In economics, a shortage or excess demand is a situation in which the demand for a product or service exceeds its supply in a market. It is the opposite of an excess supply, in a perfect market, an excess of demand will prompt sellers to increase prices until demand at that price matches the available supply, establishing market equilibrium. In economic terminology, a shortage occurs when for some reason the price does not rise to reach equilibrium. In this circumstance, buyers want to more at the market price than the quantity of the good or service that is available. So in a market the only thing that can cause a shortage is price. In common use, the term shortage may refer to a situation where most people are unable to find a good at an affordable price. Market clearing happens when all buyers and sellers willing to transact at the price are able to find partners. Shortages may be caused by, Price ceilings, a type of control which involves a government-imposed limit on the price of a product service.
Government ban on the sale of a product or service, such as prostitution or certain recreational drugs, Decisions by suppliers not to raise prices, for example to maintain friendly relationships with potential future customers during a supply disruption. Artificial scarcity Decisions which result in a below-market-clearing price help some people, in this case, shortages may be accepted because they theoretically enable a certain portion of the population to purchase a product that they couldnt afford at the market-clearing price. The cost is to those who are willing to pay for a product and either cant, in the case of government intervention in the market, there is always a trade-off with positive and negative effects. For example, a price ceiling may cause a shortage, economic shortages caused by higher transaction costs and opportunity costs mean that the distribution process is wasteful. Both of these contribute to a decrease in aggregate wealth. Artificial controls of demand, such as time and rationing, non-monetary bargaining methods, such as time, nepotism, or even violence.
The inability to purchase a product, during the 1973 oil crisis, during which long lines and rationing was used to control demand. In the former Soviet Union during the 1980s, prices were low by fiat. Soviet citizens waited in line for various price-controlled goods and services such as cars and this method for determining the allocation of goods in short supply is known as rationing. Whether an economic shortage of a good or service is beneficial or detrimental to society often depends on ones ethical and political views
In economics and other social sciences, preference is the ordering of alternatives based on their relative utility, a process which results in an optimal choice. The character of the preferences is determined purely by taste factors, independent of considerations of prices, income. With the help of the scientific method many practical decisions of life can be modelled, in 1926 Ragnar Frisch developed for the first time a mathematical model of preferences in the context of economic demand and utility functions. Up to then, economists had developed a theory of demand that omitted primitive characteristics of people. This omission ceased when, at the end of the 19th, because binary choices are directly observable, it instantly appealed to economists. The search for observables in microeconomics is taken further by revealed preference theory. Since the pioneer efforts of Frisch in the 1920s, one of the issues which has pervaded the theory of preferences is the representability of a preference structure with a real-valued function.
This has been achieved by mapping it to the mathematical index called utility, von Neumann and Morgenstern 1944 book Games and Economic Behaviour treated preferences as a formal relation whose properties can be stated axiomatically. Even though the economics of choice can be examined either at the level of utility functions or at the level of preferences, suppose the set of all states of the world is X and an agent has a preference relation on X. It is common to mark the weak preference relation by ⪯, the symbol ∼ is used as a shorthand to the indifference relation, x ∼ y ⟺, which reads the agent is indifferent between y and x. The symbol ≺ is used as a shorthand to the preference relation, x ≺ y ⟺. In everyday speech, the statement x is preferred to y is generally understood to mean that someone chooses x over y, decision theory rests on more precise definitions of preferences given that there are many experimental conditions influencing peoples choices in many directions. Suppose a person is confronted with an experiment that she must solve with the aid of introspection.
She is offered apples and oranges, and is asked to choose one of the two. A decision scientist observing this event would be inclined to say that whichever is chosen is the preferred alternative. Under several repetitions of experiment, if the scientist observes that apples are chosen 51% of the time it would mean that x ≻ y. If half of the oranges are chosen, x ∼ y. Finally, if 51% of the time she chooses oranges it means that y ≻ x, preference is here being identified with a greater frequency of choice
Interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum. It is distinct from a fee which the borrower may pay the lender or some third party, in the case of savings, the customer is the lender, and the bank plays the role of the borrower. Interest differs from profit, in that interest is received by a lender, whereas profit is received by the owner of an asset, the rate of interest is equal to the interest amount paid or received over a particular period divided by the principal sum borrowed or lent. Compound interest means that interest is earned on prior interest in addition to the principal, due to compounding, the total amount of debt grows exponentially, and its mathematical study led to the discovery of the number e. In practice, interest is most often calculated on a daily, monthly, or yearly basis, according to historian Paul Johnson, the lending of food money was commonplace in Middle Eastern civilizations as early as 5000 BC.
