Contents
Microeconomics
Rationale
Microeconomics (or price theory) is a branch of economics that studies how individuals, households, and firms make decisions to allocate limited resources,[1] typically in markets where goods or services are being bought and sold.
Microeconomics examines how these decisions and behaviours affect 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]
Macroeconomics, on the other hand, involves the "sum total of economic activity, dealing with the issues of growth, inflation, and unemployment and with national economic policies relating to these issues"[4] and the effects of government actions (e.g., changing taxation levels) on them.[5] Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon 'microfoundations' — i.e. based upon basic assumptions about micro-level behaviour.
- Overview
- Assumptions and definitions
- Modes of operation
- Market failure
- Opportunity cost
- Applied 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
Today's Videos
- Connect with us on http://www.youtube.com/finntrack
- Google's Play lists
Teaching and Learning Resources
Preliminaries. The Basics of Supply and Demand.Consumer Behavior
In economics, supply and demand describe market relations between prospective sellers and buyers of a good. The supply and demand model determines price and quantity sold in the market. The model is fundamental in microeconomic analysis of buyers and sellers and of their interactions in a market. It is also used as a point of departure for other economic models and theories. The model predicts that in a competitive market, price will function to equalize the quantity demanded by consumers and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity. The model incorporates other factors changing such equilibrium as reflected in a shift of demand or supply.
- "Marshallian Cross Diagrams and Their Uses before Alfred Marshall: The Origins of Supply and Demand Geometry"
- Supply and Demand book by Hubert D. Henderson at Project Gutenberg.
- Price Theory and Applications by Steven E. Landsburg ISBN 0-538-88206-9
- An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith, 1776 [1]
- By what is the price of a commodity determined?, a brief statement of Karl Marx's rival account [2]
- The Economic Motivation of Open Source Software: Stakeholder Perspectives, Dirk Riehle, 2007 [3]
Individual and Market Demand. Choice Under Uncertainty. Production
Tutorials
Readings
Manufacturing is the use of machines, tools and labor to make things for use or sale. Also it can be used for selling things. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale. Such finished goods may be used for manufacturing other, more complex products, such as household appliances or automobiles, or sold to wholesalers, who in turn sell them to retailers, who then sell them to end users - the "consumers".
Manufacturing takes turns under all types of economic systems. In a free market economy, manufacturing is usually directed toward the mass production of products for sale to consumers at a profit. In a collectivist economy, manufacturing is more frequently directed by the state to supply a centrally planned economy. In free market economies, manufacturing occurs under some degree of government regulation.
Modern manufacturing includes all intermediate processes required for the production and integration of a product's components. Some industries, such as semiconductor and steel manufacturers use the term fabrication instead.
The manufacturing sector is closely connected with engineering and industrial design. Examples of major manufacturers in the North America include General Motors Corporation, General Electric, and Pfizer. Examples in Europe include Volkswagen Group, Siemens, and Michelin. Examples in Asia include Toyota, Samsung, and Bridgestone.
- History and development
- Economics of manufacturing
- Manufacturing and investment around the world
- Taxonomy of manufacturing processes
- Manufacturing categories
- Theories
- Control
- Cato Institute article:Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade
- How Everyday Things Are Made: video presentations.
- TIME Magazine article on American manufacturing's global effectiveness
- Grant Thornton IBR 2008 Manufacturing industry focus
- Process vs. Discrete Manufacturing Summary
The Cost of Production. Profit Maximization and Competitive Supply.The Analysis of Competitive Markets
Tutorials
- The Cost of Production
- Profit Maximization and Competitive Supply
- The Analysis of Competitive Markets
Readings
In economics, the cost-of-production theory of value is the theory that the price of an object is determined by the sum of the cost of the resources that went into making it. The cost can be composed of the cost of any of the factors of production including labour, taxation, capital, land, or technology.
The theory makes the most sense under assumptions of constant returns to scale and the existence of just one non-produced factor of production. These are the assumptions of the so-called non-substitution theorem. Under these assumptions, the long run price of a commodity is equal to the sum of the cost of the inputs into that commodity, including interest charges.
