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The production possibilities frontier (PPF) for guns versus butter. Points like X that are outside the PPF are impossible to achieve. Points such as B, C, and D illustrate the trade-off between guns and butter: at these levels of production, producing more of one requires producing less of the other.
The differentiation between long-run and short-run economic models did not come into practice until 1890, with Alfred Marshall's publication of his work Principles of Economics. However, there is no hard and fast definition as to what is classified as "long" or "short" and mostly relies on the economic perspective being taken.
Conventionally stated, the shutdown rule is: "in the short run a firm should continue to operate if price equals or exceeds average variable costs." [4] Restated, the rule is that to produce in the short run a firm must earn sufficient revenue to cover its variable costs. [5] The rationale for the rule is straightforward.
In economics, a price mechanism refers to the way in which price determines the allocation of resources and influences the quantity supplied and the quantity demanded of goods and services. The price mechanism, part of a market system , functions in various ways to match up buyers and sellers: as an incentive, a signal, and a rationing system ...
In other words, the rule is that the size of the markup of price over the marginal cost is inversely related to the absolute value of the price elasticity of demand for the good. [10] The optimal markup rule also implies that a non-competitive firm will produce on the elastic region of its market demand curve. Marginal cost is positive.
Walras's law is a consequence of finite budgets. If a consumer spends more on good A then they must spend and therefore demand less of good B, reducing B's price. The sum of the values of excess demands across all markets must equal zero, whether or not the economy is in a general equilibrium.
Featherbedding is the practice of hiring more workers than are needed to perform a given job, or to adopt work procedures which appear pointless, complex and time-consuming merely to employ additional workers. [1] The term "make-work" is sometimes used as a synonym for featherbedding.
The most influential reaction function is the Taylor rule, developed by economist John Taylor in 1993.The rule provides a systematic formula for setting the nominal interest rate based on four key variables: The deviation of current inflation rate from the central bank's target; The current inflation rate itself; The equilibrium real interest rate; and the output gap, measured as the ...