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Microeconomics
Rationale
Economics, as a social science, studies the production, distribution, and consumption of resources.
The word "economics" is from the Greek words οἶκος [oikos], meaning "family, household, estate," and νόμος [nomos], or "custom, law," and hence literally means "household management" or "management of the state." An economist is a person using economic concepts and data in the course of employment.
The field may be divided in several different ways, most popularly microeconomics (at the level of individual choices) vs macroeconomics (aggregate results). It may also be divided in positive (descriptive) vs. normative, mainstream vs. heterodox, and by subfield. Economics has many direct applications in business, personal finance, and government. Theories developed as a part of economic theory have also been applied to non-monetary choices in fields as diverse as criminal behaviour, scientific research, death, politics, health, education, family, dating, etc. This is allowed because economics is fundamentally about human decision making.
There has been an increasing trend for ideas and methods from economics to be applied in wider contexts. Economic analysis focuses on decision making, and has been applied, with varying degrees of success, to various fields where people are faced with alternatives – education, marriage, health, law, crime, war, and religion. This has sometimes been described as economic imperialism by critics. Gary Becker at the University of Chicago was one of the important pioneers in this imperialistic endeavour. In a collection of his early influential articles, he advanced the view that economics is not to be defined by its subject matters, but should be defined as an approach of explaining human behaviours.
Many mainstream economists feel that the combination of rigorous theory and empirical data ultimately gives the best understanding of real-world phenomena. Towards this end, economics has undergone a massive formalization of its ideas, concepts and methods – according to critics, sometimes to the detriment of its real-world relevance. This creates a tension in the profession on what economists should do. The traditional Chicago School, with its emphasis on economics being an empirical science aimed at explaining real-world phenomena, has insisted on the powerfulness of price theory as the tool of analysis. On the other hand, some economic theorists have formed the view that a consistent economic theory may be useful even if at present no real world economy bears out its prediction.
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Teaching and Learning Resources
Introduction
- Introduction to Economics: The Economic Problem, Opportunity Cost, Production Possibility, Frontiers
- What is Economics?
- Basics
- Definition
Microeconomics is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold.
Microeconomics examines these decisions and behaviours. effects on the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the supply and demand of goods and services.[2] [3] Microeconomics has been called “the bottom-up view of the economy” [4] , or “how people deal with money, time, and resources.” [5]
Macroeconomics studies the “sum total of economic activity, dealing with the issues of growth, inflation, and unemployment and with national economic policies relating to these issues” [6] and the effects of government actions (e.g., changing taxation levels) on them. [7]
- Overview
- Assumptions and definitions
- Modes of Operation
- Market Failure
- Opportunity cost
- Applied microeconomics
- Taxonomy of Microeconomics
- References
- Further Reading
- AmosWEB GLOSS*arama - online economics dictionary
- A free textbook of microeconomics, supplemented by software and data
- BasicEconomics.info - Introduction to Economics - main subject matters relating to the study of microeconomics
- Economic Problem: Key Questions
- Elasticity
Activities
Demand, supply, elasticity and price
Tutorials and Workshops
- Markets in Action
- Basics of Supply and Demand
- Supply and Demand: Theory
- Supply and Demand: Practice
- Elasticity
- Choice Under Uncertainty
- Demand, Supply, and Market Equilibrium
- Pricing with Market Power
Readings
In microeconomic theory, the partial equilibrium Supply and Demand economic model originally developed by Antoine Augustin Cournot (published in a book in 1838) and thirty years later broadly publicized by Alfred Marshall attempts to describe, explain, and predict changes in the price and quantity of goods sold in competitive markets. The model is only a first approximation for describing an imperfectly competitive market. It formalizes the theories used by some economists before Marshall and is one of the most fundamental models of some modern economic schools, widely used as a basic building block in a wide range of more detailed economic models and theories. The theory of supply and demand is important for some economic schools' understanding of a market economy in that it is an explanation of the mechanism by which many resource allocation decisions are made. However, unlike general equilibrium models, supply schedules in this partial equilibrium model are fixed by unexplained forces.
In economics, Economic Equilibrium or market equilibrium refers to a condition where the market "clears": which is when the market for a product has attained the price where the amount supplied of a certain product equals the quantity demanded.
See also
- Economic Calculation Debate
- Equilibrium, Dynamic equilibrium
- General equilibrium
- Equilibrium Price and Quantity
- Backward Bending Supply of Labour Curve
- Demand
- Aggregate Demand
- Market Equilibrium - Demand and Supply
- The Model of Supply and Demand
Activities
Economies of Scale
- Economies of Scale
- Horizontal Boundaries of the Firm: Economies of Scale and Scope
- Economies
of Scale
- Production
Readings
In economics, Returns to Scale and Economies of Scale are related terms that describe what happens as the scale of production increases. They are different terms and are not to be used interchangeably.