Historically, the most well known proponent of such theories is probably Adam Smith. Piero Sraffa, in his introduction to the first volume of the "Collected Works of David Ricardo", referred to Adam Smith's adding up theory. Smith contrasted natural prices with market prices. Smith theorized that market prices would tend towards natural prices, where outputs would be at what he characterized as the "level of effectual demand". At this level, Smith's natural prices of commodities are the sum of the natural rates of wages, profits, and rent that must be paid for inputs into production. (Smith is ambiguous about whether rent is price-determining or price determined. The latter view is the consensus of later classical economists, with the Ricardo-Malthus-West theory of rent.)
David Ricardo mixed such cost of production theory of prices with the labor theory of value, as that latter theory was understood by Eugen von Bohm-Bawerk and others. This is the theory that prices tend toward proportionality to the socially necessary labor embodied in a commodity. Ricardo sets this theory at the start of the first chapter of his "Principles of Political Economy and Taxation". Ricardo also refutes the labor theory of value in later sections of that chapter. This refutation leads to what later became known as the transformation problem. Karl Marx later takes up that theory in the first volume of "Capital", while indicating that he is quite aware that the theory is untrue at lower levels of abstraction. This has led to all sorts of arguments over what both David Ricardo and Karl Marx "really meant". Nevertheless, it seems undeniable that all the major classical economics and Marx explicitly rejected the labor theory of price ([1]).
A somewhat different theory of cost-determined prices is provided by the "neo-Ricardian school" of Piero Sraffa and his followers.
The Polish economist Michał Kalecki [2] distinguished between sectors with "cost-determined prices" (such as manufacturing and services) and those with "demand-determined prices" (such as agriculture and raw material extraction).
One might think of this theory as equivalent to modern theories of markup-pricing, full-cost pricing, or administrative pricing. Ever since Hall and Hitch, economists have found that the evidence gathered in surveys of businessmen support such theories.
Most contemporary economists probably accept neoclassical economics or mainstream economics. The non-substitution theorem is presented in graduate level microeconomics textbooks as a theorem of mainstream economics. Also many mainstream economists think they can justify theories of full-cost pricing within their theory. The majority of mainstream economists would probably then accept this theory as an element in their theory which does not give adequate attention to issues of consumer demand and marginal utility.
In economics, profit maximization is the (short run) process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenue–total cost method relies on the fact that profit equals revenue minus cost, and the marginal revenue–marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost.
- Profit Maximization in Perfect Competition by Fiona Maclachlan, Wolfram Demonstrations Project.
Market Power: Monopoly and Monopsony. Pricing with Market Power. Monopolistic Competition and Oligopoly
Tutorials
- Market Power: Monopoly and Monopsony Pricing with Market Power
- Monopolistic Competition and Oligopoly
Readings
Monopolistic competition is a form of imperfect competition where many competing producers sell products that are differentiated from one another (that is, the products are substitutes, but, with differences such as branding, are not exactly alike). In monopolistic competition firms can behave like monopolies in the short-run, including using market power to generate profit. In the long-run, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like perfect competition where firms cannot gain economic profit. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition was Edward Hastings Chamberlin in his pioneering book on the subject Theory of Monopolistic Competition (1933).[1] Joan Robinson also receives credit as an early pioneer on the concept.
Monopolistically competitive markets have the following characteristics:
- There are many producers and many consumers in a given market, and no business has total control over the market price.
- Consumers perceive that there are non-price differences among the competitors' products.
- There are few barriers to entry and exit[2].
- Producers have a degree of control over price.
The long-run characteristics of a monopolistically competitive market are almost the same as in perfect competition, with the exception of monopolistic competition having heterogeneous products, and that monopolistic competition involves a great deal of non-price competition (based on subtle product differentiation). A firm making profits in the short run will break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This gives the amount of influence over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.
- Major characteristics
- Product differentiation
- Many firms
- Free entry and exit
- Independent decision making
- Market power
- Perfect information
- Inefficiency
- Problems
- Examples
- Notes
In Economics, an oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι (oligoi) "few" + πωλειν (polein) "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.
