Political economy is the study of production and trade and their relations with law and government. As a discipline, political economy originated in moral philosophy, in the 18th century, to explore the administration of states' wealth, with "political" signifying the Greek word polity and "economy" signifying the Greek word "okonomie"; the earliest works of political economy are attributed to the British scholars Adam Smith, Thomas Malthus, David Ricardo, although they were preceded by the work of the French physiocrats, such as François Quesnay and Anne-Robert-Jacques Turgot. In the late 19th century, the term "economics" began to replace the term "political economy" with the rise of mathematical modelling coinciding with the publication of an influential textbook by Alfred Marshall in 1890. Earlier, William Stanley Jevons, a proponent of mathematical methods applied to the subject, advocated economics for brevity and with the hope of the term becoming "the recognised name of a science".
Citation measurement metrics from Google Ngram Viewer indicate that use of the term "economics" began to overshadow "political economy" around 1910, becoming the preferred term for the discipline by 1920. Today, the term "economics" refers to the narrow study of the economy absent other political and social considerations while the term "political economy" represents a distinct and competing approach. Political economy, where it is not used as a synonym for economics, may refer to different things. From an academic standpoint, the term may reference Marxian economics, applied public choice approaches emanating from the Chicago school and the Virginia school. In common parlance, "political economy" may refer to the advice given by economists to the government or public on general economic policy or on specific economic proposals developed by political scientists. A growing mainstream literature from the 1970s has expanded beyond the model of economic policy in which planners maximize utility of a representative individual toward examining how political forces affect the choice of economic policies as to distributional conflicts and political institutions.
It is available as a stand-alone area of study in certain universities. Political economy meant the study of the conditions under which production or consumption within limited parameters was organized in nation-states. In that way, political economy expanded the emphasis of economics, which comes from the Greek oikos and nomos. Political economy was thus meant to express the laws of production of wealth at the state level, just as economics was the ordering of the home; the phrase économie politique first appeared in France in 1615 with the well-known book by Antoine de Montchrétien, Traité de l’economie politique. The French physiocrats were the first exponents of political economy, although the intellectual responses of Adam Smith, John Stuart Mill, David Ricardo, Henry George and Karl Marx to the physiocrats receives much greater attention; the world's first professorship in political economy was established in 1754 at the University of Naples Federico II in southern Italy. The Neapolitan philosopher Antonio Genovesi was the first tenured professor.
In 1763, Joseph von Sonnenfels was appointed a Political Economy chair at the University of Vienna, Austria. Thomas Malthus, in 1805, became England's first professor of political economy, at the East India Company College, Hertfordshire. In its contemporary meaning, political economy refers to different yet related approaches to studying economic and related behaviours, ranging from the combination of economics with other fields to the use of different, fundamental assumptions that challenge earlier economic assumptions: Political economy most refers to interdisciplinary studies drawing upon economics and political science in explaining how political institutions, the political environment, the economic system—capitalist, communist, or mixed—influence each other; the Journal of Economic Literature classification codes associate political economy with three sub-areas: the role of government and/or class and power relationships in resource allocation for each type of economic system. Much of the political economy approach is derived from public choice theory on the one hand and radical political economics on the other hand, both dating from the 1960s.
Public choice theory is a microfoundations theory, intertwined with political economy. Both approaches model voters and bureaucrats as behaving in self-interested ways, in contrast to a view, ascribed to earlier mainstream economists, of government officials trying to maximize individual utilities from some kind of social welfare function; as such and political scientists associate political economy with approaches using rational-choice assumptions in game theory and in examining phenomena beyond economics' standard remit, such as government failure and complex decision making in which context the term "positive political economy" is common. Other "traditional" topics include analysis of such public policy issues as economic regulation, rent-seeking, market protection, institutional corruption and distributional politics. Empirical analysis includes the influence of elections on the choice of economic policy and forecasting models of electoral outcome
Hydroelectricity is electricity produced from hydropower. In 2015, hydropower generated 16.6% of the world's total electricity and 70% of all renewable electricity, was expected to increase about 3.1% each year for the next 25 years. Hydropower is produced in 150 countries, with the Asia-Pacific region generating 33 percent of global hydropower in 2013. China is the largest hydroelectricity producer, with 920 TWh of production in 2013, representing 16.9 percent of domestic electricity use. The cost of hydroelectricity is low, making it a competitive source of renewable electricity; the hydro station consumes no water, unlike gas plants. The average cost of electricity from a hydro station larger than 10 megawatts is 3 to 5 U. S. cents per kilowatt hour. With a dam and reservoir it is a flexible source of electricity since the amount produced by the station can be varied up or down rapidly to adapt to changing energy demands. Once a hydroelectric complex is constructed, the project produces no direct waste, in many cases, has a lower output level of greenhouse gases than fossil fuel powered energy plants.