The argument that acquired seeds and animals could reproduce themselves was used to justify interest, early Muslims called this riba, translated today as the charging of interest. The First Council of Nicaea, in 325, forbade clergy from engaging in usury which was defined as lending on interest above 1 percent per month, ninth century ecumenical councils applied this regulation to the laity. Catholic Church opposition to interest hardened in the era of scholastics, in the medieval economy, loans were entirely a consequence of necessity and, under those conditions, it was considered morally reproachable to charge interest. For the same reason, interest has often been looked down upon in Islamic civilization, medieval jurists developed several financial instruments to encourage responsible lending and circumvent prohibitions on usury, such as the Contractum trinius. In the Renaissance era, greater mobility of people facilitated an increase in commerce, given that borrowed money was no longer strictly for consumption but for production as well, interest was no longer viewed in the same manner.
The first attempt to control interest rates through manipulation of the supply was made by the Banque de France in 1847. The latter half of the 20th century saw the rise of interest-free Islamic banking and finance, a movement that applies Islamic law to financial institutions, some countries, including Iran and Pakistan, have taken steps to eradicate interest from their financial systems. All financial transactions must be asset-backed and it does not charge any interest or fee for the service of lending, in economics, the rate of interest is the price of credit, and it plays the role of the cost of capital. Over centuries, various schools of thought have developed explanations of interest and interest rates, the School of Salamanca justified paying interest in terms of the benefit to the borrower, and interest received by the lender in terms of a premium for the risk of default. In the sixteenth century, Martín de Azpilcueta applied a time preference argument, interest is compensation for the time the lender forgoes the benefit of spending the money.
On the question of why interest rates are normally greater than zero, in 1770, French economist Anne-Robert-Jacques Turgot, for the land value to remain positive and finite keeps the interest rate above zero. Adam Smith, Carl Menger, and Frédéric Bastiat propounded theories of interest rates, in the 1930s, Wicksells approach was refined by Bertil Ohlin and Dennis Robertson and became known as the loanable funds theory. Other notable interest rate theories of the period are those of Irving Fisher, simple interest is calculated only on the principal amount, or on that portion of the principal amount that remains
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 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 and trademarks are sometimes used as examples of government-granted monopolies.
The government may 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 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, 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
In economics, a service is a transaction in which no physical goods is transferred from the seller to the buyer. The benefits of such a service are held to be demonstrated by the willingness to make the exchange. Public services are those that society as a whole pays for, using resources, skill and experience, service providers benefit service consumers. Services can be described in terms of their key characteristics, sometimes called the Five Is of Services and they are not manufactured, transported or stocked. Services cannot be stored for a future use and they are produced and consumed simultaneously. Services are perishable in two regards, Service-relevant resources and systems are assigned for delivery during a specific period in time. If the service consumer does not request and consume the service during this period, from the perspective of the service provider, this is a lost business opportunity if no other use for those resources is available. Examples, A hairdresser serves another client, an empty seat on an airplane cannot be filled after departure.
When the service has been rendered to the consumer, this particular service irreversibly vanishes. Example, a passenger has been transported to the destination and the flight is over, the service provider must deliver the service at the time of service consumption. The service is not manifested in an object that is independent of the provider. The service consumer is inseparable from service delivery, The service consumer must sit in the hairdressers chair, or in the airplane seat. Correspondingly, the hairdresser or the pilot must be in the shop or plane, many services are regarded as heterogeneous and are typically modified for each service consumer or each service context. Another and more common term for this is heterogeneity, both service provider and service consumer participate in the service provision. Mass generation and delivery of services must be mastered for a provider to expand. This can be seen as a problem of service quality, both inputs and outputs to the processes involved providing services are highly variable, as are the relationships between these processes, making it difficult to maintain consistent service quality.
