1.
Perfect competition
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In economics and general equilibrium theory, a perfect market is defined by several conditions, collectively called perfect competition. Perfect information – All consumers and producers know all prices of products, homogeneous products – The products are perfect substitutes for each other. Well defined Property rights – These determine what may be sold, profit maximization of sellers – Firms sell where the most profit is generated, where marginal costs meet marginal revenue. Rational buyers, Buyers make all trades that increase their economic utility, No externalities – Costs or benefits of an activity do not affect third parties. This criteria also excludes any government intervention, zero transaction costs – Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market. Non-increasing returns to scale and no network effects – The lack of economies of scale or network effects ensures that there always be a sufficient number of firms in the industry. This equilibrium will be a Pareto optimum, meaning that nobody can be better off by exchange without making someone else worse off. Such markets are efficient, as output will always occur where marginal cost is equal to marginal revenue. But perfectly competitive markets are not necessarily productively efficient as output will not always occur where marginal cost is equal to average cost, in perfect competition, any profit-maximizing producer faces a market price equal to its marginal cost. This implies that a factors price equals the marginal revenue product. It allows for derivation of the curve on which the neoclassical approach is based. This is also the reason why a monopoly does not have a supply curve, the abandonment of price taking creates considerable difficulties for the demonstration of a general equilibrium except under other, very specific conditions such as that of monopolistic competition. Real markets are never perfect, but range from close-to-perfect to very imperfect, share and foreign exchange markets are commonly said to be the most similar to the perfect market. The real estate market is an example of an imperfect market. In a perfect market the sellers operate at zero economic surplus, normal profit is a component of costs and not a component of business profit at all. It represents the opportunity cost, as the time that the owner spends running the firm could be spent on running a different firm. In other words, the cost of normal profit varies both within and across industries, it is commensurate with the associated with each type of investment. Only normal profits arise in circumstances of perfect competition when long run equilibrium is reached
2.
Microeconomics
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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 under which free markets lead to desirable allocations and it also analyzes market failure, where markets fail to produce efficient results. Microeconomics also deals with the effects of economic policies on the aspects of the economy. 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 behavior. Microeconomic theory typically begins with the study of a single rational, 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, microeconomic theory progresses by defining a competitive budget set which is a subset of the consumption set. It is at point that economists make the technical assumption that preferences are locally non-satiated. Without the assumption of LNS there is no guarantee that an individual would maximize 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, 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, 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 and 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, a 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 usually assumes that markets are perfectly competitive. This implies that there are buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices, quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the works well in situations meeting these assumptions
3.
Monopoly
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A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors, in economics, a monopoly is a single seller. In law, a monopoly is an entity that has significant market power, that is. Although monopolies may be big businesses, size is not a characteristic of a monopoly, a small business may still have the power to raise prices in a small industry. A monopoly is distinguished from a monopsony, in there is only one buyer of a product or service. Likewise, a monopoly should be distinguished from a cartel, in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations in one or a few entities have market power and therefore interact with their customers. Monopolies can be established by a government, form naturally, or form by integration, in many jurisdictions, competition laws restrict monopolies. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, patents, copyrights, and trademarks are sometimes used as examples of government-granted monopolies. The government may also reserve the venture for itself, thus forming a government monopoly, There are four basic types of market structures in traditional economic analysis, perfect competition, monopolistic competition, oligopoly and monopoly. A monopoly is a structure in which a single supplier produces, if there is a single seller in a certain market and there are no close substitutes for the product, then the market structure is that of a pure monopoly. Sometimes, there are many sellers in an industry and/or there exist many close substitutes for the goods being produced and this is termed monopolistic competition, whereas in oligopoly the companies interact strategically. Most economic textbooks follow the practice of explaining the perfect competition model. The boundaries of what constitutes a market and what does not are relevant distinctions to make in economic analysis, in a general equilibrium context, a good is a specific concept including geographical and time-related characteristics. Most studies of market structure relax a little their definition of a good, price Maker, Decides the price of the good or product to be sold, but does so by determining the quantity in order to demand the price desired by the firm. High Barriers, Other sellers are unable to enter the market of the monopoly, single seller, In a monopoly, there is one seller of the good, who produces all the output. Therefore, the market is being served by a single company, and for practical purposes. Price Discrimination, A monopolist can change the price or quantity of the product and he or she sells higher quantities at a lower price in a very elastic market, and sells lower quantities at a higher price in a less elastic market
4.
