Walras’s stability

Named after French- born economist Leon Walras (1834-1910), who laid the groundwork for a unified model which included theories of exchange, production, formation and theory. Walras asserted that if there are n markets and n-1 markets are in equilibrium, then the last market must be in equilibrium as well. Also see: general equilibrium theory, partial equilibrium theory Source: L

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Weber’s theory of the location of the firm (1909)

Formulated by German economist and sociologist ALFRED WEBER (1868-1958), Weber’s theory of the location of the firm states that the location of firms is determined by attempts to minimize costs. Thus, if production costs are the same everywhere, transport costs will govern the choice of location. Also see: central place theory, location theory, gravity model, least cost

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Wicksell’s theory of capital (1893)

Named after Swedish economist Knut Wicksell (1851-1926), Wicksell’s theory of capital examines factor prices as derived from the value of the marginal product. Wicksell pointed out that in an equilibrium situation, the interest rate would exceed the value of the marginal product of capital because the aggregate stock of capital would be revalued due to changes in

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X-efficiency (1966)

Formulated by American economist HARVEY LEIBENSTEIN (1922-1993), x-efficiency describes the general efficiency of a firm (judged on managerial and technological criteria) in transforming inputs at minimum cost into maximum profits. Also see: theory of the firm, managerial theories of the firm, satisficing, agency theory, scalar principle, parkinson’s law Source: H Leibenstein, ‘Allocative Efficiency vs “X-efficiency”‘, American Economic Review,

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Axiomatic theories (1939)

Axiomatic theories relating to consumer behavior and rationality, and are an essential part of consumer demand theory and indifference curve analysis. The axioms of rationality are: – completeness (the ability to order every available combination of goods according to preference); – transitivity (relationship between different combination preferences); and – selection (the consumer will aim for the

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CES production function

Proposed by the American economist Kenneth Arrow (1921- ), Hollis Chenery (1918- ), BAGICHA S. MINHAS, and Robert Solow (1924- ), CES production function is also known as the constant elasticity of substitution function. This is a linearly homogenous production function with a constant elasticity of input substitution, which takes on forms other than unity. It replaced the Cobb-Douglas Production Function model

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clubs, theory of

Based on work by American economists Charles Tiebout (1924-1968) and James M. Buchanan (1919- ), theory of clubs studies the optimal size of groups of people with a shared consumption (pools, clubs, museums), and the optimal provision of the goods or services. A club good is excludable in that it is possible to prevent its consumption by entire

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consumer demand, theory of

Theory of consumer demand is the analysis of demand with regard to consumer behavior and rationale when changes occur in variable factors such as price, income, substitute goods. Choice and revealed preference are two important factors affecting consumer demand. Also see: axiomatic theories Source: P Newman, The Theory of Exchange (Englewood Cliffs, N.J., 1965) Indifference

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core, theory of the

Developed by Irish-born economist and statistician Francis Edgeworth (1845-1926), theory of the core analyzes those parts of the economy which cannot be improved upon by individual or concerted action. Theory of the core is a fundamental equilibrium aspect of modern macroeconomics, the core coinciding with a set of price equilibria under perfect competition. Source: F Y Edgeworth,

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diminishing returns, law of

Sometimes referred to as variable factor proportions, law of diminishing returns states that as equal quantities of one variable factor are increased, while other factor inputs remain constant, ceteris paribus, a point is reached beyond which the addition of one more unit of the variable factor will result in a diminishing rate of return and

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firm, theory of the

Theory of the firm is an analysis of the behavior of companies that examine inputs, production methods, output and prices. The first elementary examination of companies was made by French economist Antoine Augustin Cournot (1801-1877) and later modified by (among others) English political economist Alfred Marshall (1842-1924). The traditional theory assumes that profit maximization is the goal of

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Hicks-Hansen model

Developed by English economist John Hicks (1904-1989) and American economist Alvin Hansen (1887-1975) to provide a framework for analyzing the factors determining the level of aggregate demand. IS-LM model (also known as the Hicks-Hansen model) was adopted as a universal framework in studying macroeconomics because it seemed to incorporate different views of the working of the economy. It

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historical materialism

Historical materialism, also known as the materialist conception of history, is a methodology used by scientific socialist and Marxist historiographers that focuses on human societies and their development through history, arguing that history is the result of material conditions rather than ideals. This was first articulated by Karl Marx (1818–1883) as the “materialist conception of history”.[1] It is principally a theory of history which asserts that the material conditions of a

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income determination, theory of

Based on the income-determination model developed by English economist John Maynard Keynes (1883-1946), and later modified by American economist Paul Samuelson (1915- ), theory of income determination postulates that the level of national income is determined where aggregate demand equals aggregate supply. The crucial component of aggregate demand is the consumption function. Keynes asserted that his theory was different from those of

income distribution, theory of

Developed over a 250-year period by a wide variety of economists including Adam Smith (1723-1790) and Karl Marx (1818-1883), theory of income distribution analyzes the pattern of payment to the factors of production; namely rent, wages, profit and interest. Source: C J Bliss, Capital Theory and the Distribution of Income (New York, 1975) Measurement Main article: Income inequality metrics

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information theory

The mathematical study of information, its storage by codes, and its transmission through channels of limited capacity. A fundamental idea is the entropy of a set of events, H=- Σ1n pk logpk where the pks are the probability of each event. Information theory was introduced by CLAUDE ELWOOD SHANNON in 1948 to measure the uncertainty of

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long wages

Named after Russian-born economist NIKOLAI KONDRATIEFF (1892-1938), Kondratieff cycles refers to trade cycle of long duration. KONDRATIEFF studied American, British and French wholesale prices and interest rates from the 18th century, and found that the peaks and troughs in economic activity fell at regular intervals. Joseph Schumpeter applied the term ‘Kondriatieff cycles’ to cycles of 50-60 years

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markets, law of

A recognition of the fact that any market (that is, a medium of exchange for buyers and sellers) operates with basic principles such as supply and demand leading to an equilibrium. Imperfections within the market would in time create monopolies and oligopolies. (1) Market forces are those pressures generated by buyers and sellers which

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natural rate of unemployment

The natural rate of unemployment is the name that was given to a key concept in the study of economic activity. Milton Friedman and Edmund Phelps, tackling this ‘human’ problem in the 1960s, both received the Nobel Prize in economics for their work, and the development of the concept is cited as a main motivation behind the prize. A simplistic summary of the

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non-accelerating inflation rate of unemployment

Non-accelerating inflation rate of unemployment (NAIRU)[1] is a theoretical level of unemployment below which inflation would be expected to rise.[2] It was first introduced as NIRU (non-inflationary rate of unemployment) by Franco Modigliani and Lucas Papademos in 1975, as an improvement over the “natural rate of unemployment” concept,[3][4][5] which was proposed earlier by Milton Friedman.[6] In the United States, estimates of NAIRU typically range between 5 and 6%.[2] Monetary

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