Hydropower has been used since ancient times to perform other tasks. In the mid-1770s, French engineer Bernard Forest de Bélidor published Architecture Hydraulique which described vertical- and horizontal-axis hydraulic machines. By the late 19th century, the electrical generator was developed and could now be coupled with hydraulics; the growing demand for the Industrial Revolution would drive development as well. In 1878 the world's first hydroelectric power scheme was developed at Cragside in Northumberland, England by William Armstrong, it was used to power a single arc lamp in his art gallery. The old Schoelkopf Power Station No. 1 near Niagara Falls in the U. S. side began to produce electricity in 1881. The first Edison hydroelectric power station, the Vulcan Street Plant, began operating September 30, 1882, in Appleton, with an output of about 12.5 kilowatts. By 1886 there were 45 hydroelectric power stations in the U. S. and Canada. By 1889 there were 200 in the U. S. alone. At the beginning of the 20th century, many small hydroelectric power stations were being constructed by commercial companies in mountains near metropolitan areas.
Grenoble, France held the International Exhibition of Hydropower and Tourism with over one million visitors. By 1920 as 40% of the power produced in the United States was hydroelectric, the Federal Power Act was enacted into law; the Act created the Federal Power Commission to regulate hydroelectric power stations on federal land and water. As the power stations became larger, their associated dams developed additional purposes to include flood control and navigation. Federal funding became necessary for large-scale development and federally owned corporations, such as the Tennessee Valley Authority and the Bonneville Power Administration were created. Additionally, the Bureau of Reclamation which had begun a series of western U. S. irrigation projects in the early 20th century was now constructing large hydroelectric projects such as the 1928 Hoover Dam. The U. S. Army Corps of Engineers was involved in hydroelectric development, completing the Bonneville Dam in 1937 and being recognized by the Flood Control Act of 1936 as the premier federal flood control agency.
Hydroelectric power stations continued to become larger throughout the 20th century. Hydropower was referred to as white coal for its plenty. Hoover Dam's initial 1,345 MW power station was the world's largest hydroelectric power station in 1936; the Itaipu Dam opened in 1984 in South America as the largest, producing 14,000 MW but was surpassed in 2008 by the Three Gorges Dam in China at 22,500 MW. Hydroelectricity would supply some countries, including Norway, Democratic Republic of the Congo and Brazil, with over 85% of their electricity; the United States has over 2,000 hydroelectric power stations that supply 6.4% of its total electrical production output, 49% of its renewable electricity. The technical potential for hydropower development around the world is much greater than the actual production: the percent of potential hydropower capacity that has not been developed is 71% in Europe, 75% in North America, 79% in South America, 95% in Africa, 95% in the Middle East, 82% in Asia-Pacific.
The political realities of new reservoirs in western countries, economic limitations in the third world and the lack of a transmission system in undeveloped areas result in the possibility of developing 25% of the remaining technically exploitable potential before 2050, with the bulk of that being in the Asia-Pacific area. Some countries have developed their hydropower potential and have little room for growth: Switzerland produces 88% of its potential and Mexico 80%. Most hydroelectric power comes from the potential energy of dammed water driving a water turbine and generator; the power extracted from the water depends on the volume and on the difference in height between the source and the water's outflow. This height difference is called the head. A large pipe delivers water from the reservoir to the turbine; this method produces electricity to supply high peak demands by moving water between reservoirs at different elevations. At times of low electrical demand, the excess generation capacity is used to pump water into the higher reservoir.
