REFINE COURSE OUTLINE - KNOWLEDGE AREAS

OEC 230: INTERMEDIATE MICROECONOMICS

1. Introduction to Intermediate Microeconomics
Intermediate Microeconomics is a core economic theory course that will further a student’s
ability to apply models to explain economic decision-making by individuals and firms, how
markets allocate resources, how the structure of markets affects choices and social welfare, and
the ways that government intervention can improve or impair the functioning of markets. The
student will be given the opportunity to apply these models to describe real world current events.

Upon completion of the course, the student should:

 Apply microeconomic models to explain economic decision making by firms and

consumers;
 Explain how resources are allocated efficiently and how the structure of markets may
have an effect on this allocation;
 Show how government intervention can improve or impair the functioning of markets;
 Solve economic problems where agents are strategically interdependent on one another;
 Apply these tools to real-world examples in a correct and proficient manner.

This course can be applied toward:

 Agricultural Business (B.S.)
 Economics (B. A.)
 Interdisciplinary Liberal Arts (B.A.)
 Minor in Economics

Preferences and Utility

(i) Axioms of Rational Choice
Completeness
a. If A and B are any two situations, an individual can always specify exactly one of
these possibilities:
i. A is preferred to B
ii. B is preferred to A
iii. A and B are equally attractive
Rational choice theory, also known as choice theory or rational action theory, is a framework
for understanding and often formally modeling social and economic behavior.[1] The basic
premise of rational choice theory is that aggregate social behavior results from the behavior of
individual actors, each of whom is making their individual decisions. The theory also focuses on
the determinants of the individual choices (methodological individualism).

(ii) Utility
Utility is an economic term introduced by Daniel Bernoulli referring to the total
satisfaction received from consuming a good or service. The economic utility of a good

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 or service is important to understand because it will directly influence the demand, and
therefore price, of that good or service.

The concept of economic utility falls under the area of study known as behavioral economics. It
is designed to assist companies in operating a business and marketing the company in a way that
is likely to attract the maximum amount of customers and sales revenues.

What are the Four Types of Economic Utility?

Form

The utility of form refers to the specific product or service that a company offers. For example, a
manufacturing firm might offer the raw material of rubber in the form of automobile tires.

A company engages in research to pinpoint exactly what products or services consumers’ desire
and then attempts to offer what the company's management believes is the best possible form of
the specific product or service that is needed or desired by potential customers.

This aspect of form utility includes offering consumers lower costs, greater convenience or a
wider selection of products. All of these efforts by a company are aimed at maximizing the
perception of the added value the company offers.

Time

The utility of time refers to easy availability of products or services at the time when customers
need or want to purchase them. Addressing the utility of time involves a company's business plan
and the logistical planning of manufacturing and delivery issues.

For service providers, time utility is addressed by seeking to make services available at the times
that they are most necessary or desirable for consumers. It includes considering the hours and
days of the week a company chooses to make its services available. The goal is to offer potential
customers an added value. A time element such as 24-hour availability might be a value that a
company chooses to offer.

Place

The utility of place refers primarily to making goods or services readily and conveniently
available to potential customers. Examples of place utility range from a retail store's location to
how easy a company's website or services are to find on the Internet.

Increasing convenience for customers can be a key element in attracting business. A company
that offers easy access to technical assistance, for example, offers an added value in comparison
to a similar company that does not offer similar ease of access. Making a product available in a

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wide variety of stores and locations is considered an added value addressing the issue of
consumer convenience.

Possession

The utility of possession refers to the benefit customers derive from ownership of a company's
product once they have purchased it. For example, if a company sells headphones, then it offers
customers an added value in listening to music available through using the headphones to
improve the functionality of a stereo system. Offering favorable financing terms toward
ownership is another way a company might choose to improve the value of possessing its
products.

(iii) Trades and Substitution

Trade involves the transfer of goods or services from one person or entity to another,
often in exchange for money. A system or network that allows trade is called a market.
An early form of trade, barter, saw the direct exchange of goods and services for other
goods and services.
Substitution. 1a : the act, process, or result of substituting one thing for another. b :
replacement of one mathematical entity by another of equal value. 2 : one that is
substituted for another. Other Words from substitution Example Sentences Learn More
about substitution.
TRADES AND SUBSTITUTION Most economic activity involves voluntary trading
between individuals. ... In Figure 3.2, the curve U1 represents all the alternative
combinations of x and y for which an individual is equally well off (remember again that
all other arguments of the utility function are being held constant).

