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In order to explain low living standards, the Rev. Thomas Robert Malthus ( 1798 ) developed the idea of diminishing returns. He said that the growth of the human population was typically geometric, outpacing the arithmetical growth of food production. Diminished returns to labour were caused by the pressure of a fast expanding population on a finite amount of land. He asserted that the outcome was persistently low salaries that kept the majority of the population's standard of living at or below the subsistence level.

Malthus' conclusions have drawn criticism from economist Julian Lincoln Simon. David Ricardo ( 1817 ) concentrated on the distribution of revenue among landowners, workers, and capitalists while Adam Smith ( 1876 ) placed more emphasis on the creation of income. Landowners and labour and capital on the one hand, and landowners on the other, were inherently at odds, according to Ricardo.

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He proposed that rising capital and population pressure on a limited amount of land leads to higher rents and stagnant wages and profits. The idea of comparative advantage, which states that each country should focus on manufacturing and exporting items in which it has a lower relative cost of production rather than relying entirely on its own production, was first articulated and shown by Ricardo. Gains from trade have been described as having a "basic analytical explanation."

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John Stuart Mill ( 1848 ), who emerged at the conclusion of the classical school, broke with older classical economists on the subject of the inevitable distribution of income generated by the market system. The two functions of the market—the distribution of income and the allocation of resources—are clearly separate from one another, according to Mill. He claimed that while the market may be effective at allocating resources, it is ineffective at distributing income, necessitating social intervention.

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Classical theory emphasised value theory. According to Smith, the "true cost of anything... is the toil and bother of obtaining it." Smith argued that in addition to rent and profit, wages are not the only costs that affect a commodity's price. The "labour theory of value," developed by other classical economists, offered variants on Smith's ideas. Classical economics concentrated on the propensity of any market economy to reach a final stationary state with a fixed amount of material wealth (capital) and a fixed number of people.​

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Marx's work is the source of Marxist and later Marxian economics, which is descended from classical economics. Das Kapital, Marx's most significant work, was initially published in German in 1867. Marx concentrated on the labour theory of value and the surplus value theory in it because he thought they provided an explanation for how capital exploits labour.

According to the labour theory of value, an exchanged good's value is defined by the labour that went into producing it, and the surplus value theory showed that employees only received a part of the value that their labour produced. The Economic Doctrines of Karl Marx and The Class Struggle ( Erfurt Program ), written by Karl Kautsky ( 1854 – 1938 ), Finance Capital by Rudolf Hilferding ( 1877–1941 ), The Development of Capitalism in Russia and Imperialism, the Highest Stage of Capitalism by Vladimir Lenin ( 1870 – 1924 ), and The Accumulation of Capital by Rosa Luxemburg ( 1871 – 1919 ) all contributed to the further development of Marxian economics.

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In his Treatise on Political Economics or, The Production, Distribution, and Consumption of Wealth, Jean-Baptiste Say defined and extensively analysed economics at its inception as the study of wealth production, distribution, and consumption ( 1803 ). Science only takes into account these three things in connection to the growth or decline of wealth, not in relation to how they are carried out. Say's definition has been accepted up to this point, with the exception that "wealth" is used in place of "goods and services," indicating that wealth may also include immaterial things.

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Lionel Robbins observed that this definition was no longer accurate 130 years later. As a result of the fact that many economists were advancing economic theory and philosophy in other spheres of human endeavour. In his Essay on the Nature and Importance of Economic Science, he put forth a description of economics as the study of a certain component of human behaviour that is influenced by scarcity, forcing people to make decisions, divide limited resources among conflicting goals, and make savings, seeking the greatest welfare while avoiding the wasting of scarce resources.

Robbins found a solution to the problem of inadequacy, and his definition enables us to declare that production, distribution, and consumption economics — as well as education economics, safety and security economics, health economics, and war economics — are all legitimate branches of the economic science." 

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According to Robbins, "Economics is the study that examines human behaviour as a relationship between ends and limited resources that can be put to other purposes." Robbins' concept gained widespread acceptance among orthodox economics after years of debate, and it is now included in most textbooks. Although there is significant disagreement, the majority of mainstream economists would agree with some aspect of Robbins' definition, despite the fact that many have voiced serious concerns about the term's implications for the nature and practise of economics.

The outdated concept is nonetheless widely accepted in many circles due to the absence of a clear consensus and the fact that the production, distribution, and consumption of goods and services constitute the main focus of economics research. Between roughly 1870 and 1910, a body of ideas that was later known as "neoclassical economics" or "marginalism" developed.

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Neoclassical economists like Alfred Marshall and Mary Paley Marshall made the term "economics" popular as a shorthand for "economic science" and to replace the earlier term "political economy." This was in line with how mathematical techniques utilised in the natural sciences had an impact on the topic. Supply and demand were systematised in neoclassical economics as joint factors that determine price and quantity in a market equilibrium, having an impact on both the allocation of output and the distribution of income.

