sacrificed (as with a movement from C to D ). The ratio of gains to losses is determined by the marginal rate of transformation.' Microeconomics Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding

4760-482: The economy's available quantities of factors of production do not change over time and that technological progress does not occur, if the economy is operating on the PPF, production of guns would need to be sacrificed to produce more butter. If production is efficient, the economy can choose between combinations (points) on the PPF: B if guns are of interest, C if more butter is needed, D if an equal mix of butter and guns

4845-537: 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

4930-407: 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

5015-495: The higher the investment this year, the more the PPF would shift out in following years. Shifts of the curve can represent how technological progress that favors production possibilities of one good, say guns, more than the other shifts the PPF outwards more along the favored good's axis, "biasing" production possibilities in that direction. Similarly, if one good makes more use of say capital and if capital grows faster than other factors, growth possibilities might be biased in favor of

5100-415: The increase in the production of goods and services. Specifically, at all points on the frontier, the economy achieves productive efficiency : no more output of any good can be achieved from the given inputs without sacrificing output of some good. Some productive efficient points are Pareto efficient : impossible to find any trade that will make no consumer worse off. Pareto efficiency is achieved when

5185-651: The loss in gun production will be small. However, the cost of producing successive units of butter will increase as resources that are more and more specialized in gun production are moved into the butter industry. If opportunity costs are constant, a straight-line (linear) PPF is produced. This case reflects a situation where resources are not specialised and can be substituted for each other with no added cost. Products requiring similar resources (bread and pastry, for instance) will have an almost straight PPF and so almost constant opportunity costs. More specifically, with constant returns to scale, there are two opportunities for

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5270-424: The marginal opportunity cost of butter in terms of guns. If, for example, the (absolute) slope at point BB in the diagram is equal to 2, to produce one more packet of butter, the production of 2 guns must be sacrificed. If at AA , the marginal opportunity cost of butter in terms of guns is equal to 0.25, the sacrifice of one gun could produce four packets of butter, and the opportunity cost of guns in terms of butter

5355-401: 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

5440-414: 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

5525-536: 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

5610-433: The opportunity cost of producing that product increases, because we are using more and more resources that are less efficient in producing it. With increasing production of butter, workers from the gun industry will move to it. At first, the least qualified (or most general) gun workers will be transferred into making more butter, and moving these workers has little impact on the opportunity cost of increasing butter production:

5695-420: 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

5780-406: 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

5865-437: 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

5950-457: 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

6035-536: The production possibilities available to a nation or economy during a given period of time for broad categories of output. It is traditionally used to show the movement between committing all funds to consumption on the y -axis versus investment on the x -axis. However, an economy may achieve productive efficiency without necessarily being allocatively efficient . Market failure (such as imperfect competition or externalities ) and some institutions of social decision-making (such as government and tradition) may lead to

6120-416: The production possibilities curve. At any such point, more of one good can be produced only by producing less of the other. For an extensive discussion of various types of efficiency measures ( Farrell , Hyperbolic, Directional, Cost, Revenue, Profit, Additive, etc.) and their relationships, see Sickles and Zelenyuk (2019, Chapter 3). The slope of the production–possibility frontier (PPF) at any given point

6205-403: 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

6290-475: 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

6375-434: 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

6460-404: The right of the production possibilities curve are said to be unattainable because they cannot be produced using currently available resources. Points that lie strictly to the left of the curve are said to be inefficient , because existing resources would allow for production of more of at least one good without sacrificing the production of any other good. An efficient point is one that lies on

6545-402: 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

6630-449: 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

6715-479: 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

6800-469: 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

6885-980: 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

6970-399: The tradeoff between the goods. The sacrifice in the production of the second good is called the opportunity cost (because increasing production of the first good entails losing the opportunity to produce some amount of the second). Opportunity cost is measured in the number of units of the second good forgone for one or more units of the first good. In the context of a PPF, opportunity cost

7055-465: 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

7140-399: The wrong combination of goods being produced (hence the wrong mix of resources being allocated between producing the two goods) compared to what consumers would prefer, given what is feasible on the PPF. The two main determinants of the position of the PPF at any given time are the state of technology and management expertise (which are reflected in the available production functions ) and

7225-522: 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

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