The analysis of welfare economics is built around the concept of Pareto efficiency. However, this efficiency criterion does not always represent a satisfactory answer. Other times, certain optimality conditions cannot be satisfied, and therefore Pareto efficiency simply cannot be reached. In order to solve this problem, and to find…
Welfare economics analyses different states in which markets or the economy can be. Its main objective is to find an indicator or measure in order to guarantee that markets are behaving optimally, thus also guaranteeing that consumer welfare is as high as possible. Even though welfare was already analysed…
The analysis of monopolies, oligopolies and perfect competition shows us that neither is real. Monopolies and oligopolies (when collusion exists) are illegal and considered as really harmful for the economy and consumer’s welfare. On the other hand, if perfect competition was real, firms would not make any profits, and…
In the previous Learning Path on oligopolies we learned what they are and what kinds of oligopolies exist. In this LP, we’ll learn about how oligopolists can collude in order to maximise their profits, even though this agreement will not likely last. Also, we’ll see what entry and exit…
The bigger a firm is, the more efficient. Therefore, bigger and fewer firms in the market should mean lower prices and more goods produced. However, as we can see everyday, this is not really the case, since firms can be greedy. In this first Learning Path on…
In the first Learning Path on monopolies, we learned about what they are, how they affect social welfare and we learned about a few types. In this second LP on monopolies, we’ll learn about a few more types, quite particular ones. We’ll learn about discriminating monopolies, how the implement…
Irving Fisher described monopolies as market structures where there is no competition. To neoclassical economists, a monopoly is the exact opposite to perfect competition. And an even simpler definition would be that a monopoly is just a market where there is only one seller. However, monopolies must be well…
Firms in a perfectly competitive market may encounter some problems that can decrease their competitiveness and may even force them out of the market. The way they deal with problems such as taxes or other factors that increase their costs will determine whether they can stay in the market….
Even though perfect competition is hard to come by, it’s a good starting point to understand market structures. It’s been used to analyse markets for centuries. From Adam Smith and his invisible hand, to economists such as Edward Chamberlin and Joan Robinson, who analysed different market structures, perfect competition…
The analysis of market structures is of great importance when studying microeconomics. How the market will behave, depending on the number of buyers or sellers, its dimensions, the existence of entry and exit barriers, etc. will determine how an equilibrium is reached. Even though market structures were thoroughly analysed…
In this LP, the second of our series on Risk and Uncertainty, we’ll learn a bit more about risk, but also about uncertainty. We’ll start by seeing again how risk is analysed using Morgenstern and von Neumann’s expected utility theory. We’ll also learn about alternative approaches, such as the…
Everyone has to make decisions, every day. However, it is not always clear to us what outcomes can derive from these decisions. When this happens, we say we are making decisions in situations under risk or uncertainty. When risk appears, although we are not sure about the possible outcomes…
In our previous Learning Path, we learned the basics about Information economics. We saw what adverse selection and moral hazard are, using as en example the healthcare insurance market. Of course, insurance companies have ways of getting around adverse selection and moral hazard to a certain extent. But an…
Information economics, also known as economics of information, is the study of how different degrees of information affect economic analysis. Since it’s usually studied as a part of microeconomic theory, information economics mainly deal with micro problems, although it is easy to see examples in our own life: why…
In game theory, games are usually classified under two categories: simultaneous games and sequential games. Although simultaneous games make up for a lot of the research made during the early years of game theory, sequential games represent a closer step when modeling economic reality. Consider for instance a firm…
In this LP, the second of our series on Game theory, we’ll learn everything there is about simultaneous games. These games, used when considering a game where players move or play their strategies simultaneously, are commonly used in many fields. From military strategies to collusion agreements, the analysis of…
Game theory is a fascinating part of micro, and macro, economics. It’s based on the psychological current that underpins all Economics, and simplifies the main economic problem: optimising the use of limited resources; into a series of sets of events that illustrate how this problem drives human interaction. The…
On our final Learning Path of our series on cost analysis, we’ll learn about cost efficiency, how to reduce costs while maintaining volume and quality. Therefore (and starting with economies of scale, as a link to last week’s LP), we could ask ourselves the following questions: will my costs…
Having covered the basics of cost analysis, we are in a position to explore other important aspects of cost efficiency. For example, will my costs fall if I produce more? As economies near perfection, costs efficiency becomes increasingly crucial, so much so that investment plays a greater role. But just…
Two things determine profits: income, or turnover (the price at which we sell something) and costs (how much we spent making what we sell). Therefore, knowing how much our costs are going to be is essential when planning the viability of a business, especially given that in a perfect…
This second Learning Path on production will draw on the basics we saw in Production I and add several extra factors to our analysis. We will basically introduce three new parameters to our possibilities: we will add a time frame and see how this shapes our choices, we will…
In this first LP on production, we will examine the decisions that lead to optimal levels of production. This is crucial, as it mirrors the same decisions that we saw consumers making: assigning our limited (and expensive!) resources in the best way possible in order to maintain optimal levels…
This Learning Path is a bit more of a mixed bag than the previous one, finishing off our consumer choice problem, looking at the some useful implications of this in demand theory before moving on to other types of demand theories.