On the demand side, it substituted a marginal utility theory of value for the labour theory of value inherited from classical economics, and on the supply side, a more comprehensive theory of costs. Neoclassical theorists abandoned the older hypothesis that a society's overall value could be assessed in favour of ordinal utility, which only hypothesises relationships among people based on their behaviour, in the 20th century.

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Neoclassical economics depicts incentives and costs as playing a ubiquitous role in influencing decision-making in microeconomics. The consumer theory of individual demand, which isolates how prices as expenses and income affect quantity desired, is a clear illustration of this. It can be seen in the early and enduring neoclassical synthesis with Keynesian macroeconomics in macroeconomics.

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Whether by its detractors or supporters, orthodox economics is sometimes used to refer to neoclassical economics. Neoclassical economics serves as a foundation for modern mainstream economics, but it has undergone numerous refinements that either add to or generalise earlier analysis. Examples of these refinements include econometrics, game theory, analyses of market failure and imperfect competition, and the neoclassical model of economic growth for examining long-run factors affecting national income.

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Neoclassical economics examines how individuals, families, and groups — also known as economic actors, players, or agents — manage or employ limited resources that can be put to other uses in order to attain their goals. It is believed that agents would behave rationally, have many desirable ends in mind, a finite amount of resources at their disposal to achieve these ends, a stable set of preferences, a clear overarching goal, and the ability to make decisions.

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When one or more resource-controlling players decide to make a choice to achieve the best result within bounded rational circumstances, there is an economic problem that economic science can research. In other words, resource-controlling agents seek to maximise value while being constrained by the information at their disposal, their cognitive capacities, and the limited time available for decision-making and action. The focus of economic research is on the actions of the economic actors that make up society. 

The focus of economic study is on them. By the investigation of agent behaviour under scarcity, the following is one way to approach understanding these processes : Prices for all commodities and services are determined by the ongoing interactions or exchange or trade between economic actors on all markets, which in turn allows for the efficient use of limited resources.

The level of output or production, consumption, savings, and investment in an economy, as well as the compensation or distribution paid to the owners of labour in the form of wages, capital in the form of profits, and land, are simultaneously determined by the decisions or choices made by the same actors as they pursue their own interests in the form of rent. Economic actors influence the economy and pricing processes each period as if they were in a massive feedback system, and they are in turn influenced by them, until a steady state or equilibrium of all the variables involved is reached or until an outside shock forces the system towards a new equilibrium point.

The economy is an adaptive complex system because of the rational interacting agents' independent behaviours. John Maynard Keynes, in particular his book The General Theory of Employment, Interest, and Money (1936), which established modern macroeconomics as a separate discipline, is the source of Keynesian economics. The book concentrated on factors that influence national income in the short run while prices are comparatively rigid.

Keynes made an effort to provide a wide theoretical analysis of why low "effective demand" can prevent high labour market unemployment from self-correcting and why price flexibility and monetary intervention might also be ineffective. The book's impact on economic analysis has earned it the label "revolutionary." There are two schools of thought that replace Keynesian economics. Macroeconomic rigidities and adjustment processes are another area of emphasis in post-Keynesian economics. 

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Instead of using straightforward optimising models, research on the micro foundations for their models is said to be based on real-world activities. It is frequently linked to Joan Robinson's work and the University of Cambridge. Developments in the Keynesian aesthetic are also connected to New-Keynesian economics. Within this group, researchers frequently share the emphasis on models using microfoundations and behaviour optimisation with other economists, but with a limited focus on traditional Keynesian topics like price and wage rigidity.

Instead of being assumed, as in earlier Keynesian-style models, these are typically made to be endogenous aspects of the models. The Chicago School of Economics is most well-known for its support of the free market and monetarist theories. Milton Friedman and monetarists contend that market economies are essentially stable as long as the money supply does not significantly increase or decrease. Former Federal Reserve Chairman Ben Bernanke is one of the economists who today mostly agrees with Friedman's explanation of the origins of the Great Depression.

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Many of the fundamental ideas put out by Adam Smith and the classical economists were successfully modernised by Milton Friedman. A good illustration of this is his assertion that a company's social responsibility should be to "use its resources and engage in activities designed to increase its profits through open and free competition without deception or fraud" in an article that appeared in The New York Times Magazine on September 13, 1970.

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In order to create a vibrant and prosperous economy, the Austrian School places a strong emphasis on human action, property rights, and the freedom to contract and transact. It also underlines that the state should have a negligibly minimal, if any, involvement in regulating business transactions between two parties. The idea of sound money is a cornerstone of Austrian economics.

According to Ludwig Von Mises, one of the most well - known Austrian economists of the 20th century, "sound money" is in the same philosophical category as political constitutions and bills of rights. According to Austrian economists, sound money prohibits government actors from debasing the currency, interfering with the population's savings rate, and unnaturally skewing the economic decisions of individual actors.

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The Freiburg School, the School of Lausanne, post-Keynesian economics, and the Stockholm School are a few other well-known schools or trends of thought that refer to a specific style of economics practised at and disseminated from well-defined groups of academicians that have become well-known internationally. Modern mainstream economics is occasionally divided into two schools, viz., the Saltwater approach, used by colleges on the US's Eastern and Western coasts, and the Freshwater approach, used by the Chicago School.