When the demand becomes greater, water is released back into the lower reservoir through a turbine. Pumped-storage schemes provide the most commercially important means of large-scale grid energy storage and improve the daily capacity factor of the generation system. Pumped storag
A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry the first supplier in a market, an overwhelming advantage over potential competitors. This occurs in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market. Natural monopolies were discussed as a potential source of market failure by John Stuart Mill, who advocated government regulation to make them serve the public good. Two different types of cost are important in microeconomics: marginal cost, fixed cost; the marginal cost is the cost to the company of serving one more customer. In an industry where a natural monopoly does not exist, the vast majority of industries, the marginal cost decreases with economies of scale increases as the company has growing pains. Along with this, the average cost of its products increases. A natural monopoly has a different cost structure.
A natural monopoly has a high fixed cost for a product that does not depend on output, but its marginal cost of producing one more good is constant, small. All industries have costs associated with entering them. A large portion of these costs is required for investment. Larger industries, like utilities, require enormous initial investment; this barrier to entry reduces the number of possible entrants into the industry regardless of the earning of the corporations within. Natural monopolies arise where the largest supplier in an industry the first supplier in a market, has an overwhelming cost advantage over other actual or potential competitors; the fixed cost of constructing a competing transmission network is so high, the marginal cost of transmission for the incumbent so low, that it bars potential competitors from the monopolist's market, acting as a nearly insurmountable barrier to entry into the market place. A firm with high fixed costs requires a large number of customers in order to have a meaningful return on investment.
This is. Since each firm has large initial costs, as the firm gains market share and increases its output the fixed cost is divided among a larger number of customers. Therefore, in industries with large initial investment requirements, average total cost declines as output increases over a much larger range of output levels. Companies that take advantage of economies of scale run into problems of bureaucracy. If that ideal size is large enough to supply the whole market that market is a natural monopoly. Once a natural monopoly has been established because of the large initial cost and that, according to the rule of economies of scale, the larger corporation has lower average cost and therefore a huge advantage. With this knowledge, no firms attempt to enter the industry and an oligopoly or monopoly develops. William Baumol provided the current formal definition of a natural monopoly where "n industry in which multi-firm production is more costly than production by a monopoly", he linked the definition to the mathematical concept of subadditivity.
Baumol noted that for a firm producing a single product, scale economies were a sufficient but not a necessary condition to prove subadditivity. The original concept of natural monopoly is attributed to John Stuart Mill, who believed that prices would reflect the costs of production in absence of an artificial or natural monopoly. In Principles of Political Economy Mill criticised Smith's neglect of an area that could explain wage disparity. Taking up the examples of professionals such as jewellers and lawyers, he said, The superiority of reward is not here the consequence of competition, but of its absence: not a compensation for disadvantages inherent in the employment, but an extra advantage. If unskilled labourers had it in their power to compete with skilled, by taking the trouble of learning the trade, the difference of wages might not exceed what would compensate them for that trouble, at the ordinary rate at which labour is remunerated, but the fact that a course of instruction is required, of a low degree of costliness, or that the labourer must be maintained for a considerable time from other sources, suffices everywhere to exclude the great body of the labouring people from the possibility of any such competition.
So Mill's initial use of the term concerned natural abilities, in contrast to the common contemporary usage, which refers to market failure in a particular type of industry, such as rail, post or electricity. Mill's development of the idea is. All the natural monopolies which produce o
An economic system is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, entities, decision-making processes and patterns of consumption that comprise the economic structure of a given community; as such, an economic system is a type of social system. The mode of production is a related concept. All economic systems have three basic questions to ask: what to produce, how to produce and in what quantities and who receives the output of production; the study of economic systems includes how these various agencies and institutions are linked to one another, how information flows between them and the social relations within the system. The analysis of economic systems traditionally focused on the dichotomies and comparisons between market economies and planned economies and on the distinctions between capitalism and socialism. Subsequently, the categorization of economic systems expanded to include other topics and models that do not conform to the traditional dichotomy.
Today the dominant form of economic organization at the world level is based on market-oriented mixed economies. Economic systems is the category in the Journal of Economic Literature classification codes that includes the study of such systems. One field that cuts across them is comparative economic systems, which include the following subcategories of different systems: Planning and reform. Productive enterprises. Public economics. National income and expenditure. International trade, finance and aid. Consumer economics. Performance and prospects. Natural resources. Political economy. There are multiple components to economic system. Decision-making structures of an economy determine the use of economic inputs, distribution of output, the level of centralization in decision-making and who makes these decisions. Decisions might be carried out by a government agency, or by private owners. An economic system is a system of production, resource allocation and distribution of goods and services in a society or a given geographic area.
