Indifference curves are graphs that represent various combinations of two commodities which an individual considers equally valuable. The axes of those graphs represent one commodity each (e.g. good A and good B). Indifference curves are widely used in microeconomics to analyze consumer preferences, the effects of subsidies and taxes, and a few other concepts. […]
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Taxes can be levied on buyers or sellers of any good or service. However, who actually pays a tax does not depend on who the tax is levied on. In economic theory, tax incidence – which refers to the distribution of a tax burden between buyers and sellers – only depends on […]
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The prisoner’s dilemma is arguably the most famous example of game theory. It describes a situation (i.e. game) between two prisoners, who act in their own self-interest, which results in an inefficient outcome for both of them. In essence, the prisoner’s dilemma illustrates why it can be difficult to maintain cooperation […]
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The Coase Theorem (named after the British economist Ronald Coase) is a famous theorem that addresses the question of how effectively private markets can deal with externalities. In essence, it states that private parties can solve the problem of externalities on their own, if they can bargain over the allocation of […]
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In the long run equilibrium, firms in competitive markets make zero profit. This may seem odd, considering all the effort and time that has to be put into running a company. So why should these firms stay in business? The answer to this question lies in the definition of the […]
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Externalities are defined as the positive or negative consequences of economic activities on unrelated third parties. Since the causers are not directly affected by those externalities, they will not take them into account. As a result, the social cost (or benefit) of these activities is different from their individual cost […]
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According to the law of supply and demand the quantity supplied of a good or service will generally decrease as its price falls. To see how strong this effect actually is, we can once again draw on the concept of elasticity. In particular, we use the price elasticity of supply. The […]
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According to the law of supply and demand the quantity demanded of a good or service will generally increase if its price falls. To see how strong this effect actually is we use the concept of elasticity. More specifically, the price elasticity of demand. Depending on what we are analyzing […]
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We live in a globalized world where virtually all countries interact and engage in trade. Most of them have various trade connections with a multitude of different countries. As a consequence, there is a significant amount of competition. This raises the question how smaller countries with relatively weak economies can […]
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Firm behavior in competitive markets is probably one of the most fundamental subjects in economics. That is mainly due to the fact that most markets we encounter in reality are competitive, at least to a certain degree. Competition is characterized by a multitude of firms offering the same (or a […]
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