Many services involve variable human activity, rather than a precisely determined process, the human factor is often the key success factor in service provision. Demand can vary by season, time of day, business cycle, consistency is necessary to create enduring business relationships
In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Economists often urge governments to adopt policies that internalize an externality, if external costs exist, such as pollution, the producer may choose to produce more of the product than would be produced if the producer were required to pay all associated environmental costs. Because responsibility or consequence for self-directed action lies partly outside the self, if there are external benefits, such as in public safety, less of the good may be produced than would be the case if the producer were to receive payment for the external benefits to others. For the purpose of these statements, overall cost and benefit to society is defined as the sum of the monetary value of benefits and costs to all parties involved. Two British economists are credited with having initiated the study of externalities, or spillover effects, Henry Sidgwick is credited with first articulating.
Pigou is credited with formalizing the concept of externalities, suppose that there are K different possible allocations and N different agents, where K, N < ∞ and N ≥2. Suppose that each agent has a type θ i ∼ F i and that each agent gets payoff v i + t i, a map f = is a social choice function if ∑ i =1 N t i ≤0 for all θ ∈ N. An allocation κ, N → K is ex-post efficient if ∑ i =1 N v i ≥ ∑ i =1 N v i for all θ = ∈ N and all k ∈ K. Let κ ∗ denote an ex-post efficient allocation and let κ i ~ denote an ex-post efficient allocation without agent i. Then the externality imposed by agent i on the agents is ∑ j ≠ i v j − ∑ j ≠ i v j. Voluntary exchange is considered beneficial to both parties involved, because buyers or sellers would not trade if either thought it detrimental to themselves. However, a transaction can cause effects on third parties. From the perspective of those affected, these effects may be negative, neoclassical welfare economics asserts that, under plausible conditions, the existence of externalities will result in outcomes that are not socially optimal.
Those who suffer from external costs do so involuntarily, whereas those who enjoy external benefits do so at no cost, a voluntary exchange may reduce societal welfare if external costs exist. The externality may even be seen as a trespass on their lungs, thus, an external cost may pose an ethical or political problem. Alternatively, it might be seen as a case of poorly defined property rights, as with, for example, on the other hand, a positive externality would increase the utility of third parties at no cost to them. Since collective societal welfare is improved, but the providers have no way of monetizing the benefit, Goods with positive externalities include education, public health initiatives and law enforcement. Positive externalities are often associated with the free rider problem, there are a number of potential means of improving overall social utility when externalities are involved
Econometrics is the application of statistical methods to economic data and is described as the branch of economics that aims to give empirical content to economic relations. More precisely, it is the analysis of actual economic phenomena based on the concurrent development of theory and observation. 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. Ragnar Frisch is credited with coining the term in the sense in which it is used today, the 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 models, analyzing economic history.
The basic tool for econometrics is the linear regression model. In modern econometrics, other tools are frequently used. Estimating a linear regression on two variables can be visualized as fitting a line through points representing paired values of the independent and dependent variables. For example, consider Okuns law, which relates GDP growth to the unemployment rate, the unknown parameters β0 and β1 can be estimated. Here β1 is estimated to be −1.77 and β0 is estimated to be 0.83 and 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 β1 were not significantly different from 0, 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.
Ordinary least squares is used for estimation since it provides the BLUE or best linear unbiased estimator given the Gauss-Markov assumptions. Estimators that incorporate prior beliefs are advocated by those who favor Bayesian statistics over traditional, classical or frequentist approaches, applied econometrics uses theoretical econometrics and real-world data for assessing economic theories, developing econometric models, analyzing economic history, and forecasting. Econometrics may use standard statistical models to study economic questions, but most often they are with observational data, rather than in controlled experiments. In this, the design of studies in econometrics is similar to the design of studies in other observational disciplines, such as astronomy, sociology
Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given, in the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity, models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, clothing, the founding father of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition. Joan Robinson published a book The Economics of Imperfect Competition with a theme of distinguishing perfect from imperfect competition. Monopolistically competitive markets have the characteristics, There are many producers and many consumers in the market.