In one view, every economic system represents an attempt to solve three fundamental and interdependent problems: What goods and services shall be produced and in what quantities? How shall goods and services be produced? That is, by whom and with what resources and technologies? For whom shall goods and services be produced? That is, to enjoy the benefits of the goods and services and how is the total product to be distributed among individuals and groups in the society? Every economy is thus a system that allocates resources for exchange, production and consumption; the system is stabilized through a combination of threat and trust, which are the outcome of institutional arrangements. An economic system possesses the following institutions: Methods of control over the factors or means of production: this may include ownership of, or property rights to, the means of production and therefore may give rise to claims to the proceeds from production; the means of production may be owned by the state, by those who use them, or be held in common.
A decision-making system: this determines, eligible to make decisions over economic activities. Economic agents with decision-making powers can enter into binding contracts with one another. A coordination mechanism: this determines how information is obtained and used in decision-making; the two dominant forms of coordination are planning and markets. An incentive system: this induces and motivates economic agents to engage in productive activities, it can be based on moral suasion. The incentive system may encourage the division of labor. Organizational form: there are two basic forms of organization: actors and regulators. Economic actors include households, work gangs and production teams, joint-ventures and cartels. Economically regulative organizations are represented by the market authorities. A distribution system: this allocates the proceeds from productive activity, distributed as income among the economic organizations and groups within society, such as property owners and non-workers, or the state.
A public choice mechanism for law-making, establishing rules and standards and levying taxes. This is the responsibility of the state, but other means of collective decision-making are possible, such as chambers of commerce or workers’ councils. There are several basic questions that must be answered in order for an economy to run satisfactorily; the scarcity problem, for example, requires answers to basic questions, such as what to produce, how to produce it and who gets what is produced. An economic system is a way of answering these basic questions and different economic systems answer them differently. Many different objectives may be seen as desirable for an economy, like efficiency, growth and equality. Economic systems are segmented by their property rights regime for the means of production and by their dominant resource allocation mechanism. Economies that combi
Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. In other words it is the sum of external costs. Private costs refer to direct costs to the producer for producing the service. Social cost includes these private costs and the additional costs associated with the production of the good for which are not accounted for by the free market. Mathematically, social marginal cost is the sum of the external costs. For example, when selling a glass of lemonade at a lemonade stand, the private costs involved in this transaction are the costs of the lemons and the sugar and the water that are ingredients to the lemonade, the opportunity cost of the labor to combine them into lemonade, as well as any transaction costs, such as walking to the stand. An example of marginal damages associated with social costs of driving includes wear and tear and the decreased quality of life due to drunks driving or impatience.a large number of people displaced from their homes and localities due to construction work.
The alternative to the above neoclassical definition is provided by the heterodox economics theory of social costs by K. William Kapp. Social costs are here defined as the socialized portion of the total costs of production, i.e. the costs which businesses shift to society in their attempts to increase their profits. According to the International Monetary Fund, "there are differences between private costs and the costs to the society as a whole". In a situation where there are positive social costs, it means that the first of the Fundamental theorems of welfare economics failed in that relying on private markets for price and quantity lead to an inefficient outcome. Market failures or situations in which consumption and production decisions made by individuals or firms result in indirect costs i.e. have an effect on parties external to the transaction are one of the most common reasons for government intervention. In economics, these indirect costs which lead to inefficiencies in the market and result in a difference between the private costs and the social costs are called externalities.
Thus, social costs are the costs pertaining to the transaction costs to the society as a whole. Social costs are easier to think about in marginal terms i.e. marginal social cost. Marginal social cost refers to the total costs that the society pays for the production of an extra unit of the good or service in question. Mathematically, this can be represented by Marginal Social Cost = Marginal Private Cost + Marginal External Costs. Social costs can be of two types -- Negative Production Externality and Positive Production Externality. Negative Production Externality refers to a situation in which marginal damages are social costs to society that result in Marginal Social Cost being greater than the Marginal Private Cost i.e. MSC > MPC. Intuitively, this refers to a situation in which the production of the firm reduces the well-being of the people in the society who are not compensated for the same. For example, steel production results in a negative externality because of the marginal damages pertaining to pollution and negative environmental effects.