Game Theory is a branch of applied mathematics and economics that studies situations where players choose different actions in an attempt to maximize their returns. First developed as a tool for understanding economic behaviour and then by the RAND Corporation to define nuclear strategies, game theory is now used in many diverse academic fields, ranging from biology and psychology to sociology and philosophy. Beginning in the 1970s, game theory has been applied to animal behaviour, including species' development by natural selection. Because of games like the prisoner's dilemma, in which rational self-interest hurts everyone, game theory has been used in political science, ethics and philosophy. Finally, game theory has recently drawn attention from computer scientists because of its use in artificial intelligence and cybernetics.
In addition to its academic interest, game theory has received attention in popular culture. A Nobel Prize-winning game theorist, John Nash, was the subject of the 1998 biography by Sylvia Nasar and the 2001 film A Beautiful Mind. Game theory was also a theme in the 1983 film WarGames. Several game shows have adopted game theoretic situations, including Friend or Foe? and to some extent Survivor. The character Jack Bristow on the television show Alias is one of the few fictional game theorists in popular culture. [1]
Although similar to decision theory, game theory studies decisions that are made in an environment where various players interact. In other words, game theory studies choice of optimal behaviour when costs and benefits of each option are not fixed, but depend upon the choices of other individuals.
- Notes
- References
- Yale Economic Review: The Rise of Game Theory.
- Kesten Green's Conflict Forecasting - See Papers for evidence on the accuracy of forecasts from game theory and other methods.
- Paul Walker: History of Game Theory Page.
- David Levine: Game Theory. Papers, Lecture Notes and much more stuff.
- Alvin Roth: Game Theory and Experimental Economics page - Comprehensive list of links to game theory information on the Web
- Mike Shor: Game Theory .net - Lecture notes, interactive illustrations and other information.
- Jim Ratliff's Graduate Course in Game Theory (lecture notes).
- Valentin Robu's software tool for simulation of bilateral negotiation (bargaining)
- Don Ross: Review Of Game Theory.
- Bruno Verbeek and Christopher Morris: Game Theory and Ethics
- Chris Yiu's Game Theory Lounge
- Elmer G. Wiens: Game Theory - Introduction, worked examples, play online two-person zero-sum games.
- Marek M. Kaminski: Game Theory and Politics - syllabuses and lecture notes for game theory and political science.
- Web sites on game theory and social interactions
Activities
Questions
Market Structures
- Introduction to Markets
- Market Structures 1
- Market Structures 2
- Market Structures and Output-pricing Decisions
Readings
In economics, Market Structure describes the state of a market with respect to competition.
There are two kinds of market structures that are usually discussed: perfectly competitive market structure and imperfectly competitive market structure. Perfectly competitive market structure is an ideal state of a market in which the competition amongst the buyers and sellers is likely to be perfectly balanced. The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate the market conditions.
Monopolistic competition is a common market form. Many markets can be considered as monopolistically competitive, often including the markets for restaurants, books, clothing, films and service industries in large cities.
Monopolistic Competition
Monopolistically competitive markets have the following characteristics:
1. There are many producers and many consumers in a given market.
2. Consumers have clearly defined preferences and sellers attempt to differentiate their products from those of their competitors; the goods and services are heterogeneous.
3. There are few barriers to entry and exit[1].
The characteristics of a monopolistically competitive market are almost exactly the same as in perfect competition, with the exception of heterogeneous products, and that monopolistic competition involves a great deal of non-price competition (based on subtle product differentiation). This gives the company a certain amount of influence over the market; it can raise its prices without losing all the customers, owing to brand loyalty. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.
A monopolistically competitive firm acts like a monopolist in that the firm is able to influence the market price of its product by altering the rate of production of the product. Unlike in perfect competition, monopolistically competitive firms produce products that are not perfect substitutes. As such, brand X's product, which is different (or at least perceived to be different) from all other brands' products, is available from only a single producer. In the short-run, the monopolistically competitive firm can exploit the heterogeneity of its brand so as to reap positive economic profit (i.e. a rate of return greater than the rate required to compensate debt and equity holders for the risk of investing in the firm). In the long-run, however, whatever distinguishing characteristic that enables one firm to reap monopoly profits will be duplicated by competing firms. This competition will drive the price of the product down and, in the long-run, the monopolistically competitive firm will make zero economic profit (i.e. a rate of return equal to the rate required to compensate debt and equity holders for the risk of investing in the firm). |
Short-run
equilibrium of the firm under monopolistic competition |
Unlike in perfect competition, the monopolistically competitive firm does not produce at the lowest attainable average total cost. Instead, the firm produces at an inefficient output level, reaping more in additional revenue than it incurs in additional cost versus the efficient output level.
Competition
Tutorials
- The Analysis of Competitive Markets
- The Market Mechanism
- Competition in Markets
- Economics of Regulation
Readings
Competition is the act of striving against another force for the purpose of
achieving dominance or attaining a reward or goal, or out of a biological
imperative such as survival. Competition is a term widely used in
several fields, including biochemistry, business,
ecology, economics, music, politics,
and sports.
Competition may be between two or more forces, life forms, agents,
systems, individuals, or groups, depending on the context in which
the term is used.