Consumers perceive that there are differences among the competitors products. There are few barriers to entry and exit, producers have a degree of control over price. The long-run characteristics of a competitive market are almost the same as a perfectly competitive market. A firm making profits in the run will nonetheless only break even in the long run because demand will decrease. This means in the run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market, because of brand loyalty and this means that an individual firms demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule. However, the differences are not so great as to other goods as substitutes. Technically, the price elasticity of demand between goods in such a market is positive. In fact, the XED would be high, MC goods are best described as close but imperfect substitutes. The goods perform the basic functions but have differences in qualities such as type, quality, appearance.
For example, the function of motor vehicles is the same—to move people and objects from point to point in reasonable comfort. Yet there are different types of motor vehicles such as motor scooters, motor cycles and cars
Rationing is the controlled distribution of scarce resources, goods, or services, or an artificial restriction of demand. Rationing controls the size of the ration, which is ones allowed portion of the resources being distributed on a day or at a particular time. Rationing is often done to keep price below the price determined by the process of supply. Thus, rationing can be complementary to price controls, an example of rationing in the face of rising prices took place in the various countries where there was rationing of gasoline during the 1973 energy crisis. A reason for setting the lower than would clear the market may be that there is a shortage. High prices, especially in the case of necessities, are undesirable with regard to those who cannot afford them, traditionalist economists argue, that high prices act to reduce waste of the scarce resource while providing incentive to produce more. Rationing using ration stamps is only one kind of non-price rationing, for example, scarce products can be rationed using queues.
This is seen, for example, at amusement parks, where one pays a price to get in, similarly, in the absence of road pricing, access to roads is rationed in a first come, first served queueing process, leading to congestion. Authorities which introduce rationing often have to deal with the goods being sold illegally on the black market. Rationing has been instituted during wartime for civilians, for example, each person may be given ration coupons allowing him or her to purchase a certain amount of a product each month. Rationing often includes food and other necessities for which there is a shortage, including materials needed for the war such as rubber tires, leather shoes, clothing. Rationing of food and water may become necessary during an emergency. In the U. S. the Federal Emergency Management Agency has established guidelines for civilians on rationing food, according to FEMA standards, every person should have a minimum of 1 US quart per day of water, and more for children, nursing mothers and the ill.
Military sieges have often resulted in shortages of food and other essential consumables, in such circumstances, the rations allocated to an individual are often determined based on age, race or social standing. During the Siege of Lucknow a woman received three quarters the food ration a man received and children received only half, during the Siege of Ladysmith in the early stages of the Boer War in 1900 white adults received the same food rations as soldiers while children received half that. Food rations for Indian people and black people were significantly smaller, the first modern rationing systems were brought in during the First World War. In Germany, suffering from the effects of the British blockade, although Britain did not suffer from food shortages, as the sea lanes were kept open for food imports, panic buying towards the end of the war prompted the rationing of first sugar and meat. It is said to have in the most part benefited the health of the country, to assist with rationing, ration books were introduced on 15 July 1918 for butter, lard and sugar
This is in contrast to a common good which is non-excludable but is rivalrous to a certain degree. Public goods include fresh air, official statistics, national security, common language, flood control systems, public goods that are available everywhere are sometimes referred to as global public goods. Many public goods may at times be subject to excessive use resulting in negative externalities affecting all users, for air pollution. Public goods problems are closely related to the free-rider problem. Thus, the good may be under-produced, overused or degraded, there is a good deal of debate and literature on how to measure the significance of public goods problems in an economy, and to identify the best remedies. Paul A. Samuelson is usually credited as the first economist to develop the theory of public goods and this is the property that has become known as non-rivalry. In addition a pure public good exhibits a second property called non-excludability, the opposite of a public good is a private good, which does not possess these properties. A loaf of bread, for example, is a good, its owner can exclude others from using it. A good that is rivalrous but non-excludable is sometimes called a common-pool resource, such goods raise similar issues to public goods, the mirror to the public goods problem for this case is sometimes called the tragedy of the commons.