(iv)Utility functions for specific preferences

In economics, utility function is an important concept that measures preferences over a
set of goods and services. Utility is measured in units called utils, which represent the
welfare or satisfaction of a consumer from consuming a certain number of goods.

(v) The Many-Good Case

I know faculty members who use the method in courses ranging from Principles to
graduate level seminars. I have used it with great success in Principles and Intermediate
Microeconomics, in intermediate level undergraduate courses in International Trade and
Economic Development as well as in advanced seminars on the Economies of Africa and
Economic Development. It can work in 10 student seminars and in very large lecture
courses

Utility Maximization and Choice

(i) Utility maximization
Economics concept that, when making a purchase decision, a consumer attempts to get
the greatest value possible from expenditure of least amount of money. His or her
objective is to maximize the total value derived from the available money.

(ii) Indirect Utility Function

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The indirect utility function is defined as the maximum utility that can be attained given money
income and goods prices.

In economics, a consumer's indirect utility function gives the consumer's maximal attainable
utility when faced with a vector of goods prices and an amount of income It reflects both the
consumer's preferences and market conditions.

This function is called indirect because consumers usually think about their preferences in terms
of what they consume rather than prices. A consumer's indirect utility can be computed from his
or her utility function defined over vectors of quantities of consumable goods, by first computing
the most preferred affordable bundle, represented by the vector by solving the utility
maximization problem, and second, computing the utility the consumer derives from that
bundle.

Properties of the indirect utility function:

 u* is decreasing in prices and increasing in income

 u* is homogeneous of degree 0 in prices and income
 u* is quasi-convex in prices
 Roy's identity: -xi* = (∂u*/∂pi) / (∂u*/∂M)

(iii) The Lump Sum Principle

Definition of 'Lumpsum' Definition: A lump sum amount is defined as a single complete
sum of money. A lump sum investment is of the entire amount at one go. For example, if
an investor is willing to invest the entire amount available with him in a mutual fund, it
will refer to as lump sum mutual fund investment.

Lump sum

A lump sum is a single payment of money, as opposed to a series of payments made over time
(such as an annuity). The United States Department of Housing and Urban Development
distinguishes between "price analysis" and "cost analysis" by whether the decision maker
compares lump sum amounts, or subjects contract prices to an itemized cost breakdown.

(iv)Expenditure Minimization
Expenditure Minimization problem and Expenditure function. The expenditure
minimization function is the minimum money that is required to achieve a given level of
utility and prices. ... As we can see, the minimum income required is $200 - which is the
same from our utility maximization question.

(v) Properties of Expenditure Function

In microeconomics, the expenditure function gives the minimum amount of money an
individual needs to spend to achieve some level of utility, given a utility function and the
prices of the available goods.

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 The expenditure function gives the minimum amount of money an individual needs to
spend to achieve some level of utility, given a utility function and the prices of the
available goods

2. Income Effects and Preferences

How does income affect the economy?
The Income Effect. Changes in purchasing power can result from income changes, price
changes or currency fluctuations. ... Inferior goods are goods for which demand declines as
consumers real incomes rise. This occurs when a good has more costly substitutes that see an
increase in demand as the society's economy improves.

What happens when income increases?

An outward shift in demand will occur if income increases, in the case of a normal good;
however, for an inferior good, the demand curve will shift inward noting that the consumer only
purchases the good as a result of an income constraint on the purchase of a preferred good.

Income and Substitution Effects

The income effect expresses the impact of increased purchasing power on consumption, while
the substitution effect describes how consumption is impacted by changing relative income and
prices. ... Some products, called inferior goods, generally decrease in consumption whenever
incomes increase.

What is the income and substitution effect?

The substitution effect is the change in consumption patterns due to a change in the relative
prices of goods. ... The income effect is the change in consumption patterns due to the change in
purchasing power. This can occur from income increases, price changes, or even currency
fluctuations

(i) Demand Functions

Demand is the quantity of a good that consumers are willing and able to purchase at
various prices during a given period of time. The relationship between price and quantity
demanded is also known as the demand curve.

The demand function shows the reverse relationship between the price and the quantity
demanded of any product or service, where the demand function indicates the negative
signal which means the inverse relationship between the price and the quantity
demanded, mean the higher the price the lower the demand of quantity and vice versa.

