Microeconomics is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. 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, it analyzes market failure, where markets fail to produce efficient results. Microeconomics stands in contrast to macroeconomics, which involves "the sum total of economic activity, dealing with the issues of growth and unemployment and with national policies relating to these issues". Microeconomics deals with the effects of economic policies on microeconomic behavior and thus on the aforementioned aspects of the economy. 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 theory begins with 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 is no guarantee that the resulting utility function would be differentiable. Microeconomic theory progresses by defining a competitive budget set, 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 there is no 100% guarantee but there would be a rational rise in individual utility. With the necessary tools and assumptions in place the utility maximization problem 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 mathematically modeling and analyzing the consequences. The utility maximization problem serves not only as 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 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 as the primitive.
However, an alternative way to develop microeconomic theory is by taking consumer choice as the primitive. This model of microeconomic theory is referred to as revealed preference theory; the theory of supply and demand assumes that markets are competitive. This implies that there are many buyers and sellers in the market and none of them have the capacity to influence prices of goods and services. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices. Quite 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 is devoted to cases where market failures lead to resource allocation, 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 existed. This is studied in the field of public choice theory. "Optimal welfare" takes on a Paretian norm, 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 is limited in implications without mixing the belief of the economist and their theory; the demand for various commodities by individuals is 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. The study of microeconomics involves several "key" areas: Supply and demand is an economic model of price determination in a competitive market.
It concludes that in a 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 the quantity supplied by producers. This price results in a stable economic equilibrium. Elasticity is the measurement of how resp
Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. More it is "the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference". An introductory economics textbook describes econometrics as allowing economists "to sift through mountains of data to extract simple relationships"; the first known use of the term "econometrics" was by Polish economist Paweł Ciompa in 1910. Jan Tinbergen is considered by many to be one of the founding fathers of econometrics. Ragnar Frisch is credited with coining the term in the sense. A basic tool for econometrics is the multiple linear regression model. Econometric theory uses statistical theory and mathematical statistics to evaluate and develop econometric methods. Econometricians try to find estimators that have desirable statistical properties including unbiasedness and consistency.
Applied econometrics uses theoretical econometrics and real-world data for assessing economic theories, developing econometric models, analysing economic history, forecasting. A basic tool for econometrics is the multiple linear regression model. In modern econometrics, other statistical tools are used, but linear regression is still the most used starting point for an analysis. Estimating a linear regression on two variables can be visualised as fitting a line through data points representing paired values of the independent and dependent variables. For example, consider Okun's law, which relates GDP growth to the unemployment rate; this relationship is represented in a linear regression where the change in unemployment rate is a function of an intercept, a given value of GDP growth multiplied by a slope coefficient β 1 and an error term, ε: Δ Unemployment = β 0 + β 1 Growth + ε. The unknown parameters β β 1 can be estimated. Here β 1 is estimated to be −1.77 and β 0 is estimated to be 0.83.
This means that if GDP growth increased by one percentage point, the unemployment rate would be predicted to drop by 1.77 points. The model could be tested for statistical significance as to whether an increase in growth is associated with a decrease in the unemployment, as hypothesized. If the estimate of β 1 were not different from 0, the test would fail to find evidence that changes in the growth rate and unemployment rate were related; the variance in a prediction of the dependent variable as a function of the independent variable is given in polynomial least squares. Econometric theory uses statistical theory and mathematical statistics to evaluate and develop econometric methods. Econometricians try to find estimators that have desirable statistical properties including unbiasedness and consistency. An estimator is unbiased. Ordinary least squares is used for estimation since it provides the BLUE or "best linear unbiased estimator" given the Gauss-Markov assumptions; when these assumptions are violated or other statistical properties are desired, other estimation techniques such as maximum likelihood estimation, generalized method of moments, or generalized least squares are used.