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Macroeconomic theories include monetarism, new classical economics, new keynesian economics, and the new neoclassical synthesis. These theories are listed in roughly chronological sequence of their historical debut in the literature. Alternative economic advances generally include feminist economics, biophysical economics, constitutional economics, institutional economics, evolutionary economics, dependency theory, structuralist economics, world systems theory, ecological economics, and structuralist economics.

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A priori quantitative economic models that use a number of different concepts are the foundation of mainstream economic theory. Ceteris paribus, which refers to retaining constant explanatory factors other than the one being considered, is the standard starting point for theory. Finding theories that are at least as basic in information requirements, more accurate in predictions, and more productive in generating new lines of research is the goal when developing new theories. Economic theory can assume the shape of different schools of thought, such as in heterodox economic theories, even though neoclassical economic theory is the mainstream or orthodox theoretical as well as methodological framework.

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Supply and demand, marginalism, rational choice theory, opportunity cost, financial limitations, utility, and the theory of the company are some of the key ideas in microeconomics. Early macroeconomic models emphasised simulating links between aggregate variables, but since these relationships appeared to alter over time, macroeconomists, particularly new Keynesians, rebuilt their models in terms of microfoundations.

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Macroeconomic models heavily rely on the aforementioned microeconomic ideas. For instance, in monetary theory, the quantity theory of money predicts that increases in the growth rate of the money supply will raise inflation, and inflation is thought to be controlled by rational expectations. Due to the diminishing marginal returns on capital and investment, slower growth in industrialised countries has occasionally been projected in development economics; the Four Asian Tigers have confirmed this prediction.

An economic theory could occasionally be more qualitative than quantitative. Two-dimensional graphs are frequently used to illustrate theoretical linkages in explanations of economic reasoning. A more general definition of mathematical economics is the use of mathematical techniques to represent theories and examine economics-related issues. The approach is best shown by Paul Samuelson's 1947 book Foundations of Economic Analysis, especially in terms of maximising the behavioural interactions of agents approaching equilibrium.

The book concentrated on analysing the group of claims known as operationally meaningful theorems in economics, which are theorems that could potentially be disproven by empirical evidence. Economic theories are routinely put to the test using empirical methods, primarily by utilising econometrics to analyse economic data. In economics, controlled experiments, which are prevalent in the physical sciences, are challenging and rare, and instead, wide data is seen and evaluated.

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This sort of testing is generally regarded as less rigorous than controlled experimentation, and the conclusions are typically more uncertain. Yet, the study of experimental economics is expanding, and more natural experiments are being used. Regression analysis is one popular statistical tool. The size, economic significance, and statistical significance or the signal strength of the hypothesised relation(s) are estimated using such techniques, and noise from other variables is also taken into account. With such methods, a hypothesis might be accepted, albeit in a probabilistic sense as opposed to a certain one.

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The ability of the falsifiable hypothesis to withstand tests is required for acceptance. With various tests, data sets, and preexisting opinions, using generally accepted methodologies may not necessarily result in a definitive answer or even an agreement on a particular subject. Although much economic research has been accused of being non - replicable and esteemed journals have been accused of not facilitating replication by not providing the code and data, criticisms based on professional standards and non-replicability of results serve as additional checks against bias, errors, and overgeneralization.

The use of test statistics is also subject to critical review, just like theories, albeit in the past 40 years, the amount of critical comments on economics publications in respected journals like the American Economic Review has sharply decreased. Journals' motivations to increase citations have been cited as the cause of this in order to improve their position on the Social Science Citation Index (SSCI). Input-output models that use linear programming techniques are fairly frequent in applied economics.

Vast volumes of data are run via computer science oriented coding algorithms, including Python programming and other related computer languages to examine the impact of various policies; IMPLAN is one well-known example. The use of scientifically controlled experiments has been encouraged by experimental economics. As a result, the boundary between economics and the natural sciences has become less significant because direct testing of previously accepted axioms is now possible.

They have discovered that the axioms are not always true; for instance, the ultimatum game demonstrated that people reject offers that are not equal. In 2002, psychologist Daniel Kahneman and economist Amos Tversky shared the Nobel Prize in Economics for their empirical studies of a number of cognitive biases and heuristics. In neuroeconomics, similar empirical testing is conducted. Another illustration is the choice between a model that assesses selfish, altruistic, and cooperative preferences vs the assumption of strictly selfish preferences. Others have claimed that economics is a "real science" as a result of these strategies.

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Microeconomics looks at how the components of a market structure interact with one another to build a market system. These organisations, which can be classified as either public or private participants and operate best when there are few tradable units and little government oversight, contain both. The exchanged item could be a physical good like apples or a service like entertainment, legal advice, or repair work.

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Theoretically, in a free market, the aggregates or sum of quantity demanded by buyers and quantity supplied by sellers may reach economic equilibrium over time in response to price changes. In practise, however, a number of obstacles may prevent equilibrium, and any equilibrium that is reached may not necessarily be morally just. For instance, if external circumstances restrict the availability of healthcare services, the equilibrium price may be out of reach for many people who need them but cannot afford them.