Industry
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Industry is the production of goods or related services within an economy. The major source of revenue of a group or company is the indicator of its relevant industry, when a large group has multiple sources of revenue generation, it is considered to be working in different industries. Manufacturing industry became a key sector of production and labour in European and North American countries during the Industrial Revolution, upsetting previous mercantile and this came through many successive rapid advances in technology, such as the production of steel and coal. Following the Industrial Revolution, possibly a third of the economic output are derived that is from manufacturing industries. Many developed countries and many developing/semi-developed countries depend significantly on manufacturing industry, Industries, the countries they reside in, and the economies of those countries are interlinked in a complex web of interdependence. Industries can be classified in a variety of ways, at the top level, industry is often classified according to the three-sector theory into sectors, primary, secondary, and tertiary. Some authors add quaternary or even quinary sectors, over time, the fraction of a societys industry within each sector changes. Below the economic sectors there are other more detailed industry classifications. These classification systems commonly divide industries according to functions and markets. Market-based classification systems such as the Global Industry Classification Standard and the Industry Classification Benchmark are used in finance, the International Standard Industrial Classification of all economic activities is the most complete and systematic industrial classification made by the United Nations Statistics Division. ISIC is a classification of economic activities arranged so that entities can be classified according to the activity they carry out. The Industrial Revolution led to the development of factories for large-scale production, originally the factories were steam-powered, but later transitioned to electricity once an electrical grid was developed. The mechanized assembly line was introduced to parts in a repeatable fashion. This led to significant increases in efficiency, lowering the cost of the end process, later automation was increasingly used to replace human operators. This process has accelerated with the development of the computer and the robot, historically certain manufacturing industries have gone into a decline due to various economic factors, including the development of replacement technology or the loss of competitive advantage. An example of the former is the decline in manufacturing when the automobile was mass-produced. A recent trend has been the migration of prosperous, industrialized nations towards a post-industrial society and this is manifested by an increase in the service sector at the expense of manufacturing, and the development of an information-based economy, the so-called informational revolution. In a post-industrial society, manufacturing is relocated to more favourable locations through a process of off-shoring
5.
Marginal cost
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In economics, marginal cost is the change in the opportunity cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit, for example, if producing additional vehicles requires building a new factory, the marginal cost of the extra vehicles includes the cost of the new factory. In practice, this analysis is segregated into short and long-run cases, so that, over the longest run, the graph is plotted with Price, Cost and Revenue on the Y-axis and Quantity on the X-axis. This is as the definition finds the tangent to the total cost curve at the point q which assumes that costs increase at the rate as they were at q. If the cost function is differentiable joining, the marginal cost is the cost of the unit produced referring to the basic volume. Marginal Cost = d C d Q If the cost function is not differentiable, M C = Δ C Δ Q A number of other factors can affect marginal cost and its applicability to real world problems. Some of these may be considered market failures and these may include information asymmetries, the presence of negative or positive externalities, transaction costs, price discrimination and others. Since fixed costs do not vary with production quantity, it out of the equation when it is differentiated. The important conclusion is that marginal cost is not related to fixed costs and this can be compared with average total cost or ATC, which is the total cost divided by the number of units produced and does include fixed costs. A T C = C0 + Δ C Q For discrete calculation without calculus, for instance, suppose the total cost of making 1 shoe is $30 and the total cost of making 2 shoes is $40. The marginal cost of producing the second shoe is $40 – $30 = $10, marginal cost is not the cost of producing the next or last unit. As Silberberg and Suen note, the cost of the last unit is the same as the cost of the first unit, in the short run, increasing production requires using more of the variable input — conventionally assumed to be labor. Adding more labor to a capital stock reduces the marginal product of labor because of the diminishing marginal returns. This reduction in productivity is not limited to the labor needed to produce the marginal unit – the productivity of every unit of labor is reduced. The first component is the per unit or average cost, the second unit is the small increase in costs due to the law of diminishing marginal returns which increases the costs of all units of sold. Marginal costs can also be expressed as the cost per unit of labor divided by the product of labor. Economies of scale is a concept applies to the long run. Production may be subject to economies of scale, conversely, there may be levels of production where marginal cost is higher than average cost, and average cost is an increasing function of output
6.
