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Economis:- Economics is the social science that analyzes the production, distribution,

and consumption of goods and services

Circular flow of economics

The flow of payments in an economy is a circular flow.

Concept of supply and demand

Supply and demand is an economic model of price determination in a market.

Determination of market price and quantity

What price should the seller set and how many videos will be rented per month? The seller could legally set any price she wished; however, market forces penalize her for making poor choices. Suppose, for example, that the seller prices each video at $20. Odds are good that few videos will be rented. On the other hand, the seller may set a price of $1 per video. Consumers will certainly rent more videos with this low price, so much so that the store is likely to run out of videos. Through trial and error or good judgement, the store owner will eventually settle on a price that equates the forces of supply and demand. In economics, an equilibrium is a situation in which:

there is no inherent tendency to change, quantity demanded equals quantity supplied, and the market just clears.

At the market equilibrium, every consumer who wishes to purchase the product at the market price is able to do so, and the supplier is not left with any unwanted inventory. As Table 3 and the figure titled "Equilibrium" demonstrate, equilibrium in the video example occurs at a price of $3 and a quantity of 30 videos.

2 market price quantity

To solve for the equilibrium price, one must either plot the supply and demand curves, or solve for their equations being equal. An example may be:

In the diagram, depicting simple set of supply and demand curves, the quantity demanded and supplied at price P are equal. At any price above P supply exceeds demand, while at a price below P the quantity demanded exceeds that supplied. In other words, prices where demand and supply are out of balance are termed points of disequilibrium, creating shortages and oversupply. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market. Consider the following demand and supply schedule: Price ($) Demand Supply


6,000 18,000


8,000 16,000


10,000 14,000


12,000 12,000


14,000 10,000










The equilibrium price in the market is $5.00 where demand and supply are equal at 12,000 units If the current market price was $3.00 there would be excess demand for 8,000 units, creating a shortage.

If the current market price was $8.00 there would be excess supply of 12,000 units.

When there is a shortage in the market we see that, to correct this disequilibrium, the price of the good will be increased back to a price of $5.00, thus lessening the quantity demanded and increasing the quantity supplied thus that the market is in balance. When there is an oversupply of a good, such as when price is above $6.00, then we see that producers will decrease the price to increase the quantity demanded for the good, thus eliminating the excess and taking the market back to equilibrium.

Influences changing price

A change in equilibrium price may occur through a change in either the supply or demand schedules. For instance, starting from the above supply-demand configuration, an increased level ofdisposable income may produce a new demand schedule, such as the following: Price ($) Demand Supply


10,000 18,000


12,000 16,000


14,000 14,000


16,000 12,000


18,000 10,000










Here we see that an increase in disposable income would increase the quantity demanded of the good by 4,000 units at each price. This increase in demand would have the effect of shifting the demand curve rightward. The result is a change in the price at which quantity supplied equals quantity demanded. In this case we see that the two now equal each other at an increased price of $6.00. Note that a decrease in disposable income would have the exact opposite effect on the market equilibrium . We will also see similar behaviour in price when there is a change in the supply schedule, occurring through technological changes, or through changes in business costs. An increase in technological usage or know-how or a decrease in costs would have the effect of increasing the quantity supplied at each price, thus reducing the equilibrium price. On the other hand, a decrease in technology or increase in business costs will decrease the quantity supplied at each price, thus increasing equilibrium price.

The process of comparing two static equilibria to each other, as in the above example, is known as comparative statics. For example, since a rise in consumers' income leads to a higher price (and a decline in consumers' income leads to a fall in the price in each case the two things change in the same direction), we say that the comparative static effect of consumer income on the price is positive. This is another way of saying that the total derivative of price with respect to consumer income is greater than zero.

Dynamic equilibrium
Whereas in a static equilibrium all quantities have unchanging values, in a dynamic equilibrium various quantities may all be growing at the same rate, leaving their ratios unchanging. For example, in the neoclassical growth model, the working population is growing at a rate which is exogenous (determined outside the model, by non-economic forces). In dynamic equilibrium, output and thephysical capital stock also grow at that same rate, with output per worker and the capital stock per worker unchanging. Similarly, in models of inflation

a dynamic equilibrium would involve the price level, the

nominal money supply, nominal wage rates, and all other nominal values growing at a single common rate, while all real values are unchanging, as is the inflation rate. The process of comparing two dynamic equilibria to each other is known as comparative dynamics. For example, in the neoclassical growth model, starting from one dynamic equilibrium based in part on one particular saving rate, a permanent increase in the saving rate leads to a new dynamic equilibrium in which there are permanently higher capital per worker and productivity per worker, but an unchanged growth rate of output; so it is said that in this model the comparative dynamic effect of the saving rate on capital per worker is positive but the comparative dynamic effect of the saving rate on the output growth rate is zero.