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There are numerous market structures. No participant in a market with perfect competition is big enough to have the clout to dictate the price of a homogeneous good. In other words, because no participant has any influence over a product's pricing, every participant is a "price taker." In the actual world, imperfect competition is common in markets. 

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Monopsony, which occurs when there is only one buyer of a good, Duopoly, which occurs when there are only two buyers of a good, Oligopoly, which occurs when there are only a few buyers of a good, Monopoliistic Competition, which occurs when there are many sellers producing highly differentiated goods, and Oligopsony in which there are few buyers of a good. Imperfect competition, in contrast to perfect competition, always results in an uneven distribution of market power.

Companies operating in an environment of imperfect competition have the potential to be "price makers," or have the ability to control product pricing by controlling a disproportionately high part of the market. By presuming that activity in the market being studied has no impact on other markets, microeconomics can study specific markets by simplifying the whole economic system. Partial - equilibrium analysis is the term for this technique of analysis ( supply and demand ).

With this technique, only one market is aggregated, i.e. the total of all activity. The general - equilibrium theory investigates the behaviour of various marketplaces. The total amount of activity across all markets is aggregated. This approach investigates market changes as well as the interactions that contribute to equilibrium. Production in microeconomics is the transformation of inputs into outputs.

It is an economic procedure that employs inputs to produce a good or service that can be sold or used directly. Production is a flow, and as such, it is a pace of output over time. There are differences between the production of products for consumption ( food, haircuts, etc. ) and investment ( new tractors, buildings, roads, etc. ), as well as between public and private goods ( new computers, bananas, etc. ) and between "weapons" and "butter."

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Economically speaking, opportunity cost is the value of the next best chance that is lost. There must be decisions between actions that are both advisable and incompatible. It is said to convey "the fundamental link between scarcity and choice." For instance, if a baker uses a bag of flour one morning to make pretzels, he or she cannot utilise the flour or the morning to create bagels the next morning. Making pretzels comes at a price because the flour and the morning are no longer available for use in other ways.

When selecting whether to engage in an activity more frequently or less frequently, the opportunity cost of that activity is a factor in ensuring that limited resources are spent effectively. The true cost of output forgone, leisure, or anything else that provides the alternative advantage could be used to quantify opportunity costs instead of just being limited to monetary or financial expenses ( utility ). 

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Primary factors of production such as labour services, capital ( durable manufactured products utilised in manufacturing, such as an existing factory ), and land are examples of inputs used in the production process including natural resources. A new car's steel is an example of an intermediate good that is utilised in the creation of final goods.

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How well a system produces intended output with a given set of inputs and accessible technology is measured by its economic efficiency. If more output is produced with the same inputs, or, to put it another way, if "waste" is decreased, efficiency is increased. Pareto efficiency, which is reached when no further adjustment can make someone better off without leaving someone else worse off, is a generally accepted benchmark.

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The production - possibility frontier ( PPF ) is a graphical illustration of efficiency, cost, and scarcity. An economy can only create two products in the most basic scenario ( say "guns" and "butter" ). The PPF is a table or graph that displays the various quantity combinations of the two items that are possible for production with a given technology and total factor inputs. The greatest practicable output of one good, given a feasible output quantity of the other good, is represented by each point on the curve. This potential total output for the economy is shown by the entire curve.

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Those who would be willing but collectively unable to consume more than the PPF ( such as at X ) and the negative slope of the curve serve as the figure's representation of scarcity. Production of the second good declines as one good's output rises along the curve, showing an inverse relationship. This is because boosting the output of one item necessitates diverting resources away from producing the other good, hence lowering the latter.

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The trade-off between the two things is shown by the slope of the curve at a particular location on it. It calculates the value of units of the other good foregone for each additional unit of the first good, which is an illustration of a genuine opportunity cost. The opportunity cost of one Gun is 100 Butter if one additional Gun costs 100 units of butter. Scarcity indicates along the PPF that selecting more of one good overall implies using less of the other good.

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But, in a market economy, movement along the curve may show that the agents expect their decision to choose the greater output to be worthwhile in terms of the cost. Each point on the curve demonstrates effective productivity in maximising output for a given total input. The output of one or both items might be increased by travelling in a northeasterly direction to a point on the curve, but a position inside the curve reflects production inefficiency or wasteful use of resources.

Instances of this inefficiency given include excessive unemployment during a business cycle slump or an economy that inhibits resource utilisation to its full potential. If a point on the curve does not result in a combination of items that consumers prefer above other points, then it may still not fully meet allocative efficiency, also known as Pareto efficiency.

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Applied economics in public policy is heavily focused on figuring out how to increase an economy's efficiency. The "essence of economics" has been defined as the study of how to arrange society to make the best use of resources given the reality of scarcity. Here is where "economics makes its unique contribution." Considering both theoretical and practical factors, specialisation is regarded as being essential to economic efficiency. Real opportunity costs of production may fluctuate between people or countries, depending on factors like the amount of human capital per worker or the capital-to-labor ratio.

