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Microeconomics

Demand

Demand is defined as the amount of good or service a consumer is willing and able to buy per period of time. It is essential to understand the term "willing and able." Many people want to buy products that they cannot afford at prices they cannot pay. However, because they are not able to purchase the product, we cannot include them in the…
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Returns to Scale

Returns to scale describes the rate of increase in production relative to the associated increase in the factors of production in the long run. At this point, all factors of production are variable (not fixed) and can scale. Therefore, the scale of production can be changed by changing the quantity of all factors of production.The difference…
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The Decoy Effect

The Decoy Effect or the Asymmetric Dominance Effect is a cognitive bias in which consumers will tend to have a specific change in preferences between two options when also presented with a third option that is asymmetrically dominated. Simply put when there is a third strategically important choice, aka the decoy, then the consumer is more…
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Price Elasticity of Supply

Price Elasticity of Supply is defined as the responsiveness of quantity supplied when the price of the good changes. It is the ratio of the percentage change in quantity supplied to the percentage change in price.The Price Elasticity of Supply is always positive because the Law of Supply says that quantity supplied increases with an increase in…
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Price Floor

A Price Floor or a minimum price is defined as an intervention to raise market prices if the government feels the price is too low. In this case, since the new price is higher, the producers benefit. For a price floor to be effective, the minimum price has to be higher than the equilibrium price. For example, many governments intervene by…
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Free Rider Problem

The Free Rider Problem occurs when there is a good (likely to be a public good) that everyone enjoys the benefits of without having to pay for the good. The free rider problem leads to under-provision of a good or service and thus causes market failure. The problem occurs because of the failure of individuals to reveal their real or true…
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