For example, it is so difficult to enforce restrictions on deep sea fishing that the fish stocks can be seen as a non-excludable resource. V. Ostrom and E. ” Conceptualizing subtractability of use, overtly adding a very important fourth type of good—common-pool resources—that shares the attribute of subtractability with private goods and difficulty of exclusion with public goods. Forests, water systems and the atmosphere are all common-pool resources of immense importance for the survival of humans on this earth. Changing the name of a good to a “toll” good since many goods that share these characteristics are provided by small scale public as well as private associations. The definition of non-excludability states that it is impossible to exclude individuals from consumption, technology now allows radio or TV broadcasts to be encrypted such that persons without a special decoder are excluded from the broadcast. Many forms of information goods have characteristics of public goods, for example, a poem can be read by many people without reducing the consumption of that good by others, in this sense, it is non-rivalrous.
Similarly, the information in most patents can be used by any party without reducing consumption of good by others. Official statistics provide an example of information goods that are public goods. Creative works may be excludable in some circumstances, the individual who wrote the poem may decline to share it with others by not publishing it
Goods and services
Physiocratic economists categorized production into productive labour and unproductive labour. This emphasis on production was adapted by David Ricardo, Thomas Robert Malthus and John Stuart Mill. Other, mainly Italian, 18th century economists maintained that all desired goods, the division of consumables into services is a simplification, these are not discrete categories. Most business theorists see a continuum with pure service at one endpoint, most products fall between these two extremes. For example, a restaurant provides a good, but provides services in the form of ambience. Although some utilities, such as electricity and communications service providers, exclusively provide services, other utilities deliver physical goods, for public sector contracting purposes in the European Union, electricity supply is actually defined as goods rather than services. Goods are normally structural and can be transferred in an instant while services are delivered over a period of time, goods can be returned while a service once delivered cannot.
Goods are not always tangible and may be virtual e. g. a book may be paper or electronic, marketing theory makes use of the service-goods continuum as an important concept which enables marketers to see the relative goods/services composition of total products. In a narrower sense, service refers to quality of customer service and this particular usage occurs frequently in retailing. Distinctions are made between goods and services in the context of international trade liberalization, for example, the World Trade Organizations General Agreement on Tariffs and Trade covers international trade in goods and the General Aglreement on Trade in Services covers the services sector
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers. Oligopolies can result from forms of collusion which reduce competition. Oligopoly has its own market structure, with few sellers, each oligopolist is likely to be aware of the actions of the others. According to game theory, the decisions of one firm therefore influence and are influenced by decisions of other firms, strategic planning by oligopolists needs to take into account the likely responses of the other market participants. Oligopoly is a market form where a number of firms are in competition. As a quantitative description of oligopoly, the concentration ratio is often utilized. This measure expresses, as a percentage, the share of the four largest firms in any particular industry. Oligopolistic competition can give rise to both wide-ranging and diverse outcomes, in some situations, particular companies may employ restrictive trade practices in order to raise inflate prices and restrict production in much the same way that a monopoly does.
Whenever there is an agreement for such collusion, between companies that usually compete with one another, this practice is known as a cartel. A prime example of such a cartel is OPEC, which has an influence on the international price of oil. Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment, there are legal restrictions on such collusion in most countries. In other situations, competition between sellers in an oligopoly can be fierce, with low prices and high production. This could lead to an efficient outcome approaching perfect competition, the competition in an oligopoly can be greater when there are more firms in an industry than if, for example, the firms were only regionally based and did not compete directly with each other. Thus the welfare analysis of oligopolies is sensitive to the values used to define the markets structure. In particular, the level of dead weight loss is hard to measure, the study of product differentiation indicates that oligopolies might create excessive levels of differentiation in order to stifle competition.
Oligopoly theory makes use of game theory to model the behavior of oligopolies. In this model, the firms move sequentially, in this model, the firms simultaneously choose quantities. In this model, the firms simultaneously choose prices, profit maximization conditions An oligopoly maximizes profits