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Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focuses on the study of individual markets, sectors, or industries as opposed to the national economy as a whole, which is studied in macroeconomics.
In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In theoretical models where conditions of perfect competition hold, it has been demonstrated that a market will reach an equilibrium in which the quantity supplied for every product or service, including labor, equals the quantity demanded at the current price. This equilibrium would be a Pareto optimum.
Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engineer and economist, who used the concept in his studies of economic efficiency and income distribution. The following three concepts are closely related:
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 with the theory of partial equilibrium, which analyzes a specific part of an economy while its other factors are held constant. In general equilibrium, constant influences are considered to be noneconomic, or in other words, considered to be beyond the scope of economic analysis. The noneconomic influences may change given changes in the economic factors however, and therefore the prediction accuracy of an equilibrium model may depend on the independence of the economic factors from noneconomic ones.
In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts:
Welfare economics is a field of economics that applies microeconomic techniques to evaluate the overall well-being (welfare) of a society. This evaluation is typically done at the economy-wide level, and attempts to assess the distribution of resources and opportunities among members of society.
Allocative efficiency is a state of the economy in which production is aligned with the preferences of consumers and producers; in particular, the set of outputs is chosen so as to maximize the social welfare of society. This is achieved if every produced good or service has a marginal benefit equal to the marginal cost of production.
In economics, an Edgeworth box, sometimes referred to as an Edgeworth-Bowley box, is a graphical representation of a market with just two commodities, X and Y, and two consumers. The dimensions of the box are the total quantities Ωx and Ωy of the two goods.
In welfare economics, a social planner is a hypothetical decision-maker who attempts to maximize some notion of social welfare. The planner is a fictional entity who chooses allocations for every agent in the economy—for example, levels of consumption and leisure—that maximize a social welfare function subject to certain constraints. This so-called planner's problem is a mathematical constrained optimization problem. Solving the planner's problem for all possible Pareto weights yields all Pareto efficient allocations.
There are two fundamental theorems of welfare economics. The first states that in economic equilibrium, a set of complete markets, with complete information, and in perfect competition, will be Pareto optimal. The requirements for perfect competition are these:
- There are no externalities and each actor has perfect information.
- Firms and consumers take prices as given.
A Lindahl tax is a form of taxation conceived by Erik Lindahl in which individuals pay for public goods according to their marginal benefits. In other words, they pay according to the amount of satisfaction or utility they derive from the consumption of an additional unit of the public good. Lindahl taxation is designed to maximize efficiency for each individual and provide the optimal level of a public good.
In economics, a market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services to buyers in exchange for money. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and allocation of resources in a society. Markets allow any tradeable item to be evaluated and priced. A market emerges more or less spontaneously or may be constructed deliberately by human interaction in order to enable the exchange of rights of services and goods. Markets generally supplant gift economies and are often held in place through rules and customs, such as a booth fee, competitive pricing, and source of goods for sale.
In microeconomics, the property of local nonsatiation (LNS) of consumer preferences states that for any bundle of goods there is always another bundle of goods arbitrarily close that is strictly preferred to it.
Competitive equilibrium is a concept of economic equilibrium, introduced by Kenneth Arrow and Gérard Debreu in 1951, appropriate for the analysis of commodity markets with flexible prices and many traders, and serving as the benchmark of efficiency in economic analysis. It relies crucially on the assumption of a competitive environment where each trader decides upon a quantity that is so small compared to the total quantity traded in the market that their individual transactions have no influence on the prices. Competitive markets are an ideal standard by which other market structures are evaluated.
In welfare economics, a utility–possibility frontier, is a widely used concept analogous to the better-known production–possibility frontier. The graph shows the maximum amount of one person's utility given each level of utility attained by all others in society. The utility–possibility frontier (UPF) is the upper frontier of the utility possibilities set, which is the set of utility levels of agents possible for a given amount of output, and thus the utility levels possible in a given consumer Edgeworth box. The slope of the UPF is the trade-off of utilities between two individuals. The absolute value of the slope of the utility-possibility frontier showcases the utility gain of one individual at the expense of utility loss of another individual, through a marginal change in outputs. Therefore, it can be said that the frontier is the utility maximisation by consumers given an economies' endowment and technology. This means that points on the curve are, by definition, Pareto efficient, which are represented by E, F and G in the image to the right. Meanwhile the points that do not lie on this curve are not Pareto efficient, as shown by point H. The utility possibility frontier also represents a social optimum, as any point on the curve is a maximisation of the given social welfare function.
A Robinson Crusoe economy is a simple framework used to study some fundamental issues in economics. It assumes an economy with one consumer, one producer and two goods. The title "Robinson Crusoe" is a reference to the 1719 novel of the same name authored by Daniel Defoe.
Efficiency and fairness are two major goals of welfare economics. Given a set of resources and a set of agents, the goal is to divide the resources among the agents in a way that is both Pareto efficient (PE) and envy-free (EF). The goal was first defined by David Schmeidler and Menahem Yaari. Later, the existence of such allocations has been proved under various conditions.
This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.
Approximate Competitive Equilibrium from Equal Incomes (A-CEEI) is a procedure for fair item assignment. It was developed by Eric Budish.
In theoretical economics, an abstract economy is a model that generalizes both the standard model of an exchange economy in microeconomics, and the standard model of a game in game theory. An equilibrium in an abstract economy generalizes both a Walrasian equilibrium in microeconomics, and a Nash equilibrium in game-theory.
References
- ↑ Serrano, Roberto; Feldman, Allan M. (2012). "An Exchange Economy". A Short Course in Intermediate Microeconomics with Calculus: 263–283. doi:10.1017/CBO9781139084093.016. ISBN 9781139084093.
- ↑ Varian, Hal (1992). Microeconomic Analysis (Third ed.). New York: Norton. ISBN 0-393-95735-7.
- ↑ Elzen, Antoon (1993). Adjustment Processes for Exchange Economies and Noncooperative Games. Berlin, Heidelberg: Springer Berlin Heidelberg. pp. 1–12. ISBN 978-3-642-48133-8.
- ↑ Levy, Daniel; Bergen, Mark (Apr 1993). "Simulating a multiproduct barter exchange economy" (PDF). Economic Inquiry. 31 (2): 314. doi:10.1111/j.1465-7295.1993.tb00885.x.
- ↑ Bikhchandani, Sushil; Mamer, John W (1 June 1997). "Competitive Equilibrium in an Exchange Economy with Indivisibilities". Journal of Economic Theory. 74 (2): 385–413. doi:10.1006/jeth.1996.2269.
- ↑ Trueman, Brett (Jun 1983). "Optimality of the Disclosure of Private Information in a Production-Exchange Economy". The Journal of Finance. 38 (3): 913.
- ↑ Kunkel, J.Gregory (September 1982). "Sufficient Conditions for Public Information to Have Social Value in a Production and Exchange Economy". The Journal of Finance. 37 (4): 1005–1013. doi:10.1111/j.1540-6261.1982.tb03593.x.