Estimators that incorporate prior beliefs are advocated by those who favour Bayesian statistics over traditional, classical or "frequentist" approaches. Applied econometrics uses theoretical econometrics and real-world data for assessing economic theories, developing econometric models, analysing economic history, forecasting. Econometrics may use standard statistical models to study economic questions, but most they are with observational data, rather than in controlled experiments. In this, the design of observational studies in econometrics is similar to the design of studies in other observational disciplines, such as astronomy, epidemiology and political science. Analysis of data from an observational study is guided by the study protocol, although exploratory data analysis may be useful for generating new hypotheses. Economics analyses systems of equations and inequalities, such as supply and demand hypothesized to be in equilibrium; the field of econometrics has developed methods for identification and estimation of simultaneous-equation models.
These methods are analogous to methods used in other areas of science, such as the field of system identification in systems analysis and control theory. Such methods may allow researchers to estimate models and investigate their empirical consequences, without directly manipulating the system. One of the fundamental statistical methods used by econometricians is regression analysis. Regression methods are important i
Service economy can refer to one or both of two recent economic developments: The increased importance of the service sector in industrialized economies. The current list of Fortune 500 companies contains more service companies and fewer manufacturers than in previous decades; the relative importance of service in a product offering. The service economy in developing countries is concentrated in financial services, retail, human services, information technology and education. Products today have a higher service component than in previous decades. In the management literature this is referred to as the servitization of products or a product-service system; every product today has a service component to it. The old dichotomy between product and service has been replaced by a service-product continuum. Many products are being transformed into services. For example, IBM treats its business as a service business. Although it still manufactures computers, it sees the physical goods as a small part of the "business solutions" industry.
They have found that the price elasticity of demand for "business solutions" is much less than for hardware. There has been a corresponding shift to a subscription pricing model. Rather than receiving a single payment for a piece of manufactured equipment, many manufacturers are now receiving a steady stream of revenue for ongoing contracts. Full cost accounting and most accounting reform and monetary reform measures are thought to be impossible to achieve without a good model of the service economy. Since the 1950s, the global economy has undergone a structural transformation. For this change, the American economist Victor R. Fuchs called it “the service economy” in 1968, he believes that the United States has taken the lead in entering the service economy and society in the Western countries. The declaration heralded the arrival of a service economy that began in the United States on a global scale. With the rapid development of information revolution and technology, the service economy has shown new development trends.
This is seen in green economics and more specific theories within it such as Natural Capitalism, as having these benefits: Much easier integration with accounting for nature's services Much easier integration with state services under globalization, e.g. meat inspection is a service, assumed within a product price, but which can vary quite drastically with jurisdiction, with some serious effects. Association of goods movements in commodity markets with negative commodity public bads so that no commodity can be traded without assuming responsibility for damage done by its extraction, shipping and sale - its comprehensive outcome Easier integration with urban ecology and industrial ecology modelling Making it easier to relate to the Experience Economy of actual quality of life decisions made by human beings based on assumptions about service, integrating economics better with marketing theory about brand value e.g. products are purchased for their assumed reliability in some known process.
This assumes that the user's experience with the brand is far more important than its technical characteristicsProduct stewardship or product take-back are words for a specific requirement or measure in which the service of waste disposal is included in the distribution chain of an industrial product and is paid for at time of purchase. That is, paying for the safe and proper disposal when you pay for the product, relying on those who sold it to you to dispose of it; those who advocate it are concerned with the phases of product lifecycle and the comprehensive outcome of the whole production process. It is considered a pre-requisite to a strict service economy interpretation of "commodity" and "product" relationships, it is applied to paint and other goods that become toxic waste if not disposed of properly. It is most familiar as the container deposit charged for a deposit bottle. One pays a fee to buy the bottle, separately from the fee to buy. If one returns the bottle, the fee is returned, the supplier must return the bottle for re-use or recycling.