Product rule
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In calculus, the product rule is a formula used to find the derivatives of products of two or more functions. It may be stated as ′ = f ′ ⋅ g + f ⋅ g ′ or in the Leibniz notation d d x = u ⋅ d v d x + v ⋅ d u d x. In differentials notation, this can be written as d = u d v + v d u, discovery of this rule is credited to Gottfried Leibniz, who demonstrated it using differentials. Here is Leibnizs argument, Let u and v be two functions of x. Then the differential of uv is d = ⋅ − u ⋅ v = u ⋅ d v + v ⋅ d u + d u ⋅ d v. Since the term du·dv is negligible, Leibniz concluded that d = v ⋅ d u + u ⋅ d v, suppose we want to differentiate ƒ = x2 sin. By using the rule, one gets the derivative ƒ = 2x sin + x2cos. This follows from the rule since the derivative of any constant is zero. This, combined with the sum rule for derivatives, shows that differentiation is linear, the rule for integration by parts is derived from the product rule, as is the quotient rule. Let h = f g, and suppose that f and g are each differentiable at x and we want to prove that h is differentiable at x and that its derivative h is given by f g + f g. To do this f g − f g is added to the numerator to permit its factoring, a rigorous proof of the product rule can be given using the definition of the derivative as a limit, and the basic properties of limits. Let h = f g, and suppose that f and g are each differentiable at x0 and we want to prove that h is differentiable at x0 and that its derivative h′ is given by f′ g + f g′. Let Δh = h − h, note that although x0 is fixed, Δh depends on the value of Δx, which is thought of as being small. The function h is differentiable at x0 if the limit lim Δ x →0 Δ h Δ x exists, as with Δh, let Δf = f − f and Δg = g − g which, like Δh, also depends on Δx. Then f = f + Δf and g = g + Δg, using the basic properties of limits and the definition of the derivative, we can tackle this term-by term. First, lim Δ x →0 = f ′ g, similarly, lim Δ x →0 = f g ′. The third term, corresponding to the small rectangle, winds up being negligible because Δf Δg vanishes to second order. Then, f g − f g = − f g = f ′ g h + f g ′ h + O Taking the limit for small h gives the result, Let f = uv and suppose u and v are positive functions of x
7.
Price elasticity of demand
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Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price, ceteris paribus. More precisely, it gives the change in quantity demanded in response to a one percent change in price. Price elasticities are almost always negative, although tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, in general, the demand for a good is said to be inelastic when the PED is less than one, that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic when its PED is greater than one, revenue is maximized when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence of a tax on that good, various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis. It is a measure of responsiveness of the quantity of a raw good or service demanded to changes in its price, for example, if the price increases by 5% and quantity demanded decreases by 5%, then the elasticity at the initial price and quantity = −5%/5% = −1. The only classes of goods which have a PED of greater than 0 are Veblen and Giffen goods, although the PED is negative for the vast majority of goods and services, economists often refer to price elasticity of demand as a positive value. The latter type of elasticity measure is called a cross-price elasticity of demand, as the difference between the two prices or quantities increases, the accuracy of the PED given by the formula above decreases for a combination of two reasons. First, the PED for a good is not necessarily constant, as explained below, PED can vary at different points along the demand curve, due to its percentage nature. Elasticity is not the thing as the slope of the demand curve. Second, percentage changes are not symmetric, instead, the change between any two values depends on which one is chosen as the starting value and which as the ending value. For example, if quantity demanded increases from 10 units to 15 units, but if quantity demanded decreases from 15 units to 10 units, the percentage change is −33. 3%, i. e. ÷15. Two alternative elasticity measures avoid or minimise these shortcomings of the elasticity formula, point-price elasticity. Point elasticity of demand method is used to change in demand within same demand curve. One way to avoid the accuracy problem described above is to minimise the difference between the starting and ending prices and quantities. However, the point-price elasticity can be computed if the formula for the demand function, Q d = f, is known so its derivative with respect to price, d Q d / d P. Loosely speaking, this gives an average elasticity for the section of the actual demand curve—i. e, the arc of the curve—between the two points
8.