(ii) Changes in Income

The Income Effect. Changes in purchasing power can result from income changes, price
changes or currency fluctuations. ... Inferior goods are goods for which demand declines
as consumers real incomes rise. This occurs when a good has more costly substitutes that
see an increase in demand as the society's economy.

What happens when income increases?

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An outward shift in demand will occur if income increases, in the case of a normal good;
however, for an inferior good, the demand curve will shift inward noting that the consumer only
purchases the good as a result of an income constraint on the purchase of a preferred good.

(iii) Changes in a Good’s Price

A change in the price of a good or service causes a movement along a specific demand
curve, and it typically leads to some change in the quantity demanded, but it does not
shift the demand curve.

Key points
 Demand curves can shift. Changes in factors like average income and preferences can
cause an entire demand curve to shift right or left. This causes a higher or lower quantity
to be demanded at a given price.
 Ceteris paribus assumption. Demand curves relate the prices and quantities demanded
assuming no other factors change. This is called the ceteris paribus assumption. This
article talks about what happens when other factors aren't held constant.

What factors affect demand?

We defined demand as the amount of some product a consumer is willing and able to purchase at
each price. That suggests at least two factors in addition to price that affect demand. Willingness
to purchase suggests a desire, based on what economists call tastes and preferences. If you
neither need nor want something, you will not buy it. Ability to purchase suggests that income is
important. Professors are usually able to afford better housing and transportation than students
because they have more income. Prices of related goods can affect demand also. If you need a
new car, the price of a Honda may affect your demand for a Ford. Finally, the size or
composition of the population can affect demand. The more children a family has, the greater
their demand for clothing. The more driving-age children a family has, the greater their demand
for car insurance, and the less for diapers and baby formula.
The ceteris paribus assumption
A demand curve or a supply curve is a relationship between two, and only two, variables:
quantity on the horizontal axis and price on the vertical axis. The assumption behind a demand
curve or a supply curve is that no relevant economic factors, other than the product’s price, are
changing. Economists call this assumption ceteris paribus, a Latin phrase meaning “other things
being equal”. If all else is not held equal, then the laws of supply and demand will not
necessarily hold. The rest of this article explores what happens when other factors aren't held
constant.

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How does income affect demand?
Say we have an initial demand curve for a certain kind of car. Now imagine that the economy
expands in a way that raises the incomes of many people, making cars more affordable. This will
cause the demand curve to shift.
Which direction would this rise in incomes cause the demand curve to shift?

(iv)The Individual’s Demand Curve

Individual Demand Curve. The individual demand curve represents the quantity of a
good that a consumer will buy at a given price, holding all else constant.
Individual Demand Market Demand. The consumer equilibrium condition determines
the quantity of each good the individual consumer will demand. ... The market demand
curve for good X is found by summing together the quantities that both consumers
demand at each price.

(v) Compensated Demand Curves

Definition: the compensated demand curve is a demand curve that ignores the income
effect of a price change, only taking into account the substitution effect. To do this, utility
is held constant from the change in the price of the good.

(vi)Revealed Preference and the Substitution Effect

REVEALED PREFERENCE AND THE SUBSTITUTION EFFECT The principal
unambiguous prediction that can be derived from the utility-maximation model is that the
slope (or price elasticity) of the compensated demand curve is negative.
What are the assumptions of revealed preference theory?
Consistency: The revealed preference theory sets upon this basic assumption, which has been
called as consistency postulate. It can thus be stated, “no two observations of choice behaviour
are made which provide conflicting evidence to the individual's preference”.

Uncertainty and Information

What is uncertainty in information theory?
Information theory, formulated by Claude Shannon, says that information reduces
uncertainty. ... In his information theory, Claude Shannon defined "entropy" as a measure of
uncertainty with respect to some variable or event.

What is economic uncertainty?

Uncertainty is an important factor in economics. According to economist Frank Knight, it is
different from risk, where there is a specific probability assigned to each outcome (as when
flipping a fair coin). Knightian uncertainty involves a situation that has unknown probabilities.

What is uncertainty data?