Theoretically, this could result in a comparative advantage in the manufacturing of items that employ the relative more abundant, thus comparatively cheaper, input more intensively. Even if a region has an absolute advantage in terms of the ratio of its outputs to inputs for every type of output, it may still choose to focus on the output for which it has a comparative advantage in order to benefit from trade with a region that lacks an absolute advantage but has an advantage over it when producing a different kind of output.

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High-income nations included, it has been noted that substantial trade takes place between regions even when they have access to comparable technologies and a variety of factor inputs. To the overall benefit of the separate trade parties or areas, this has prompted research into economies of scale and agglomeration to explain specialisation in related but distinct product lines.

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The general notion of specialisation covers commerce between people, farms, businesses, services, and economies. There may be a matching division of labour among each of these production systems, with various work groups specialising, as well as proportionately various forms of capital equipment and diversified land uses. A country that, like developed countries, specialises in the production of high-tech knowledge products and trades with developing countries for goods made in factories where labour is relatively cheap and plentiful, resulting in different in opportunity costs of production, is an example that combines the features mentioned above.

Hence, specialisation in production and trade results in greater overall productivity and usefulness than if each nation developed its own high-tech and low-tech goods. Theory and observation outline the circumstances under which market prices for outputs and productive inputs allocate factor inputs based on comparative advantage, resulting in the production of relatively low - cost outputs. The method may result in a rise in aggregate output either accidentally or on purpose.

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Due to this specialisation of production, resource owners have the opportunity to profit from trade by exchanging one sort of output for other, more valuable goods. The higher income levels that trade may enable serve as a gauge of trade's benefits. The properties of commodities produced and traded in a market economy that can be observed most immediately are prices and quantities, according to some. The basic principle for describing how prices coordinate the amounts produced and consumed is the theory of supply and demand.

In microeconomics, it refers to the determination of prices and output for a market with perfect competition, which includes the requirement of having no customers or sellers with sufficient purchasing power. Demand is the ratio of the quantity that all purchasers would be willing to buy at each unit price of the good for a particular market of a commodity. Tables or graphs that display price and amount demanded are frequently used to illustrate demand.

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In accordance with their income, preferences, and other factors, individual consumers choose the most desirable quantity of each good, according to demand theory. "Constrained utility maximisation" is a word for this ( with income and wealth as the constraints on demand ). Utility in this context refers to the assumed relationship between each individual consumer's preference for various product bundles.

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According to the law of demand, the relationship between price and quantity requested in a particular market is often inverse. In other words, individuals would be willing to purchase less of a product if its price was greater ( other things unchanged ). Consumers switch from purchasing comparably more expensive things to the commodity when its price drops ( the substitution effect ). A further benefit of the price drop is that it boosts purchasing power ( the income effect ). A rise in income, for instance, will cause the demand curve for a typical good to move away from the origin, as shown in the image. Most determinants are treated as constant forces affecting supply and demand.

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The relationship between the quantity of a good available for purchase at a certain price and its price is known as supply. An illustration of the relationship between price and quantity delivered can be a table or graph. Producers, like commercial enterprises, are assumed to be profit maximizers, which means they make an effort to produce and offer the maximum number of items in order to maximise their profits. 

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If other elements remain constant, supply is often depicted as a function connecting price and quantity. In other words, producers will supply more of the good, as shown in the picture, the higher the price at which it may be sold. It is profitable to increase output because of the increased pricing. The position of the supply can fluctuate, just like it might on the demand side, for example due to a change in the cost of a productive input or a technical advancement. According to the "Law of Supply," a rise in price results in an expansion of supply, whereas a decline in price results in a contraction of supply. 

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The supply determinants in this case as well, including the cost of production, the technology used, and other manufacturing inputs, are all assumed to be constant for the duration of the supply evaluation. The supply and demand curves in the above picture intersect at this point, which represents the market equilibrium, where the quantity supplied equals the quantity demanded. A shortfall of quantity supplied compared to amount required exists at a price below equilibrium.

This is supposed to drive up the price. There is an excess of quantity supplied relative to amount sought at a price above equilibrium. The price is lowered as a result. According to the supply and demand model, price and quantity will stabilise at the point where amount provided and quantity wanted are equal for the given supply and demand curves. Similar to this, a change in supply or demand is predicted by the demand - and - supply theory to result in a new price - quantity combination.

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On markets, people typically don't engage in direct trading. Instead, people might work for and produce through businesses on the supply side. Corporations, partnerships, and trusts are the three most prevalent types of businesses. Ronald Coase asserts that when operating costs are lower than on the market, people start to arrange their production into enterprises. Companies can attain much bigger economies of scale than individual market trade (where the average cost per unit decreases as more units are produced). Businesses mix labour and capital.

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There are numerous producers in fully competitive markets covered by the theory of supply and demand, yet none of them has a substantial impact on pricing. Industrial organisation extrapolates from that unique instance to examine the strategic actions of businesses that do exercise extensive price control. It takes into account the organisation of these marketplaces and how they interact. In addition to perfect competition, oligopoly in its different forms, monopoly, and monopolistic competition are frequently researched market structures.

