Profit is obtained by subtracting total cost (TC) from total revenue (TR). Under the assumption of the neo-classical theory, a firm will aim to produce a level of output where the difference between the total revenue and total cost is the greatest. The maximization of TR-TC is the equilibrium condition for a profit-maximizing firm. This is because once the firm is getting the most profit from a particular level of output and sales, it will not be incentivised to alter the level of output that is giving it the most yields in total investment performance. A firm which strictly follows the primary assumption of the neoclassical theory of the firm will make its decisions on inputs and outputs based on Continue reading
Economics Basics
Economic Systems – Planned Economy, Free Market Economy and Mixed Economy
System of Planned Economy Under the conditions of the planned economy, all decisions concerning what to manufacture, how to manufacture and to whom to manufacture are approved by the sole center or group. This economy is based on collective ownership. Fixed production assets are owned by the government, and resources, production and the quantities of future products are distributed according to a plan. The type of the system of the command economy was prevailing in the USSR, Cuba, and North Korea. The plans of the system of the centralized economy are drawn up and implemented by the authorities and governmental political leaders after consulting with highly ranked professionals: engineers, economists, industrialists, and other experts. These planners decide which products to Continue reading
Government – Meaning and Roles
Government is one of humanity’s oldest and most important institutions. Since the early times, some kind of government has been an important source in the society. Every society needs some people to make and enforce decisions upon the society and the government refers to the process of exercising power in a group. Government generally means the public government as of a nation, state, province, country, city or village. Government affects the activity of every human in important ways. Form of government refers to the set of political institutions by which a government of a state or a country is organized. Each successive government is composed of a body of individuals who control and exercises control over political decision-making. Their function Continue reading
Keynesian and Classical Economists Views about Disequilibrium
Economists usually define general disequilibrium as the state in which contrasting market forces of supply and demand fail to reach a balance and there exist an intrinsic inclination for change. The main indicator of market disequilibrium is the continuation of shortages either in the demand or supply side of the economy. There are two main models that hold divergent views concerning disequilibrium namely the Keynesian and Classical Economists models. Generally, the major causes for disequilibrium in the markets if the deficiencies created either in the aggregate demand or aggregate supply side of the economy. This means that in such circumstances the market does not clear. Main causes of disequilibrium are understood in the light of the economic model s followed Continue reading
The Baumol Model of Innovation
The main idea behind Baumols model is that Innovation is the motivating force behind the growth miracle of capitalism. In the neoclassical theory of the firm, firms compete based on price, but William Baumol argues that in a Capitalist economy innovation rather than price is the main competitive dimension and less innovative firms will find their markets shrinking as they lose business to their more innovative competitors. Thus, innovation is essential to the survival of firms in a capitalist economy. Baumol argues that innovation has replaced price as the most important factor that lies behind economic growth. He suggests that even though it has been recognized that important innovations stem from small firms, individuals or entrepreneurs, the bulk of innovative Continue reading
Product Line Pricing
Since almost every firm has several items in its product line, product line pricing becomes an important  phase of pricing policy. The problem of product line pricing is to find the proper relationship among the  prices of numbers of a product group. Product line pricing may refer to product group. Product line  pricing may refer to products physically the same but sold under different conditions. This gives the seller  an opportunity to charge different prices. Thus use differentials (e.g. hot coffee versus cold/iced coffee),  seasonal differentials (e.g. night fights or night telephone calls), and style cycles differentials are all  phases of product line pricing. The rationale for this heterodox approach to pricing is that the essential  economic features of the Continue reading