If not, one has paid the fee, this can pay for landfill or litter control measures that dispose of diapers or a broken bottle. Since the same fee can be collected by anyone finding and returning the bottle, it is common for people to collect these and return them as a means of gaining a small income; this is quite common for instance among homeless people in U. S. cities. Legal requirements vary: the bottle itself may be considered the property of the purchaser of the contents, or, the purchaser may have some obligation to return the bottle to some depot so it can be recycled or re-used. In some countries, such as Germany, law requires attention to the comprehensive outcome of the whole extraction, distribution and waste of a product, holds those profiting from these responsible for any outcome along the way; this is the trend in the UK and EU generally. In the United States, there have been many class action suits that are product stewardship liability - holding companies responsible for things the product does which it was never advertised to do.
Rather than let liability for these problems be taken up by the public sector or be haphazardly assigned one issue at a time to companies via lawsuits, many accounting reform efforts focus on achieving full cost accounting. This is the financial reflection of the comprehensive outcome - noting the gains and losses to all parties involved, not just those investing or purchasing; such moves have made moral purchasing
Cultural economics is the branch of economics that studies the relation of culture to economic outcomes. Here, ` culture' is defined by shared preferences of respective groups. Programmatic issues include whether and how much culture matters as to economic outcomes and what its relation is to institutions; as a growing field in behavioral economics, the role of culture in economic behavior is being demonstrate to cause significant differentials in decision-making and the management and valuation of assets. Applications include the study of social norms. Social identity, beliefs in redistributive justice, hatred, trust, family ties, long-term orientation, the culture of economics. A general analytical theme is how ideas and behaviors are spread among individuals through the formation of social capital, social networks and processes such as social learning, as in the theory of social evolution and information cascades. Methods include case studies and theoretical and empirical modeling of cultural transmission within and across social groups.
In 2013 Said E. Dawlabani added the value systems approach to the cultural emergence aspect of macroeconomics. Cultural economics develops from how wants and tastes are formed in society; this is due to nurture aspects, or what type of environment one is raised in, as it is the internalization of one’s upbringing that shapes their future wants and tastes. Acquired tastes can be thought of as an example of this, as they demonstrate how preferences can be shaped socially. A key thought area that separates the development of cultural economics from traditional economics is a difference in how individuals arrive at their decisions. While a traditional economist will view decision making as having both implicit and explicit consequences, a cultural economist would argue that an individual will not only arrive at their decision based on these implicit and explicit decisions but based on trajectories; these trajectories consist of regularities, which have been built up throughout the years and guide individuals in their decision-making process.
Economists have started to look at cultural economics with a systems thinking approach. In this approach, the economy and culture are each viewed as a single system where "interaction and feedback effects were acknowledged, where in particular the dynamic were made explicit". In this sense, the interdependencies of culture and the economy can be combined and better understood by following this approach. Said E. Dawlabani's book MEMEnomics: The Next-Generation Economic System combines the ideas of value systems and systems thinking to provide one of the first frameworks that explores the effect of economic policies on culture; the book explores the intersections of multiple disciplines such as cultural development, organizational behavior, memetics all in an attempt to explore the roots of cultural economics. The advancing pace of new technology is transforming how the public shares culture; the cultural economic field has seen great growth with the advent of online social networking which has created productivity improvements in how culture is consumed.
New technologies have lead to cultural convergence where all kinds of culture can be accessed on a single device. Throughout their upbringing, younger persons of the current generation are consuming culture faster than their parents did, through new mediums; the smartphone is a blossoming example of this where books, talk and more can all be accessed on a single device in a matter of seconds. This medium and the culture surrounding it is beginning to have an effect on the economy, whether it be increasing communication while lowering costs, lowering the barriers of entry to the technology economy, or making use of excess capacity; this field has seen growth through the advent of new economic studies that have put on a cultural lens. For example, a recent study on Europeans living with their families into adulthood was conducted by Paola Sapienza, a professor at Northwestern University; the study found that those of Southern European descent tend to live at home with their families longer than those of Northern European descent.