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Microeconomic analysis is applied to particular decisions in business firms or other management units by managerial economics. In the absence of certainty and complete knowledge, it strongly borrows upon quantitative methods like operations research and programming and from statistical methods like regression analysis. In light of the firm's goals and the limitations imposed by technology and market conditions, an overarching topic is the attempt to optimise business decisions, including unit-cost minimization and profit maximisation.

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In economics, uncertainty refers to the unknown possibility of profit or loss, whether or not it can be quantified as risk. Without it, household behaviour would not be impacted by a lack of stable employment and income opportunities, the financial and capital markets would only allow for the trading of a single instrument throughout each market period, and there would be no communications industry. Given its diverse manifestations, there are numerous approaches to depict uncertainty and model how economic agents will react to it.

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One type of uncertainty is taken into account by the discipline of applied mathematics known as game theory: the strategic interactions between agents. It offers a mathematical underpinning for industrial organisation, as discussed above, to model various types of firm behaviour, such as in a solipsistic industry (few sellers), but it is equally applicable to wage negotiations, bargaining, contract design, and any circumstance in which there aren't enough agents to have noticeable effects on one another.

It has been used to describe the interactions of agents whose interests are at least partially at odds with their own in behavioural economics. This generalises maximisation techniques created to analyse market participants, such as the supply and demand model, and allows for agents with partial information. The area has its roots in John von Neumann and Oskar Morgenstern's 1944 book Theory of Games and Economic Behavior. 

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It appears to have important applications outside of economics in fields as diverse as developing nuclear war plans, coding algorithms, computer science &  engineering, ethics, political science, law and evolutionary biology. If markets that work well, such as those for insurance, commodities futures contracts, and financial instruments, risk aversion may encourage activity that reduces risk and disseminates information about risk. The distribution of financial resources is described by financial economics or simply finance.

Additionally, it examines the price of financial instruments, corporate financial structures, the strength and brittleness of the financial markets, financial crises, and relevant governmental legislation. Uncertainty - related inefficiencies may be caused by some market organisations. The paradigm example is based on George Akerlof's article "Market for Lemons," which describes a shady used vehicle industry. 

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Buyers who don't know if a car is a "lemon" lower its price below what a nice used automobile would cost. If the vendor knows more pertinent information than the buyer but has no motivation to provide it, information asymmetry results. Adverse selection, which makes people who pose the greatest risk more likely to get insurance such as irresponsible drivers, and moral hazard, which makes insurance encourage riskier behaviour, are related issues in the insurance industry say more reckless driving.

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By pushing away otherwise interested buyers and sellers from the market, both issues could increase insurance prices and decrease efficiency as in "incomplete markets". However, seeking to address one issu e— say, adverse selection — by requiring insurance could exacerbate another, such as moral hazard. Such issues are relevant to fields including insurance, contract law, mechanism design, monetary economics, and health care, according to information economics, which investigates them.

Applied topics include market and legal risk-spreading or risk-reduction strategies, such as warranties, government-mandated limited insurance, bankruptcy or restructuring law, inspection, and quality control and information disclosure regulations. The phrase "market failure" refers to a number of issues that could cast doubt on accepted economic theories. The following categories appear in the primary texts despite the fact that economists classify market failures in a variety of ways. [h] The term "market failures" is often employed when economic theories don't match reality, rendering these theories and the paradigms in which these terms are used unfalsifiable, according to authors who are critical of economics.

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Economic inefficiency may be caused by information asymmetries and imperfect markets, but there is also a chance to improve efficiency through the aforementioned market, legal, and regulatory remedies. An extreme example of how competition fails to serve as a producer restraint is a natural monopoly, which is the overlapping idea of "practical" and "technical" monopoly. High economies of scale could be a contributing factor.

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Public goods are products that, in a regular market, are undersupplied. The characteristics are that people can use public goods without having to pay for them and that multiple people can use them simultaneously. When there are large societal advantages or costs associated with production or consumption that are not accounted for by market prices, this is known as an externality. As an illustration, air pollution could have a negative externality while education could have a positive externality ( less crime, etc. ).

In an effort to address the price distortions brought on by these externalities, governments frequently tax or otherwise restrict the sale of commodities that have negative externalities and subsidise or otherwise promote the purchase of goods that have positive externalities. Basic demand - and - supply theory can forecast equilibrium, but it cannot predict how quickly the equilibrium will change in response to a change in demand or supply.

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In many instances, some type of price stickiness is proposed to explain why quantities react to changes in the short run of either the supply or demand, as opposed to prices. This comprises common macroeconomic analyses of the business cycle. Analysis frequently focuses on the factors that contribute to this price stickiness and how they may affect the possibility of achieving a long-run equilibrium. Wage rates in labour markets and posted prices in markets with imperfect competition are two examples of such price stickiness in specific markets.

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Market failure is a topic that is more prevalent in some disciplines of economics than others. One illustration is the economics of the public sector. Externalities or "public bads" are major topics in environmental economics. Regulations that take into account cost-benefit analyses are one type of policy approach, as are market solutions that alter incentives through the imposition of emission costs or the redefining of property rights.

