t In an economic context, demand is defined as the quantity of a specific good or service that consumers are willing and able to buy over a given period. As you can tell, this definition looks at all consumers combined (i.e., aggregated data). However, individual consumers may have different preferences […]
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The demand curve tells us how much of a good or service people are willing to buy at any given price (see Law of Supply and Demand). However, we know that demand is not constant over time. As a result, the demand curve constantly shifts left or right. Depending on […]
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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 […]
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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 microeconomics, goods can be categorized in many different ways. One of the most common distinctions is based on two characteristics: excludability and rivalrousness. That means we categorize goods depending on whether people can be prevented from consuming them (excludability) and whether individuals can consume them without affecting their availability […]
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Four basic types of market structure characterize most economies: perfect competition, monopolistic competition, oligopoly, and monopoly. Each of them has its own set of characteristics and assumptions, which in turn affect the decision-making of firms and the profits they can make. It is important to note that not all 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. Because the causers are not directly affected by the 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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