Sapienza added cultural critique to her analysis of the research, revealing that it is Southern European culture to stay at home longer and related this to how those who live at home longer have fewer children and start families thus contributing to Europe's falling birthrates. Sapienza's work is an example of how the growth of cultural economics is beginning to spread across the field. An area that cultural economics has a strong presence in is sustainable development. Sustainable development has been defined as "...development that meets the needs of the present without compromising the ability of future generations to meet their own needs...". Culture plays an important role in this as it can determine how people view preparing for these future generations. Delayed gratification is a cultural economic issue that developed countries are dealing with. Economists argue that to ensure that the future is better than today, certain measures must be taken such as collecting taxes or "going green" to protect the environment.
Policies such as these are hard for today's politicians to promote who want to win the vote of today's voters who are concerned with the present and not the future. People want to see the benefits now, not in the future. Economist David Throsby has proposed the idea of culturally sustainable development which compasses both the cultural industries and culture, he has created a set of criteria in regards to for which policy prescriptions can be compared to in order to ensure growth for future generations. The
Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is calculated in real terms - i.e. inflation-adjusted terms – to eliminate the distorting effect of inflation on the price of goods produced. Measurement of economic growth uses national income accounting. Since economic growth is measured as the annual percent change of gross domestic product, it has all the advantages and drawbacks of that measure; the economic growth rates of nations are compared using the ratio of the GDP to population or per-capita income. The "rate of economic growth" refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time; this growth rate is the trend in the average level of GDP over the period, which ignores the fluctuations in the GDP around this trend. An increase in economic growth caused by more efficient use of inputs is referred to as intensive growth.
GDP growth caused only by increases in the amount of inputs available for use is called extensive growth. Development of new goods and services creates economic growth; the economic growth rate is calculated from data on GDP estimated by countries' statistical agencies. The rate of growth of GDP per capita is calculated from data on GDP and people for the initial and final periods included in the analysis of the analyst. In national income accounting, per capita output can be calculated using the following factors: output per unit of labor input, hours worked, the percentage of the working age population working and the proportion of the working-age population to the total population. "The rate of change of GDP/population is the sum of the rates of change of these four variables plus their cross products."Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. Economists attribute the ups and downs in the business cycle to fluctuations in aggregate demand.
In contrast, economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation. Increases in labor productivity have been the most important source of real per capita economic growth. "In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U. S. per capita income, with increased investment in capital explaining only the remaining 20 percent."Increases in productivity lower the real cost of goods. Over the 20th century the real price of many goods fell by over 90%. Economic growth has traditionally been attributed to the accumulation of human and physical capital and the increase in productivity and creation of new goods arising from technological innovation. Further division of labour is fundamental to rising productivity. Before industrialization technological progress resulted in an increase in the population, kept in check by food supply and other resources, which acted to limit per capita income, a condition known as the Malthusian trap.
The rapid economic growth that occurred during the Industrial Revolution was remarkable because it was in excess of population growth, providing an escape from the Malthusian trap. Countries that industrialized saw their population growth slow down, a phenomenon known as the demographic transition. Increases in productivity are the major factor responsible for per capita economic growth – this has been evident since the mid-19th century. Most of the economic growth in the 20th century was due to increased output per unit of labor, materials and land; the balance of the growth in output has come from using more inputs. Both of these changes increase output; the increased output included more of the same goods produced and new goods and services. During the Industrial Revolution, mechanization began to replace hand methods in manufacturing, new processes streamlined production of chemicals, iron and other products. Machine tools made the economical production of metal parts possible, so that parts could be interchangeable.
See: Interchangeable parts. During the Second Industrial Revolution, a major factor of productivity growth was the substitution of inanimate power for human and animal labor. There was a great increase in power as steam powered electricity generation and internal combustion supplanted limited wind and water power. Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency. Other major historical sources of productivity were automation, transportation infrastructures, new materials and power, which includes steam and internal combustion engines and electricity. Other productivity improvements included mechanized agriculture and scientific agriculture including chemical fertilizers and livestock and poultry management, the Green Revolution. Interchangeable parts made with machine tools powered by electric motors evolved into mass production, universally used today. Great sources of productivity improvement in the late 19th century were railroads, steam ships, horse-pulled reapers and combine harvesters, steam-powered factories.
