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An aggregate in economics is a summary measure. The aggregation problem is the difficult problem of finding a valid way to treat an empirical or theoretical aggregate as if it reacted like a less-aggregated measure, say, about behavior of an individual agent as described in general microeconomic theory.Examples of aggregates in micro- and macroeconomics relative to less aggregated counterparts are:
Standard theory uses simple assumptions to derive general, and commonly accepted, results such as the law of demand to explain market behavior. An example is the abstraction of a composite good. It considers the price of one good changing proportionately to the composite good, that is, all other goods. If this assumption is violated and the agents are subject to aggregated utility functions, restrictions on the latter are necessary to yield the law of demand. The aggregation problem emphasizes:
Franklin Fisher notes that this has not dissuaded macroeconomists from continuing to use such concepts.
The aggregate consumer demand curve is the summation of the individual consumer demand curves. The aggregation process preserves only two characteristics of individual consumer preference theory—continuity and homogeneity. Aggregation introduces three additional non-price determinants of demand:
Thus if the population of consumers increases, ceteris paribus the demand curve will shift out; if the proportion of consumers with a strong preference for a good increases, ceteris paribus the demand for that good will change. Finally, if the distribution of income changes in favor of consumers who prefer the good in question, the demand will shift out. It is important to remember that factors that affect individual demand can also affect aggregate demand. However, net effects must be considered.
First, to sum the demand functions without other strong assumptions it must be assumed that they are independent – that is, that one consumer's demand decisions are not influenced by the decisions of another consumer.For example, A is asked how many pairs of shoes he would buy at a certain price. A says at that price I would be willing and able to buy two pairs of shoes. B is asked the same question and says four pairs. Questioner goes back to A and says B is willing to buy four pairs of shoes, what do you think about that? A says if B has any interest in those shoes then I have none. Or A, not to be outdone by B, says "then I'll buy five pairs". And on and on. This problem can be eliminated by assuming that the consumers' tastes are fixed in the short run. This assumption can be expressed as assuming that each consumer is an independent idiosyncratic decision maker.
This second problem is more serious. As David M. Kreps notes, “total demand will shift about as a function of how individual incomes are distributed even holding total (societal) income fixed. So it makes no sense to speak of aggregate demand as a function of price and societal income".Since any change in relative price brings about a redistribution of real income, there is a separate demand curve for every relative price. Kreps continues, "So what can we say about aggregate demand based on the hypothesis that individuals are preference/utility maximizers? Unless we are able to make strong assumptions about the distribution of preferences or income throughout the economy (everyone has the same homothetic preferences for example) there is little we can say”. The strong assumptions are that everyone has the same tastes and that each person's tastes remain the same as income changes so additional income is spent in exactly the same way as before.
Microeconomist Hal Varian reached a more muted conclusion: "The aggregate demand function will in general possess no interesting properties".However, Varian continued: "the neoclassical theory of the consumer places no restriction on aggregate behavior in general". This means the preference conditions (with the possible exception of continuity) simply do not apply to the aggregate function.
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.
Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory, a theory that has come under considerable question in recent years.
In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come. The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.
In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an overall general equilibrium. General equilibrium theory contrasts to the theory of partial equilibrium, which only analyzes single markets.
This aims to be a complete article list of economics topics:
The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their preferences subject to limitations on their expenditures, by maximizing utility subject to a consumer budget constraint.
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate well-being (welfare) at the aggregate (economy-wide) level.
Economists use the term representative agent to refer to the typical decision-maker of a certain type.
In economics, a demand curve is a graph depicting the relationship between the price of a certain commodity and the quantity of that commodity that is demanded at that price. Demand curves may be used to model the price-quantity relationship for an individual consumer, or more commonly for all consumers in a particular market. It is generally assumed that demand curves are downward-sloping, as shown in the adjacent image. This is because of the law of demand: for most goods, the quantity demanded will decrease in response to an increase in price, and will increase in response to a decrease in price.
Monetary disequilibrium theory is a product of the monetarist school and is mainly represented in the works of Leland Yeager and Austrian macroeconomics. The basic concepts of monetary equilibrium and disequilibrium were, however, defined in terms of an individual's demand for cash balance by Mises (1912) in his Theory of Money and Credit.
Social choice theory or social choice is a theoretical framework for analysis of combining individual opinions, preferences, interests, or welfares to reach a collective decision or social welfare in some sense. A non-theoretical example of a collective decision is enacting a law or set of laws under a constitution. Social choice theory dates from Condorcet's formulation of the voting paradox. Kenneth Arrow's Social Choice and Individual Values (1951) and Arrow's impossibility theorem in it are generally acknowledged as the basis of the modern social choice theory. In addition to Arrow's theorem and the voting paradox, the Gibbard–Satterthwaite theorem, the Condorcet jury theorem, the median voter theorem, and May's theorem are among the more well known results from social choice theory.
Gorman polar form is a functional form for indirect utility functions in economics. Imposing this form on utility allows the researcher to treat a society of utility-maximizers as if it consisted of a single 'representative' individual. Gorman showed that having the function take Gorman polar form is both necessary and sufficient for this condition to hold.
The Sonnenschein–Mantel–Debreu theorem is an important result in general equilibrium economics, proved by Gérard Debreu, Rolf Mantel, and Hugo F. Sonnenschein in the 1970s. It states that the excess demand curve for a market populated with utility-maximizing rational agents can take the shape of any function that is continuous, homogeneous of degree zero, and in accord with Walras's law. This implies that market processes will not necessarily reach a unique and stable equilibrium point.
In economics, Aggregate behavior refers to economy-wide sums of individual behavior. It involves relationships between economic aggregates such as national income, government expenditure and aggregate demand. For example, the consumption function is a relationship between aggregate demand for consumption and aggregate disposable income.
Value and Capital is a book by the British economist John Richard Hicks, published in 1939. It is considered a classic exposition of microeconomic theory. Central results include:
The Keynesian cross diagram is a formulation of the central ideas in Keynes' General Theory. It first appeared as a central component of macroeconomic theory as it was taught by Samuelson in his textbook, Economics: An Introductory Analysis. The Keynesian Cross plots aggregate income and planned total spending or aggregate expenditure.
In consumer theory, a consumer's preferences are called homothetic if they can be represented by a utility function which is homogeneous of degree 1. For example, in an economy with two goods , homothetic preferences can be represented by a utility function that has the following property: for every :
In economics and other social sciences, preference is the order that a person gives to alternatives based on their relative utility, a process which results in an optimal "choice". Instead of the prices of goods, personal income, or availability of goods, the character of the preferences is determined purely by a person's tastes. However, persons are still expected to act in their best interest.
The Cambridge capital controversy, sometimes called "the capital controversy" or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that started in the 1950s and lasted well into the 1960s. The debate concerned the nature and role of capital goods and a critique of the neoclassical vision of aggregate production and distribution. The name arises from the location of the principals involved in the controversy: the debate was largely between economists such as Joan Robinson and Piero Sraffa at the University of Cambridge in England and economists such as Paul Samuelson and Robert Solow at the Massachusetts Institute of Technology, in Cambridge, Massachusetts.
This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.