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Using microeconomic methods, welfare economics assesses well-being from the distribution of productive components in relation to desirability and economic effectiveness within an economy, frequently in relation to competitive general equilibrium. It examines social wellbeing, as it may be determined, in terms of the economic pursuits of the people who make up the hypothetical community under consideration. As a result, whether of a group, community, or society, individuals with related economic activities serve as the fundamental units for aggregating social wellbeing.

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There is no such thing as "social welfare" apart from the "welfare" linked with its individual units. Macroeconomics looks at the entire economy in order to "top down"— that is, employ a condensed version of general - equilibrium theory — explain broad aggregates and their relationships. The unemployment rate, price inflation, and national income and output are a few examples of such aggregates, as are sub - aggregates like total consumption and investment spending and their constituent parts. It also examines the results of fiscal and monetary policies.

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Macroeconomics has been more thoroughly incorporated into micro-based sector modelling, including the rationality of actors, effective use of market knowledge, and imperfect competition, at least since the 1960s. This has addressed a long-standing issue with the same subject's inconsistent developments. Macroeconomic analysis takes into account variables that affect the level and long-term growth of national income. These elements include the growth of the labour force, technical advancement, and capital accumulation.

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Growth economics investigates the variables that contribute to sustained increases in a nation's production per person. The same reasons are used to explain why some countries grow faster than others and whether or not countries converge at the same rates of growth, as well as variances in the level of output per capita between nations. The rate of investment, population expansion, and technological advancement are all heavily researched variables. They are depicted in growth accounting as well as theoretical and empirical forms such as the neoclassical and endogenous growth models.

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The establishment of "macroeconomics" as a distinct subject was prompted by the economics of a slump. The General Theory of Employment, Interest, and Money, written by John Maynard Keynes during the 1930s Great Depression, outlines the main concepts of Keynesian economics. Keynes argued that during economic downturns, the overall demand for goods could be insufficient, resulting in excessively large unemployment and losses in potential productivity. 

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In order to stabilise output over the economic cycle, he consequently favoured active policy responses from the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government. So, a key finding of Keynesian economics is that there are some circumstances in which there is no powerful automatic mechanism that drives output and employment levels towards full employment.

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The General Theory has been most successfully interpreted using John Hicks' IS/LM model. Understanding of the business cycle has evolved through time into a number of study initiatives, most of which are either to or unrelated to Keynesianism. The Keynesianism is right in the short run, but is qualified by neoclassical-like considerations in the intermediate and long run, according to the neoclassical synthesis, which unifies Keynesian economics with neoclassical economics.

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In contrast to the Keynesian theory of the business cycle, new classical macroeconomics proposes market clearing with incomplete knowledge. It comprises the real business cycle theory, Robert Lucas' "rational expectations" theory, and Friedman's permanent income hypothesis on consumption. The new Keynesian method, in contrast, makes a number of market failures while keeping the rational expectations assumption. In instance, New Keynesians believe that wages and prices are "sticky," meaning they do not immediately alter in response to changes in the economy.

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As a result, the new classical school of thought holds that prices and wages will adjust automatically to reach full employment, in contrast to the new Keynesian school, which believes that full employment will only be automatically achieved in the long run. For this reason, government and central bank policies are necessary because the "long run" may be extremely long. The unemployment rate, or the proportion of workers without jobs in the labour force, is used to calculate the level of unemployment in a given economy.

The only people in the labour force are those who are actively looking for work. The labour force excludes those who are retired, enrolled in school, or deterred from looking for work due to a lack of employment opportunities. There are multiple different types of unemployment that are often tied to various causes. When wages are too high, firms are unwilling to take on extra workers, according to traditional models of unemployment. Similar to classical unemployment, frictional unemployment happens when a worker can obtain suitable employment, but the time it takes to look for and land that position results in a period of unemployed.

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A mismatch between employees' skills and the skills needed for open jobs is one of several potential reasons of structural unemployment. When an economy is switching industries and people discover their prior set of skills are no longer in demand, there can be significant structural unemployment. Similar to frictional unemployment in that both highlight the difficulty in matching job seekers with open positions, structural unemployment also takes into account the time required to develop new skills, as opposed to only the short-term job search process.

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While some forms of unemployment can happen no matter how the economy is doing, cyclical unemployment happens when growth slows. The empirical link between unemployment and economic growth is represented by Okun's law. According to Okun's law's original formulation, a 3% rise in output would result in a 1% drop in unemployment.

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In most economies with a price system, money is the primary form of final payment for goods and the unit of account used to express prices. Money is widely accepted, has a relatively constant value, is divisible, durable, portable, elastic in supply, and has a long lifespan with widespread public confidence. Checkable deposits and non-bank public currencies are included. It has been compared to a social convention similar to language that is beneficial to one person primarily because it benefits others. Money is what money does, as well-known economist Francis Amasa Walker once said ( "Money is that money does" in the original ).