The invention of processes for making cheap steel were important for many forms
Natural resource economics
Natural resource economics deals with the supply and allocation of the Earth's natural resources. One main objective of natural resource economics is to better understand the role of natural resources in the economy in order to develop more sustainable methods of managing those resources to ensure their availability to future generations. Resource economists study interactions between economic and natural systems, with the goal of developing a sustainable and efficient economy. Natural resource economics is a transdisciplinary field of academic research within economics that aims to address the connections and interdependence between human economies and natural ecosystems, its focus is how to operate an economy within the ecological constraints of earth's natural resources. Resource economics brings together and connects different disciplines within the natural and social sciences connected to broad areas of earth science, human economics, natural ecosystems. Economic models must be adapted to accommodate the special features of natural resource inputs.
The traditional curriculum of natural resource economics emphasized fisheries models, forestry models, minerals extraction models. In recent years, other resources, notably air, the global climate, "environmental resources" in general have become important to policy-making. Academic and policy interest has now moved beyond the optimal commercial exploitation of the standard trio of resources to encompass management for other objectives. For example, natural resources more broadly defined have recreational, as well as commercial values, they may contribute to overall social welfare levels, by their mere existence. The economics and policy area focuses on the human aspects of environmental problems. Traditional areas of environmental and natural resource economics include welfare theory, land/location use, pollution control, resource extraction, non-market valuation, resource exhaustibility, environmental management, environmental policy. Research topics could include the environmental impacts of agriculture and urbanization, land use in poor and industrialized countries, international trade and the environment, climate change, methodological advances in non-market valuation, to name just a few.
Hotelling's rule is a 1938 economic model of non-renewable resource management by Harold Hotelling. It shows that efficient exploitation of a nonrenewable and nonaugmentable resource would, under otherwise stable economic conditions, lead to a depletion of the resource; the rule states that this would lead to a net price or "Hotelling rent" for it that rose annually at a rate equal to the rate of interest, reflecting the increasing scarcity of the resource. Nonaugmentable resources of inorganic materials are uncommon. Vogely has stated that the development of a mineral resource occurs in five stages: The current operating margin governed by the proportion of the reserve depleted; the intensive development margin governed by the trade-off between the rising necessary investment and quicker realization of revenue. The extensive development margin in which extraction is begun of known but uneconomic deposits; the exploration margin in which the search for new deposits is conducted and the cost per unit extracted is uncertain with the cost of failure having to be balanced against finding usable resources that have marginal costs of extraction no higher than in the first three stages above.
The technology margin which interacts with the first four stages. The Gray-Hotelling theory is a special case, since it covers only Stages 1–3 and not the far more important Stages 4 and 5. Simon has stated that the supply of natural resources is infinite These conflicting views will be reconciled by considering resource-related topics in depth in the next section, or at least minimized. Furthermore, Hartwick's rule provides insight to the sustainability of welfare in an economy that uses non-renewable resources; the perpetual resource concept is a complex one because the concept of resource is complex and changes with the advent of new technology, new needs, to a lesser degree with new economics. On the one hand, a material can enter a time of shortage and become a strategic and critical material, but on the other hand a material can go out of use, its resource can proceed to being perpetual if it was not before, the resource can become a paleoresource when the material goes completely out of use.
Some of the complexities influencing resources of a material include the extent of recyclability, the availability of suitable substitutes for the material in its end-use products, plus some other less important factors. The Federal Government became compellingly interested in resource issues on December 7, 1941, shortly after which Japan cut the U. S. off from tin and rubber and made some other materials difficult to obtain, such as tungsten. This was the worst case for resource availability, becoming a critical material. After the war a government stockpile of strategic and critical materials was set up, having around 100 different materials which were purchased for cash or obtained by trading off U. S. agricultural commodities for them. In the longer term, scarcity of tin led to comple