We first pick up where we left off in our…
In this Learning Path, the first one about microeconomics, we will look at consumer behaviour from a theoretical perspective, trying to solve the basic problem we all face every day: how to get as much of what we want or need without blowing our budget.
Since the main tools needed…
Exchange rates can be understood as the price of one currency in terms of another currency. However, just like for goods and services, we must take into account what determines that price, since governments can influence it, and even fix it. Exchange rate regimes (or systems) are the frame…
Inflation and unemployment can be very harmful to the economy, and so governments will always try to control them by implementing economic policies. However, knowing how a problem originates is always helpful when trying to fix it. This is the reason why economists have created an incredible amount of…
There is a relationship between inflation and unemployment that can be easily analysed. Governments around the world take this relationship very seriously, since there will always be a trade-off when implementing economic policies aiming either at reducing unemployment or keeping inflation at bay. Even though this relationship was first…
Inflation and unemployment are probably, along with GDP, two of the most used economic indicators of how well a country is doing. Inflation measures increases in the price levels, which can hurt the economy in multiple ways when not under control. Unemployment measures the percentage of people in a…
Nowadays, pretty much every country in the world is considered to be an open economy. This means that the country will trade with the rest of the world, these exchanges being measured in terms of net exports. When analysing open economies, it is important to understand a few things…
When we study macroeconomics, the easiest and first approach is to analyse closed economies. These are defined as countries that are self-sufficient and autartik, meaning they do not trade with other countries, and rely only on what they produce. There is a widely used analogy by Economics professors: Robinson…
Economists study macroeconomics as a way to understand how the world works, and how to analyse any country’s economy . In other words, in contrast to microeconomics, which analyses a consumer or a firm’s economy, macroeconomics analyses the economy as a whole. Therefore, to understand how the economy of…
The second half of the 20th century was an exciting time for Economics, with developments rapidly succeeding each other as a reaction to the very different economic scenarios the world faced. This development did nothing if not speed up towards the end of the century, when different theories not…
The second half of the 20th century was an exciting time for Economics, with developments rapidly succeeding each other as a reaction to the very different economic scenarios the world faced. This development did nothing if not speed up towards the end of the century, when different theories not…
From the conciliatory mood of the 1940s and 1950s, where we saw how Keynesianism and Neoclassicism could fit together, we move away from the Neoclassical Synthesis and back to a determinedly ‘laissez faire’ attitude with Monetarism. This current popularises government intervention as firmly limited to guaranteeing market safeguards and…
John Maynard Keynes marked a hugely important turning point in the history of Economics. For the first time, Economics had become positive, allowing for differences of opinion. It was firmly a social science, not a collection of observations or ‘natural laws’ condemned to repeat their patterns ad eternum, but…
Modern economics would look nothing like what they do without neoclassical economics which, for instance, implemented rigorous mathematical analysis into economics. Most of what we absolutely take for granted was discovered by the great economists of the time, and they are also responsible for providing enough of a framework…
It is the first important school of economic thought, which included some of the best known economists of all times, as we will see. Thanks to these authors, the study of economics became more of a science, instead of just a kind of philosophy. It took place…