Cost curve
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In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. There are various types of cost curves, all related to other, including total and average cost curves, and marginal cost curves. Some are applicable to the run, others to the long run. Average variable cost is the variable cost per unit of output, SRAVC = wL / Q where w is the rate, L is the quantity of labor used. The SRAVC curve plots the short-run average variable cost against the level of output and is drawn as U-shaped. The average total cost curve is constructed to capture the relation between cost per unit of output and the level of output, ceteris paribus. A perfectly competitive and productively efficient firm organizes its factors of production in such a way that the factors of production is at the lowest point. In the short run, when at least one factor of production is fixed and this is at the minimum point in the diagram on the right. Within the graph shown in the figure, The Marginal cost curve, Average Fixed Cost curve and Average Variable cost curve can not start with zero as at quantity zero, short run average cost equals average fixed costs plus average variable costs. Average fixed cost continuously falls as production increases in the short run, the shape of the average variable cost curve is directly determined by increasing and then diminishing marginal returns to the variable input. A short-run marginal cost curve graphically represents the relation between marginal cost incurred by a firm in the production of a good or service. This curve is constructed to capture the relation between marginal cost and the level of output, holding other variables, like technology and resource prices, the marginal cost curve is usually U-shaped. Marginal cost is high at small quantities of output, then as production increases, marginal cost declines, reaches a minimum value. The marginal cost is shown in relation to marginal revenue, the amount of sales revenue that an additional unit of the product or service will bring to the firm. This shape of the marginal cost curve is directly attributable to increasing, for most production processes the marginal product of labor initially rises, reaches a maximum value and then continuously falls as production increases. Thus marginal cost initially falls, reaches a value and then increases. The marginal cost curve intersects both the average variable cost curve and average total cost curve at their minimum points, when the marginal cost curve is above an average cost curve the average curve is rising. When the marginal curve is below an average curve the average curve is falling
9.
Profit maximization
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In economics, profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem, any costs incurred by a firm may be classed into two groups, fixed costs and variable costs. Fixed costs, which only in the short run, are incurred by the business at any level of output. These may include equipment maintenance, rent, wages of employees whose numbers cannot be increased or decreased in the short run, variable costs change with the level of output, increasing as more product is generated. Materials consumed during production often have the largest impact on this category, fixed cost and variable cost, combined, equal total cost. Revenue is the amount of money that a company receives from its business activities, usually from the sale of goods. For instance, taking the first definition, if it costs a firm 400 USD to produce 5 units and 480 USD to produce 6, to obtain the profit maximizing output quantity, we start by recognizing that profit is equal to total revenue minus total cost. Given a table of costs and revenues at each quantity, we can compute equations or plot the data directly on a graph. The profit-maximizing output is the one at which this difference reaches its maximum, in the accompanying diagram, the linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market, and thus cannot set its own selling price. The profit-maximizing output level is represented as the one at which revenue is the height of C and total cost is the height of B. This output level is also the one at which the total profit curve is at its maximum, an equivalent perspective relies on the relationship that, for each unit sold, marginal profit equals marginal revenue minus marginal cost. At the output level at which marginal revenue equals marginal cost, marginal profit is zero, average total costs are represented by curve ATC. Total economic profit is represented by the area of the rectangle PABC, the optimum quantity is the same as the optimum quantity in the first diagram. If the firm is operating in a market, changes would have to be made to the diagrams. For example, the marginal revenue curve would have a negative gradient, in a competitive environment, more complicated profit maximization solutions involve the use of game theory. In some cases a firms demand and cost conditions are such that marginal profits are greater than zero for all levels of production up to a certain maximum. In other words, the profit maximizing quantity and price can be determined by setting marginal revenue equal to zero, marginal revenue equals zero when the total revenue curve has reached its maximum value. An example would be an airline flight
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