The Coase Theorem

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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Why Zero Profit Equilibria Can Subsist

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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Positive Externalities vs Negative Externalities

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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The Price Elasticity of Supply

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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The Price Elasticity of Demand

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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Comparative Advantage and Trade

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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Perfect Competition vs Imperfect Competition

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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Profit Maximization

In economics it is often assumed that companies try to maximize profit. That is, they try to maximize revenue while at the same time minimizing costs. In order to do that, firms need to look “at the margin”. That means, they have to keep an eye on changes in revenue (i.e. marginal […]

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Monopoly Power

A Monopoly is one of the four typical market structures. It describes a situation where a single firm (or individual) is the sole producer and seller of a product or service in an entire market. It is characterized through a lack of competition. As a result the monopolist has the ability to […]

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The Law of Supply and Demand

The principle of supply and demand is one of the most important concepts in microeconomics. It helps us understand how and why transactions on markets take place and how prices are determined. To learn more about supply and demand we mainly need to look at consumers and producers. Consumers In this case, […]

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