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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.
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.
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.
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.
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.
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.
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.
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.
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:
No
one can be made better off without making someone
else worse off.
More
output cannot be obtained without increasing the
amount of inputs.
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.