Steelmaking results in indirect costs as a result of emission of pollutants, lower air quality, etc. For example, these indirect costs might include the health of a homeowner near the production unit and higher healthcare costs which have not been factored into the free market price and quantity. Given that the producer does not bear the burden of these costs, they are not passed down to the end user thus creating a situation where MSC > MPC. This example can be better elucidated with a diagram. Profit-maximizing organizations in a free market will set output at QMarket where marginal private costs is equal to marginal benefit. Intuitively, this is the point on the diagram where the private supply curve and consumer demand curve intersect i.e. where consumer demand meets firm supply. This results in a competitive market equilibrium price of pMarket. In the presence of a negative production externality, the private marginal cost increases i.e. shifted upwards to the left by marginal damages to yield the marginal social curve.
The star in the diagram, or the point where the new supply curve and the consumer demand intersect, represents the optimum quantity Qoptimum and price. At this social optimum, the price paid by the consumer is p*consumer and the price received by the producers is p*producer. High positive social costs, in the form of marginal damages, lead to an over-production. In the diagram, there is overproduction at QMarket - Qoptimum with an associated deadweight loss of the shaded triangle. One of the public sector remedies for internalizing externalities is a corrective tax. According to neoclassical economist Arthur Pigou, in order to correct this market failure the government should levy a tax which equals to marginal damages per unit; this would increase the firm's private marginal so that SMC = PMC. The prospect of government intervention in regards to correcting an externality has been hotly debated. Economists like Ronald Coase contend that the market can internalize an externality and provide for an external outcome through bargaining among affected parties.
For example, in the above-mentioned case, the homeowners could negotiate with the pollution firm and strike a deal in which they would pay the firm not to pollute or to charge the firm for pollution. According to
In economics, a production function gives the technological relation between quantities of physical inputs and quantities of output of goods. The production function is one of the key concepts of mainstream neoclassical theories, used to define marginal product and to distinguish allocative efficiency, a key focus of economics. One important purpose of the production function is to address allocative efficiency in the use of factor inputs in production and the resulting distribution of income to those factors, while abstracting away from the technological problems of achieving technical efficiency, as an engineer or professional manager might understand it. In macroeconomics, aggregate production functions are estimated to create a framework in which to distinguish how much of economic growth to attribute to changes in factor allocation and how much to attribute to advancing technology; some non-mainstream economists, reject the concept of an aggregate production function. In general, economic output is not a function of input, because any given set of inputs can be used to produce a range of outputs.
To satisfy the mathematical definition of a function, a production function is customarily assumed to specify the maximum output obtainable from a given set of inputs. The production function, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of input. Assuming that maximum output is obtained from given inputs allows economists to abstract away from technological and managerial problems associated with realizing such a technical maximum, to focus on the problem of allocative efficiency, associated with the economic choice of how much of a factor input to use, or the degree to which one factor may be substituted for another. In the production function itself, the relationship of output to inputs is non-monetary. In the decision frame of a firm making economic choices regarding production—how much of each factor input to use to produce how much output—and facing market prices for output and inputs, the production function represents the possibilities afforded by an exogenous technology.
Under certain assumptions, the production function can be used to derive a marginal product for each factor. The profit-maximizing firm in perfect competition will choose to add input right up to the point where the marginal cost of additional input matches the marginal product in additional output; this implies an ideal division of the income generated from output into an income due to each input factor of production, equal to the marginal product of each input. The inputs to the production function are termed factors of production and may represent primary factors, which are stocks. Classically, the primary factors of production were land and capital. Primary factors do not become part of the output product, nor are the primary factors, transformed in the production process; the production function, as a theoretical construct, may be abstracting away from the secondary factors and intermediate products consumed in a production process. The production function is not a full model of the production process: it deliberately abstracts from inherent aspects of physical production processes that some would argue are essential, including error, entropy or waste, the consumption of energy or the co-production of pollution.