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Money, as a means of exchange, makes trade easier. It functions as a measure of value and, more crucially, a store of value that serves as the foundation for the formation of credit. Contrast its economic purpose with barter or non-monetary exchange. A difficult - to - find double coincidence of wants as to what is exchanged, such as apples and a book, may be required in barter due to the wide variety of created items and specialised providers.

When money is instantly accepted, the cost of exchange can be reduced. Thus accepting money in exchange for anything rather than what the buyer provides is less expensive for the seller. Theory and data support a positive link between the total money supply, the nominal value of total output, and the general price level at the level of an economy. Because of this, controlling the money supply is a crucial component of monetary policy.

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Governments use fiscal policy to modify aggregate demand and affect macroeconomic circumstances through modifying spending and taxation policies. There is an output gap when total demand is lower than the economy's potential output, leaving some of its productive capacity idle. To enhance aggregate demand, governments decrease taxes and increase spending. Government agencies can make use of idle resources.

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For instance, expanding roadways could involve hiring unemployed home builders. Tax reductions give customers more money to spend, which increases total demand. Tax reductions and expenditures both have multiplier effects, which means that the initial rise in demand caused by the policy spreads throughout the economy and spurs more economic activity. Crowding out has the potential to limit the effects of fiscal policy.

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Crowding out has the potential to limit the effects of fiscal policy. The economy is generating at its maximum potential and there are no surpluses of resources that can be put to use when there is no output gap. If the government boosts expenditure in this circumstance, it uses resources that the private sector would have otherwise used, resulting in a decrease in overall output. While some economists believe that crowding out is a problem regardless of output, others do not believe that it is a significant problem at all. The claim of Ricardian equivalence is also made by critics of fiscal policy.

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They contend that because future tax hikes will be required to cover a growth in debt, individuals will cut back on their spending and start saving money. Any rise in demand brought on by tax cuts will be countered by increased savings meant to cover future tax increases, according to the Ricardian equivalence theory. Economic inequality includes wealth inequality, which is determined by the distribution of wealth or the amount of wealth people own, and income inequality, which is determined by the distribution of income or the amount of money people receive.

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It also includes other indicators like consumption, land ownership, and human capital. Different levels of inequality exist between nations or states, sociological groups, societal groups, civics and people. There are various ways to measure inequality, and the Gini coefficient is frequently used to compare individual income discrepancies. The Inequality-adjusted Human Development Index, a composite index that considers inequality, is an illustration of a measure of inequality between nations. Equity, equality of result, and equality of opportunity are significant ideas of equality.

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Economic inequality has been linked in studies to social and political unrest, including uprisings, the dissolution of democracies, and civil war. According to research, increasing inequality impedes macroeconomic stability and economic progress, and inequality of land and human capital is more detrimental to growth than disparity of income. Considering that government spending and tax policies have a considerable impact on income distribution, inequality is at the forefront of economic policy discussions around the world. In developed economies, taxes and transfers reduce income inequality by one-third, with public social spending accounting for the majority of this reduction such as pensions and family benefits.

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The area of economics known as "public economics" is concerned with the economic operations of the public sector, typically the government. The course covers topics including tax incidence (who actually pays a certain tax), cost-benefit analyses of government initiatives, the impact of various spending and tax policies on economic efficiency and income distribution, and fiscal politics. The latter, a component of public choice theory, simulates interactions between self-interested voters, politicians, and bureaucrats in a manner similar to microeconomic theory.

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Positive economics focuses on describing and forecasting economic occurrences. Normative economics aims to define what types of economies are desirable. A branch of normative economics known as welfare economics uses microeconomic methods to estimate both the income distribution and the allocative efficiency of an economy. It makes an effort to gauge social wellbeing by looking at how each member of society is making money. International trade researches the factors that influence the flow of commodities and services across borders.

It also has to do with the quantity and distribution of trade-related profits. Estimating the consequences of shifting tariff rates and trade quotas is one example of a policy application. The study of the movement of capital across international borders and its impact on currency rates is known as international finance. Increasing international trade in products, services, and capital is one of the main effects of modern globalisation.

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The goal of labour economics is to comprehend the dynamics and operation of wage labour markets. Employers and employees interact to drive the operation of labour markets. In order to comprehend the pattern of wages, employment, and income that results, labour economics looks at the employers who want labour services and the employees who supply those services. Labor is a term used in economics to describe the work that people perform.

It is typically compared to other production inputs like land and capital. Although some macroeconomic system theories contend that the word "human capital" is a contradiction in terms, other theories have established the idea of "human capital," which refers to the abilities that employees possess rather than necessarily their actual labour. 

With a focus on structural change, poverty, and economic growth, development economics investigates the financial aspects of the economic development process in relatively low-income nations. Social and political aspects are regularly taken into account in development economics methodologies. 

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Economic theory has historically come under fire for being based on implausible, unprovable, or too simplistic assumptions, often because these assumptions make the justifications for desired results easier to prove. A scientistic approach to economics, for instance, according to economist Friedrich Hayek, is "decidedly unscientific in the real sense of the word, since it involves a mechanical and unthinking application of habits of thought to sectors different from those in which they have been established."

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