Data uncertainty is a term we use to describe the level of confidence that a user has in his or her
data. ... Before we look at those reasons in more detail, it is useful to look at two aspects of
uncertainty: accuracy and precision. Accuracy refers to the degree to which a measured value
approaches a true value.
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 (i) Fair Games and the Expected Utility Hypothesis
In economics, game theory, and decision theory the expected utility hypothesis,
concerning people's preferences with regard to choices that have uncertain outcomes
(gambles), states that the subjective value associated with an individual's gamble is the
statistical expectation of that individual's valuations of the outcomes of that gamble,
where these valuations may differ from the dollar value of those outcomes.

(ii) The von Neumann Morgenstern Theorem

There are four axioms of the expected utility theory that define a rational decision maker.
They are completeness, transitivity, independence and continuity.[4]

Completeness assumes that an individual has well defined preferences and can always
decide between any two alternatives.

(iii) Risk Aversion

In economics and finance, risk aversion is the behavior of humans (especially consumers
and investors), who, when exposed to uncertainty, attempt to lower that uncertainty.
In economics and finance, risk aversion is the behavior of humans, who, when exposed to
uncertainty, attempt to lower that uncertainty. It is the hesitation of a person to agree to a
situation with an unknown payoff rather than another situation with a more predictable
payoff but possibly lower expected payoff.

What does it mean to be risk averse or risk neutral?

Risk neutral is a mindset where an investor is indifferent to risk when making an investment
decision. The risk-neutral investor places himself in the middle of the risk spectrum,
represented by risk-seeking investors at one end and risk-averse investors at the other.

Is it risk averse or risk adverse?

Adverse means "negative or unfavorable". Averse is the word you want to use. Second, the
adjective phrase is a reduction of "averse to risk", that is, you have an adjective, averse,
premodified by a noun, risk. Adjective phrases of this sort are joined with a hyphen, so the
phrase you want is "risk-averse"

(iv)The State-Preference Approach to Choice under Uncertainty

The basic principle is that it can reduce choices under uncertainty to a conventional
choice problem by changing the commodity structure appropriately.
What is state preference theory?
The state ‘preference framework for modeling choice under uncertainty, in which objects of
choice are allocations of wealth or commodities across states of the world, is a natural one for
modeling smooth ambiguity' averse preferences.

(v) The Economics of Information

Information economics or the economics of information is a branch of microeconomic
theory that studies how information and information systems affect an economy and
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 economic decisions. ... These special characteristics (as compared with other types of
goods) complicate many standard economic theories.
(vi)Properties of Information
Five characteristics of high quality information are accuracy, completeness,
consistency, uniqueness, and timeliness. Information needs to be of high quality to be
useful and accurate. The information that is input into a data base is presumed to be
perfect as well as accurate.

What are the critical characteristics of information?

Availability is the characteristic of information that enables user access to information without
interference or obstruction and in a required format. A user in this definition may be either a
person or another computer system

USING INFORMATION

Characteristics of Information

Good information is that which is used and which creates value. Experience and research shows
that good information has numerous qualities.

Good information is relevant for its purpose, sufficiently accurate for its purpose, complete
enough for the problem, reliable and targeted to the right person.  It is also communicated in time
for its purpose, contains the right level of detail and is communicated by an appropriate channel,
i.e. one that is understandable to the user.

Further details of these characteristics related to organisational information for decision-making

follows.

Availability/accessibility

Information should be easy to obtain or access.  Information kept in a book of some kind is only
available and easy to access if you have the book to hand.  A good example of availability is a
telephone directory, as every home has one for its local area.  It is probably the first place you
look for a local number. But nobody keeps the whole country’s telephone books so for numbers
further afield you probably phone a directory enquiry number.  For business premises, say for a
hotel in London, you would probably use the Internet.

Businesses used to keep customer details on a card-index system at the customer’s branch.  If the
customer visited a different branch a telephone call would be needed to check details.  Now, with
centralised computer systems, businesses like banks and building societies can access any
customer’s data from any branch.

Accuracy

Information needs to be accurate enough for the use to which it is going to be put.  To obtain
information that is 100% accurate is usually unrealistic as it is likely to be too expensive to
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produce on time.  The degree of accuracy depends upon the circumstances.  At operational levels
information may need to be accurate to the nearest penny – on a supermarket till receipt, for
example.  At tactical level department heads may see weekly summaries correct to the nearest
£100, whereas at strategic level directors may look at comparing stores’ performances over
several months to the nearest £100,000 per month.

Accuracy is important.  As an example, if government statistics based on the last census wrongly
show an increase in births within an area, plans may be made to build schools and construction
companies may invest in new housing developments. In these cases any investment may not be
recouped.