Competition may yield various results to the participants, including both intrinsic and extrinsic rewards. Some, such as survival advantages, including favourable territory, are intrinsic biological factors that occur as a result of ecological competition between organisms. Others, such as competition in business and politics, involve competition between humans. In addition, extrinsic symbols, such as trophies, plaques, ribbons, prizes, or laudations, may be given to the winner(s). Such symbolic rewards are commonly used wherever the rewards inherent in the competition are primarily intrinsic, such as at human sporting and academic competitions.
The Latin root for the verb "to compete" is "competere" which means "to seek together" or "to strive together" from dictionary.com
- Sizes and levels of competition
- Consequences of competition
- Competition in different fields
- The study of competition
- Further
reading
- Kohn, Alfie (1986). No Contest – The Case Against Competition. Boston New York London: Houghton Mifflin Co.. ISBN 0-395-63125-4.
- Basic Principles of Oligopolies
What is a natural monopoly? Subadditivity is not the same as economies of scale.
- Competition Commission, UK
- Guide to European Competition Law
- Barrier's to Entry
- European Commission - Competition
- Between the sheets
BizEd has a variety of downloadable spreadsheets and supporting materials to help use them. There is also a general introduction on using spreadsheets in economics, business and accounting. The spreadsheets are in Microsoft Excel format and require Microsoft Excel 97 or above. The following spreadsheets and supporting materials are available:
Duncan Williamson:
Richard Green, University of Hull:
- Working with lines
- Market with tax
- Consumer choice
- Income and substitution effects
- Products and costs
- Competitive firm
- Competitive industry
- Monopoly
Brian Watson, Plymouth College of Further Education
Activities
- Market Structure - Oligopoly - How far does the theory of oligopoly match with the reality?
- The Market Mechanism
- Contestable Markets
Transaction Cost Economics
Tutorials
- Transaction Cost Economies and the Boundaries of the Firm
- Transaction Cost Economics in the Insurance Industry
Readings
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal. Or consider buying a banana from a store; to purchase the banana, your costs will be not only the price of the banana itself, but also the energy and effort it requires to find out which of the various banana products you prefer, where to get them and at what price, the cost of travelling from your house to the store and back, the time waiting in line, and the effort of the paying itself; the costs above and beyond the cost of the banana are the transaction costs. When rationally evaluating a potential transaction, it is important to consider transaction costs that might prove significant.
A number of kinds of transaction cost have come to be known by particular names.
Search and information costs are costs such as those incurred in determining that the required good is available on the market, who has the lowest price, etc.
Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. In game theory this is analysed for instance in the game of chicken.
Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.
The term "transaction cost" is frequently thought to have been coined by Ronald Coase, who used it to develop a theoretical framework for predicting when certain economic tasks would be performed by firms, and when they would be performed on the market. However, the term is actually absent from his early work up to the 1970s. While he did not coin the specific term, Coase indeed discussed "costs of using the price mechanism" in his 1937 paper The Nature of the Firm, where he first discusses the concept of transaction costs. The term "Transaction Costs" itself can instead be traced back to the monetary economics literature of the 1950s, and does not appear to have been consciously 'coined' by any particular individual [1].
Arguably, transaction cost reasoning became most widely known through Oliver E. Williamson's Transaction Cost Economics. Today, transaction cost economics is used to explain a number of different behaviours. Often this involves considering as "transactions" not only the obvious cases of buying and selling, but also day-to-day emotional interactions, informal gift exchanges, etc.
The determinants of transaction costs are according to Williamson frequency, specificity, uncertainty, limited rationality, and opportunistic behaviour.
At least two definitions of the phrase "transaction cost" are commonly used in literature. Transaction costs have been broadly defined by Steven N. S. Cheung as any costs that are not conceivable in a "Robinson Crusoe economy" -- in other words, any costs that arise due to the existence of institutions. To Cheung, "transaction costs", if the term is not so popular in economics literatures, should be called "institutional costs" [2] [3]. But many economists seem to restrict the definition to exclude costs internal to an organization [4]. The latter definition parallels Coase's early analysis of "costs of the price mechanism" and the origins of the term as a market trading fee.
Starting with the broad definition, many economists then ask what kind of institutions (firms, markets, franchises, etc.) minimize the transaction costs of producing and distributing a particular good or service. Often these relationships are categorized by the kind of contract involved. This approach sometimes goes under the rubric of New Institutional Economics.
- IT's relationship to transaction costs
- Information Infrastructure's relationship to transaction costs
- References
Recommended Texts
 |
Fifth Edition Robert S. Pindyck and Daniel L. Rubinfeld, . Upper Saddle River, NJ: Prentice-Hall.
Check the availability and buy your books from our Bookshop.
|
 |
Economics,
6e Check the availability and buy your books from our Bookshop. |
 |
Economics, David Begg, Stanley Fischer and Rudiger Dornbusch, 6th Edition, McGraw-Hill Check the availability and buy your books from our Bookshop. |
 |
Statistics
for Business and Economics Check the availability and buy your books from our Bookshop. |
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