With the fall in wages, suppliers will be able to supply more goods at lower cost, causing the SAS curve to shift to the right from SAS 1 to SAS 2. 4 Equilibrium for many products (reference only) We can develop this analysis to maximise utility for more than one product. We do this by comparing the marginal utility per unit of expenditure. Game theory. How is the exchange rate of a currency determined? 3. Will mobile devices (e. g. WAP) replace or substitute PCs or will they be complements, as for example, handheld devices such as the Psion which have been used by consultants to record time spent on a particular job with these details later being consolidated on a PC for billing purposes. Hence, an increase in savings will lead to an increase in investment expenditures through a reduction of the interest rate, and the economy will always return to the natural level of real GDP. If aggregate demand falls below aggregate supply due to aggregate saving, suppliers will cut back on their production and reduce the number of resources that they employ. Microeconomic Theory-Whinston &. The concept of elasticity is critical for decision makers as it guides them in their pricing policies. 1 Maximising utility We stated the assumption earlier that consumers aim to maximise their own utility. It refers to the dominant school of thought for economics in the 18th and 19th centuries. Aggregate Demand and Aggregate Supply, Next s our consumer places on each unit consumed. Our example will be Ten Pin Bowling (TPB) where we will say ? If the consumer prefers attending the cinema to watching football, and attending football to ice skating, then cinema will be preferred to ice skating. What Is the Classical Model of the Economy? Firstly, an examination of the factors which influence demand and supply will enable us to understand the context of electronic markets. When there are unemployed resources, the classical theory predicts that the wages paid to these resources will fall. The achievement of the natural level of real GDP is not as simple as Say's Law would seem to suggest. Consequently, the economy may not achieve the natural level of real GDP if there is aggregate saving. Whilst Amazon and BOL may offer the same books for sale, the additional services they offer differentiate their products. If the price is increased consumers real income falls, making consumers poorer, thus reducing the amount they have to spend on the product. Mishkin also covers Keynesian theory in chapters 20-23. The classical theorists' response is that the funds from aggregate saving are eventually borrowed and turned into investment expenditures, which are a component of real GDP. The satisfaction a consumer gets from consuming a product is called utility. from your Reading List will also remove any 2. Microeconomic Theory-Andreu Mas Colell 1995 Individual decision making. In this situation, real GDP will fall below its natural level because investment expenditures will be less than the level of aggregate saving. Therefore, this is the demand curve for our consumer. For example, the total utility from 50 minutes of Internet usage is the total satisfaction provided by the 50 minutes. For example, if the price of video-on-demand increases by ? CliffsNotes study guides are written by real teachers and professors, so no matter what you're studying, CliffsNotes can ease your homework headaches and help you score high on exams. Elasticities for most products are negative. The formula is as given: Percentage change in quantity demanded/Percentage change in price For example, if the price increases by 5% and demand falls by 10% we have an elasticity of -2 (-0. Aggregate saving, represented by the curve S, is an upward‐sloping function of the interest rate; as the interest rate rises, the economy tends to save more. 1 of expenditure gives one unit of utility. Figure 4: The demand schedule So in the above example when price is set to P1 the quantity demanded is Q1. Removing #book# In response to unbalanced growth in the economy, structural change is inevitable. • MUtpb is the marginal utility of the last unit of ten pin bowling • Pvod is the price of video-on-demand • Ptpb is the price of ten pin bowling 2. If the value goes down will that help. What has been happening to the exchange rate of the US$? The classical theory of economics is that self-interest benefits everyone. Initially, aggregate saving and investment are equivalent at the interest rate, i. This is given by the equation: (1) MUx/Px where • MUx is the marginal utility of the last unit of product x • Px is the price of product x. In fact, the interest rate will fall far enough—from i to i′ in Figure —to make the supply of funds from aggregate saving equal to the demand for funds by all investors. However, this will reduce the marginal utility of VOD, as more is consumed, and raise the marginal utility of ten pin bowling, as less is consumed. Finally, the unique characteristics of digital products will be considered. Philosophers like Aristotle and Plato made references to issues in economics such as division of labour. Businesses profit from selling goods and services to people who need them. The end result is that the equilibrium price level falls to P 3, but the economy returns to the natural level of real GDP. The flexibility of the interest rate as well as other prices is the self‐adjusting mechanism of the classical theory that ensures that real GDP is always at its natural level. The same result could also be achieved by reducing the marginal utility of ten pin bowling by increasing its consumption, or by adjusting the consumption of both to balance the equation. [William Sher; Rudy Pinola] If two products are similar in all aspects apart from price, the consumer will prefer the cheaper one. Microeconomic A command economy is also known as planned economic an economy in which central government planning either directly and indirectly sets output targets ,incomes and prices. Utility theory makes the assumption that consumers have diminishing marginal utility. The flexibility of the interest rate keeps the money market, or the market for loanable funds, in equilibrium all the time and thus prevents real GDP from falling below its natural level. 5 our consumer will see 5 films per month. It is important to remember here that this is effective demand as it is only the consumers, who have the ability to pay, who consume at any given price. 1 spent on ten pin bowling. The left hand side, however, is decided by the consumer and how they adjust their consumption. This situation is illustrated in Figure . For a utility maximising consumer it is logical to increase consumption as long as the marginal utility gained (in ? This contrasts with macroeconomic theory, which is focused instead on the broad trends and behaviors that characterize entire economic systems. She recognizes the high costs of tuition and the years of study involved in becoming a doctor. Don't use plagiarized sources. Consider, however, what happens when the funds from aggregate saving exceed the needs of all borrowers in the economy. To extend our above example, the marginal utility of the 50th minute is the difference in total utility from consuming 49 minutes and 50 minutes. can use them for free to gain inspiration and new creative ideas for their writing assignments. Let Professional Writer Help You, 6000 Fairview Road, SouthPark Towers, Suite 1200, Charlotte, NC 28210, USA. Retrieved from https://phdessay.com/classical-microeconomic-theory/. The Keynesian Theory. We can now compare the market price to the utility in ? 30 with a price of ? 2 =0). We can summarise the condition for maximising total utility, for our above example, as follows: (2) MUvod/Pvod = MUtpb/Ptpb • MUvod is the marginal utility of the last unit of video-on-demand. If we let y stand for all other products we are able to state the basic law of demand, which we will do in the next section. To do this we need to know how much a unit of utility is worth. 1 spent on video-on-demand equals the marginal utility of ? 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