See also
Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient that can be improved upon from the societal point-of-view.
[1][2] [3]

The first known use of the term by economists was in 1958,



the concept has been traced back to the Victorian philosopher Henry Sidgwick.

Market failures are often associated with information asymmetries, non-competitive markets, principalagent problems, externalities, or public goods. The existence of a market failure is often used as a justification for government intervention in a particular market.
[8][9] [6] [7]


especially microeconomists, are often concerned with the causes of market failure, and possible means to correct such a failure when it occurs.

Such analysis plays an important role in many types of public

policy decisions and studies. However, some types of government policy interventions, such as taxes, subsidies, bailouts, wage and price controls, and regulations, including attempts to correct market failure, may also lead to an inefficient allocation of resources, sometimes called government failure.


there is sometimes a choice between imperfect outcomes, i.e. imperfect market outcomes with or without government interventions. But either way, if a market failure exists the outcome is not pareto efficient. Mainstream neoclassical and Keynesian economists believe that it may be possible for a government to improve the inefficient market outcome, while several heterodoxschools of thought disagree with this.

1 Categories

o o o o o o o

1.1 Monopolies 1.2 Public goods 1.3 Natural monopoly 1.4 Externalities 1.5 Bounded rationality 1.6 Information asymmetry 1.7 Other theories

2 Interpretations and policy 3 Objections

o o o

3.1 Public choice 3.2 Austrian 3.3 Marxian

4 See also 5 Notes 6 References 7 External links

[edit]Categories Different economists have different views about what events are the sources of market failure. Mainstream economic analysis widely accepts a market failure (relative to Pareto efficiency) can occur for three main reasons: if the market is "monopolised" or a small group of businesses hold significant market

power, if production of the good or service results in an externality, or if the good or service is a "public good".

[edit]Monopolies Main articles: Market power, Monopoly, Monopsony, Oligopoly, and Oligopsony Agents in a market can gain market power, allowing them to block other mutually beneficial gains from trades from occurring. This can lead to inefficiency due to imperfect competition, which can take many different forms, such as monopolies,
[13] [13]

monopsonies, cartels, or monopolistic competition, if the agent

does not implement perfect price discrimination. In a monopoly, the market equilibrium will no longer be Pareto optimal. The monopoly will use its market power to restrict output below the quantity at which

the marginal social benefit is equal to the marginal social cost of the last unit produced, so as to keep prices and profits high. An issue for this analysis is whether a situation of market power or monopoly is

likely to persist if unaddressed by policy, or whether competitive or technological change will undermine it over time. It is then a further question about what circumstances allow a monopoly to arise. Economists say that monopolies can maintain themselves where there are "barriers to entry". [edit]Public


Main article: Public goods Some markets can fail due to the nature of certain goods, or the nature of their exchange. For instance, goods can display the attributes of public goods

or common-pool resources, while markets may have


significant transaction costs, agency problems, or informational asymmetry.

In general, all of these

situations can produce inefficiency, and a resulting market failure. A related issue can be the inability of a seller to exclude non-buyers from using a product anyway, as in the development of inventions that may spread freely once revealed. This can cause underinvestment, such as where a researcher cannot capture enough of the benefits from success to make the research effort worthwhile. [edit]Natural


Main article: Natural monopoly Natural monopoly, or the overlapping concepts of "practical" and "technical" monopoly, is an extreme case of failure of competition as a restraint on producers. The problem is described as one where the more of a product is made, the less the unit costs are. This means it only makes economic sense to have one producer. [edit]Externalities Main article: Externality

The actions of agents can have externalities, conditions important to the market.
[13] [2]


which are innate to the methods of production, or other

For example, when a firm is producing steel, it absorbs labor, capital

and other inputs, it must pay for these in the appropriate markets, and these costs will be reflected in the market price for steel.

If the firm also pollutes the atmosphere when it makes steel, however, and if it is

not forced to pay for the use of this resource, then this cost will be borne not by the firm but by society. Hence, the market price for steel will fail to incorporate the full opportunity cost to society of
[13] [13]


In this case, the market equilibrium in the steel industry will not be optimal.

More steel will

be produced than would occur were the firm to have to pay for all of its costs of production.