Moreover, production functions do not ordinarily model the business processes, ignoring the role of strategic and operational business management.. The production function is central to the marginalist focus of neoclassical economics, its definition of efficiency as allocative efficiency, its analysis of how market prices can govern the achievement of allocative efficiency in a decentralized economy, an analysis of the distribution of income, which attributes factor income to the marginal product of factor input. A production function can be expressed in a functional form as the right side of Q = f where Q is the quantity of output and X 1, X 2, X 3, …, X n are the quantities of factor inputs. If Q is a scalar this form does not encompass joint production, a production process that has multiple co-products. On the other hand, if f maps from R n to R k it is a joint production function expressing the determination of k different types of output based on the joint usage of the specified quantities of the n inputs.
One formulation, unlikely to be relevant in practice, is as a linear function: Q = a 0 + a
Labour economics seeks to understand the functioning and dynamics of the markets for wage labour. Labour markets or job markets function through the interaction of employers. Labour economics looks at the suppliers of labour services and the demanders of labour services, attempts to understand the resulting pattern of wages and income. Labour is a measure of the work done by human beings, it is conventionally contrasted with such other factors of production as capital. Some theories focus on human capital. There are two sides to labour economics. Labour economics can be seen as the application of microeconomic or macroeconomic techniques to the labour market. Microeconomic techniques study individual firms in the labour market. Macroeconomic techniques look at the interrelations between the labour market, the goods market, the money market, the foreign trade market, it looks at how these interactions influence macro variables such as employment levels, participation rates, aggregate income and gross domestic product.
The labour force is defined as the number of people of working age, who are either employed or looking for work. The participation rate is the number of people in the labour force divided by the size of the adult civilian noninstitutional population; the non-labour force includes those who are not looking for work, those who are institutionalised such as in prisons or psychiatric wards, stay-at home spouses and those serving in the military. The unemployment level is defined as the labour force minus the number of people employed; the unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people employed divided by the adult population. In these statistics, self-employed people are counted as employed. Variables like employment level, unemployment level, labour force, unfilled vacancies are called stock variables because they measure a quantity at a point in time, they can be contrasted with flow variables. Changes in the labour force are due to flow variables such as natural population growth, net immigration, new entrants, retirements from the labour force.
Changes in unemployment depend on inflows made up of non-employed people starting to look for jobs and of employed people who lose their jobs and look for new ones, outflows of people who find new employment and of people who stop looking for employment. When looking at the overall macroeconomy, several types of unemployment have been identified, including: Frictional unemployment – This reflects the fact that it takes time for people to find and settle into new jobs. Technological advancement reduces frictional unemployment. Structural unemployment – This reflects a mismatch between the skills and other attributes of the labour force and those demanded by employers. Rapid industry changes of a technical and/or economic nature will increase levels of structural unemployment; the process of globalization has contributed to structural changes in labour markets. Natural rate of unemployment – This is the summation of frictional and structural unemployment, that excludes cyclical contributions of unemployment.
It is the lowest rate of unemployment that a stable economy can expect to achieve, given that some frictional and structural unemployment is inevitable. Economists do not agree on the level of the natural rate, with estimates ranging from 1% to 5%, or on its meaning – some associate it with "non-accelerating inflation"; the estimated rate varies from country from time to time. Demand deficient unemployment – In Keynesian economics, any level of unemployment beyond the natural rate is due to insufficient goods demand in the overall economy. During a recession, aggregate expenditure is deficient causing the underutilisation of inputs. Aggregate expenditure can be increased, according to Keynes, by increasing consumption spending, increasing investment spending, increasing government spending, or increasing the net of exports minus imports, since AE = C + I + G +. Neoclassical economists view the labour market as similar to other markets in that the forces of supply and demand jointly determine price and quantity.
However, the labour market differs from other markets in several ways. In particular, the labour market may act as a non-clearing market. While according to neoclassical theory most markets attain a point of equilibrium without excess supply or demand, this may not be true of the labour market: it may have a persistent level of unemployment. Contrasting the labour market to other markets reveals persistent compensating differentials among similar workers. Models that assume perfect competition in the labour market, as discussed below, conclude that workers earn their marginal product of labour. Households are suppliers of labour. In microeconomic theory, people are assumed to be rational and seeking to maximize their utility function. In the labour market model, their utility function expresses