- Description
- Characteristics
- Modeling
- Dominant firm model
- Cournot-Nash model
- Bertrand model
- The kinked demand curve model
- Examples
- Demand curve
- Big Business
- Collusion
- Duopoly
- Cartel
- Market form
- Monopsony
- Monopoly
- Oligopolistic reaction
- Oligopsony
- Perfect competition
- Prisoner's Dilemma
- Simulations and games in economics education
- Swing producer
- Notes
- Microeconomics by Elmer G. Wiens: Online Interactive Models of Oligopoly, Differentiated Oligopoly, and Monopolistic Competition
- Vives, X. (1999). Oligopoly pricing, MIT Press, Cambridge MA. (A comprehensive work on oligopoly theory)
- Oligopoly Watch A blog on current oligopoly issues from a business and social perspective
- Simulations in Managerial/Business Economics
- Simulations in Principles of Economics
Game Theory and Competitive Strategy. Markets for Factor Inputs.Investments, Time, and Capital Markets
Tutorials
- Game Theory and Competitive Strategy
- Markets for Factor Inputs
- Investments, Time, and Capital Markets.
Readings
Game theory is a branch of applied mathematics that is used in the social sciences, most notably in economics, as well as in biology (most notably evolutionary biology and ecology), engineering, political science, international relations, computer science, and philosophy. Game theory attempts to mathematically capture behavior in strategic situations, in which an individual's success in making choices depends on the choices of others. While initially developed to analyze competitions in which one individual does better at another's expense (zero sum games), it has been expanded to treat a wide class of interactions, which are classified according to several criteria. Today, "game theory is a sort of umbrella or 'unified field' theory for the rational side of social science, where 'social' is interpreted broadly, to include human as well as non-human players (computers, animals, plants)" (Aumann 1987).
Traditional applications of game theory attempt to find equilibria in these games. In an equilibrium, each player of the game has adopted a strategy that they are unlikely to change. Many equilibrium concepts have been developed (most famously the Nash equilibrium) in an attempt to capture this idea. These equilibrium concepts are motivated differently depending on the field of application, although they often overlap or coincide. This methodology is not without criticism, and debates continue over the appropriateness of particular equilibrium concepts, the appropriateness of equilibria altogether, and the usefulness of mathematical models more generally.
Although some developments occurred before it, the field of game theory came into being with the 1944 book Theory of Games and Economic Behavior by John von Neumann and Oskar Morgenstern. This theory was developed extensively in the 1950s by many scholars. Game theory was later explicitly applied to biology in the 1970s, although similar developments go back at least as far as the 1930s. Game theory has been widely recognized as an important tool in many fields. Eight game theorists have won the Nobel Memorial Prize in Economic Sciences, and John Maynard Smith was awarded the Crafoord Prize for his application of game theory to biology.
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General Equilibrium and Economic Efficiency. Markets with Asymmetric Information. Externalities and Public Goods
Tutorials
- General Equilibrium and Economic Efficiency
- Markets with Asymmetric Information
- Externalities and Public Goods
Readings
Economic efficiency is used to refer to a number of related concepts. It is the using of resources in such a way as to maximize the production of goods and services.[1] One economic system is more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In absolute terms, a system can be called economically efficient if:
1. No one can be made better off without making someone else worse off. 2. More output cannot be obtained without increasing the amount of inputs. 3. Production proceeds at the lowest possible per-unit cost. These definitions of absolute efficiency are not equivalent, but they are all encompassed by the idea that nothing more can be achieved given the resources available.
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In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry. Examples of this problem are adverse selection and moral hazard. Most commonly, information asymmetries are studied in the context of principal-agent problems.
In 2001, the Nobel Prize in Economics was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz "for their analyses of markets with asymmetric information."[1]
"The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2001" – Official Prize announcement by the Nobel Foundation, nobelprize.org, October 2001. Accessed November 12, 2007. (Related links.) |
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Recommended Text
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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. |
Resources