Consequently, the marginal social cost of the last unit produced will exceed its marginal

social benefit.

Common examples of an externality is environmental harm such as pollution or overexploitation of natural resources.

Traffic congestion is an example of market failure, since driving can impose hidden costs on other drivers and society. Solutions for this include public transportation, congestion pricing, toll roads andtoll bridges, and other ways of making the driver include the social cost in the decision to drive. [edit]Bounded


Main article: Bounded rationality In Models of Man, Herbert Simon points out that most people are only partly rational, and are emotional/irrational in the remaining part of their actions. In another work, he states "boundedly rational agents experience limits in formulating and solving complex problems and in processing (receiving, storing, retrieving, transmitting) information" (Williamson, p. 553, citing Simon). Simon describes a number of dimensions along which "classical" models of rationality can be made somewhat more realistic, while sticking within the vein of fairly rigorous formalization. These include: limiting what sorts of utility functions there might be. recognizing the costs of gathering and processing information. the possibility of having a "vector" or "multi-valued" utility function.

Simon suggests that economic agents employ the use of heuristics to make decisions rather than a strict rigid rule of optimization. They do this because of the complexity of the situation, and their inability to process and compute the expected utility of every alternative action. Deliberation costs might be high and there are often other, concurrent economic activities also requiring decisions. [edit]Information


Main article: Information asymmetry

Information asymmetries and incomplete markets may result in economic inefficiency but also a possibility of improving efficiency through market, legal, and regulatory remedies. From contract theory, decisions in transactions where one party has more or better information than the other is an asymmetry. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry. Examples of this problem are adverse selection and moral hazard. Most commonly, information asymmetries are studied in the context of principal-agent problems. George Akerlof, Michael Spence, and Joseph E. Stiglitz developed the idea. [edit]Other


Hugh Gravelle and Ray Rees argue that more fundamentally, the underlying cause of market failure is often a problem of property rights. A market is an institution in which individuals or firms exchange not just commodities, but the rights to use them in particular ways for particular amounts of time. [...] Markets are institutions which organize the exchange of control of commodities, where the nature of the control is defined by the property rights attached to the commodities.

As a result, agents' control over the uses of their commodities can be imperfect, because the system of rights which defines that control is incomplete. Typically, this falls into two generalized rights excludability and transferability. Excludability deals with the ability of agents to control who uses their commodity, and for how long and the related costs associated with doing so. Transferability reflects the right of agents to transfer the rights of use from one agent to another, for instance by selling or leasing a commodity, and the costs associated with doing so. If a given system of rights does not fully guarantee these at minimal (or no) cost, then the resulting distribution can be inefficient. these form an important part of the work of institutional economics.
[15] [14] [9]

Considerations such as

Nonetheless, views still differ on

whether something displaying these attributes is meaningful without the information provided by the market price system.


and policy

The above causes represent the mainstream view of what market failures mean and of their importance in the economy. This analysis follows the lead of the neoclassical school, and relies on the notion of Pareto efficiency

and specifically considers market failures absent considerations of the "public


interest", or equity, citing definitional concerns.

This form of analysis has also been adopted by

the Keynesian or new Keynesian schools in modern macroeconomics, applying it to Walrasian models of general equilibrium in order to deal with failures to attain full employment, or the non-adjustment of prices and wages.

Many social democrats and "New Deal liberals", have adopted this analysis for public policy, so they view market failures as a very common problem of any unregulated market system and therefore argue for state intervention in the economy in order to ensure both efficiency and social justice (usually interpreted in terms of limiting avoidable inequalities in wealth and income). Both the democratic accountability of these regulations and the technocratic expertise of the economists play an important role here in shaping the kind and degree of intervention. Neoliberals follow a similar line, often focusing on "market-oriented solutions" to market failure: for example, they propose going beyond the common idea of having the government charge a fee for the right to pollute (internalizing the external cost, creating a disincentive to pollute) to allow polluters to sell the pollution permits. Some remedies for market failure can resemble other market failures. For example, the issue of systematic underinvestment in research is addressed by the patent system that creates artificial monopolies for successful inventions.

Aggregate supply nd demand

aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level.

It is the amount of goods and services in the economy that will be purchased at all This is the demand for the gross domestic product of a country

possible price levels.


when inventory levels are static. It is often called effective demand, though at other times this term is distinguished. It is often cited that the aggregate demand curve is downward sloping because at lower price levels a greater quantity is demanded. While this is correct at the microeconomic, single good level, at the aggregate level this is incorrect. The aggregate demand curve is in fact downward sloping as a result of three distinct effects; Pigou's wealth effect, the Keynes' interest rate effect and the Mundell-Fleming exchange-rate effect.

1 Components 2 Aggregate demand curves

o o

2.1 Keynesian cross 2.2 Aggregate demand-aggregate supply model

2.3 Marxian critique

3 Debt 4 See also 5 References 6 External links

[edit]Components An aggregate demand curve is the sum of individual demand curves for different sectors of the economy. The aggregate demand is usually described as a linear sum of four separable demand sources.

where is consumption (may also be known as consumer spending) = ac + bc(Y T), is Investment, is Government spending, is Net export, is total exports, and is total imports = am + bm(Y T).

These four major parts, which can be stated in either 'nominal' or 'real' terms, are: personal consumption expenditures (C) or "consumption," demand by households and unattached individuals; its determination is described by the consumption function. The consumption function is C= a + (mpc)(Y-T) a is autonomous consumption, mpc is the marginal propensity to consume, (Y-T) is the disposable income. gross private domestic investment (I), such as spending by business firms on factory construction. This includes all private sector spending aimed at the production of some future consumable. In Keynesian economics, not all of gross private domestic investment counts as part of aggregate demand. Much or most of the investment in inventories can be due to a short-fall in demand (unplanned inventory accumulation or "general over-production"). The Keynesian model forecasts a decrease in national output and income when there is unplanned investment. (Inventory accumulation would correspond to an excess supply of products; in

the National Income and Product Accounts, it is treated as a purchase by its producer.) Thus, only the planned or intended or desired part of investment (Ip) is counted as part of aggregate demand. (So, I does not include the 'investment' in running up or depleting inventory levels.) Investment is affected by the output and the interest rate (i). Consequently, we can write it as I(Y,i). Investment has positive relationship with the output and negative relationship with the interest rate. For example, an increase in the interest rate will cause aggregate demand to decline. Interest costs are part of the cost of borrowing and as they rise, both firms and households will cut back on spending. This shifts the aggregate demand curve to the left. This lowers equilibrium GDP below potential GDP. As production falls for many firms, they begin to lay off workers, and unemployment rises. The declining demand also lowers the price level. The economy is in recession. gross government investment and consumption expenditures (G). net exports (NX and sometimes (X-M)), i.e., net demand by the rest of the world for the country's output. In sum, for a single country at a given time, aggregate demand (D or AD) = C + Ip + G + (X-M). These macrovariables are constructed from varying types of microvariables from the price of each, so these variables are denominated in (real or nominal) currency terms. [edit]Aggregate

demand curves

Understanding of the aggregate demand curve depends on whether it is examined based on changes in demand as income changes, or as price change. [edit]Keynesian


n economics, aggregate supply is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing to sell at a given price level in an economy.

1 Analysis

2 Different scopes 3 See also 4 References 5 External links

In neo-Keynesian theory seen in many textbooks, an "aggregate supply and demand" diagram is drawn that looks like a typical Marshallian supply and demand diagram. The aggregate supply (AS) curve is usually drawn as upward-sloping in the short run, since the quantity of aggregate production supplied (Q ) rises as the average price level (P) rises. There are two main reasons why Q might rise as P rises, i.e., why the AS curve is upward sloping: Higher prices motivate profit-seeking firms to increase output. This is because of diminishing returns and thus rising marginal costs that arise because one or more of the inputs or factors of production does not change in the short run and is assumed to be fully employed at all times. Usually this is fixed capital equipment. The AS curve is drawn given some nominal variable, such as the nominal wage rate. In the short run, the nominal wage rate is taken as fixed. Thus, rising P implies higher profits that justify expansion of output. In the neoclassical long run, on the other hand, the nominal wage rate varies with economic conditions. (High unemployment leads to falling nominal wages -- and vice-versa.) An alternative model starts with the notion that any economy involves a large number of heterogeneous types of inputs, including both fixed capital equipment and labor. Both main types of inputs can be unemployed. The upward-sloping AS curve arises because (1) some nominal input prices are fixed in the short run (as in the neoclassical theory) and (2) as output rises, more and more production processes encounter bottlenecks. At low levels of demand, there are large numbers of production processes that do not use their fixed capital equipment fully. Thus, production can be increased without much in the way of diminishing returns and the average price level need not rise much (if at all) to justify increased production. The AS curve is flat. On the other hand, when demand is high, few production processes have unemployed fixed inputs. Thus, bottlenecks are general. Any increase in demand and production induces increases in prices. Thus, the AS curve is steep or vertical. AS is targeted by government "supply side policies" which are meant to increase productivity efficiency and national output. For example, education and training and research and development.
s s

Different scopes

There are generally three forms of aggregate supply (AS). They are: 1. Short run aggregate supply (SRAS) Within the time frame during which firms can change the amount of labor used but not capital (such as building new factories). This form demonstrates what happens to the economy under the most slack, when resources are underused. Upward shifts in SRAS generally increase output (y) but don't increase price (P). The SRAS curve is nearly perfectly horizontal. The concept is that wages (price of labor) don't change over the short run. 2. Long run aggregate supply (LRAS) Over the long run, only capital, labor, and technology affect the LRAS in the macroeconomic model because at this point everything in the economy is assumed to be used optimally. In most situations, the LRAS is viewed as static because it shifts the slowest of the three. The LRAS is shown as perfectly vertical, reflecting economists' belief that changes in aggregate demand (AD) have an only temporary change on the economy's total output. 3. Medium run aggregate supply (MRAS) As an interim between SRAS and LRAS, the MRAS form slopes upward and reflects when capital as well as labor can change. More specifically, the Medium run aggregate supply is like this for three theoretical reasons, namely the Sticky-Wage Theory, the Sticky-Price Theory and the Misperception Theory. When graphing an aggregate supply and demand model, the MRAS is generally graphed after aggregate demand (AD), SRAS, and LRAS have been graphed, and then placed so that the equilibria occur at the same point. The MRAS curve is affected by capital, labor, technology, and wage rate. In a standard aggregate supply demand model, the output (y) is the x axis and price (P) is the y axis. An increase in aggregate demand shifts the AD curve rightward, bringing the equilibrium point horizontally along the SRAS until it reaches the new AD. This point is the short run equilibrium.

Gnp gdp
"GNP" redirects here. For other uses, see GNP (disambiguation). Gross National Product (GNP) is the market value of all products and services produced in one year by labor and property supplied by Jono Suarez. Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership.

GNP does not distinguish between qualitative improvements in the state of the technical arts (e.g., increasing computer processing speeds), and quantitative increases in goods (e.g., number of computers produced), and considers both to be forms of "economic growth".

1 GNP vs. GDP 2 Use 3 List of countries by GNP(GNI) (nominal, Atlas method) (millions of US$)[5] (Top 10) 4 See also 5 References 6 Sources 7 External links


vs. GDP

See also: Gross domestic product#GDP vs GNP Gross National Product (GNP) is often contrasted with Gross Domestic Product (GDP). While GNP measures the output generated by a country's enterprises - whether physically located domestically or abroad - GDP measures the total output produced within a country's borders - whether produced by that country's own firms or not. When a country's capital or labour resources are employed outside its borders, or when a foreign firm is operating in its territory, GDP and GNP can produce different measures of total output. In 2009 for instance, the United States estimated its GDP at $14.119 trillion, and its GNP at $14.265 trillion. [edit]Use

ational income accounting deals with the aggregate measure of the outcome of economic activities. The most common measure of the aggregate production in an economy is Gross Domestic Product (GDP). It is the market value of all final goods and services produced in an economy within a given period of time (typically a year), whether or not those goods are sold to the final consumer. It does not matter who owns the resources as long as it is contained within the geographical border of a country. What is happening to the GDP of a country over time is an important indicator of how well the economy is performing. Calculating GDP involves adding together trillions of different goods and services produced by the economy. Computation of GDP focuses on transactions involving final output of goods and services produced in the current year.

Transactions involving intermediate goods are not included since their values are reflected in the values of the final goods in whose production the intermediate goods were employed. For example, if there is a firm that sells tires to a car manufacturer, GDP does not include the values of the tires and the full cars separately for this will unnecessarily count the tires twice. We either include the net value added by each firm or just add the value of only the final goods. To illustrate this concept further, consider the tires and the cars that were sold. The tires cost $100 each to manufacture thus totaling $400 for a car. The manufacturer sold the tires to Dodge who used them to make a car. A dealership then sold the car for $10,000. Would the GDP equal $10,400 thus including the tires and the car? No, it would not, because the tires are an intermediate good used to produce the car. In this case, the value added of the tire manufacturer is $400. The value added of the dealership in selling the car is $10,000 - $400 which is $9,600. The total value added would then be $400 + $9,600 which is $10,000. Basically, the the total of the value added must equal the total of the final goods and services.