Reliability or objectivity

Reliability deals with the truth of information or the objectivity with which it is presented.  You
can only really use information confidently if you are sure of its reliability and objectivity.
When researching for an essay in any subject, we might make straight for the library to find a
suitable book.  We are reasonably confident that the information found in a book, especially one
that the library has purchased, is reliable and (in the case of factual information) objective.  The
book has been written and the author’s name is usually printed for all to see.  The publisher
should have employed an editor and an expert in the field to edit the book and question any
factual doubts they may have.  In short, much time and energy goes into publishing a book and
for that reason we can be reasonably confident that the information is reliable and objective.

Compare that to finding information on the Internet where anybody can write unedited and
unverified material and ‘publish’ it on the web.  Unless you know who the author is, or a
reputable university or government agency backs up the research, then you cannot be sure that
the information is reliable.  Some Internet websites are like vanity publishing, where anyone can
write a book and pay certain (vanity) publishers to publish it.

Relevance/appropriateness

Information should be relevant to the purpose for which it is required. It must be suitable.  What
is relevant for one manager may not be relevant for another.  The user will become frustrated if
information contains data irrelevant to the task in hand.

For example, a market research company may give information on users’ perceptions of the
quality of a product.  This is not relevant for the manager who wants to know opinions on
relative prices of the product and its rivals.  The information gained would not be relevant to the
purpose.

Completeness

Information should contain all the details required by the user. Otherwise, it may not be useful as
the basis for making a decision. For example, if an organisation is supplied with information
regarding the costs of supplying a fleet of cars for the sales force, and servicing and maintenance

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costs are not included, then a costing based on the information supplied will be considerably
underestimated.

Ideally all the information needed for a particular decision should be available.  However, this
rarely happens; good information is often incomplete.  To meet all the needs of the situation, you
often have to collect it from a variety of sources.

Level of detail/conciseness

Information should be in a form that is short enough to allow for its examination and use. There
should be no extraneous information.  For example, it is very common practice to summarise
financial data and present this information, both in the form of figures and by using a chart or
graph.  We would say that the graph is more concise than the tables of figures as there is little or
no extraneous information in the graph or chart.  Clearly there is a trade-off between level of
detail and conciseness.

Presentation

The presentation of information is important to the user. Information can be more easily
assimilated if it is aesthetically pleasing. For example, a marketing report that includes graphs of
statistics will be more concise as well as more aesthetically pleasing to the users within the
organisation.  Many organisations use presentation software and show summary information via
a data projector.  These presentations have usually been well thought out to be visually attractive
and to convey the correct amount of detail.

Timing

Information must be on time for the purpose for which it is required. Information received too
late will be irrelevant. For example, if you receive a brochure from a theatre and notice there was
a concert by your favourite band yesterday, then the information is too late to be of use.

Value of information

The relative importance of information for decision-making can increase or decrease its value to
an organisation. For example, an organisation requires information on a competitor’s
performance that is critical to their own decision on whether to invest in new machinery for their
factory. The value of this information would be high. Always keep in mind that information
should be available on time, within cost constraints and be legally obtained.

Cost of information

Information should be available within set cost levels that may vary dependent on situation. If
costs are too high to obtain information an organisation may decide to seek slightly less
comprehensive information elsewhere. For example, an organisation wants to commission a
market survey on a new product. The survey could cost more than the forecast initial profit from
the product. In that situation, the organisation would probably decide that a less costly source of
information should be used, even if it may give inferior information.
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The difference between value and cost

Many students in the past few years have confused the definitions of value and cost.  Information
gained or used by an organisation may have a great deal of value even if it may not have cost a
lot. An example would be bookshops, who have used technology for many years now, with
microfiche giving way to computers in the mid to late 1990s.  Microfiche was quite expensive
and what the bookshops received was essentially a list of books in print.  By searching their
microfiche by publisher they could tell you if a particular book was in print.  Eventually this
information became available on CD-ROM.  Obviously this information has value to the
bookshops in that they can tell you whether or not you can get the book.  The cost of subscribing
to microfiche was fairly high; subscribing to the CD-ROM version only slightly less so.

Much more valuable is a stock system which can tell you instantly whether or not the book is in
stock, linked to an on-line system which can tell you if the book exists, where it is available
from, the cost and delivery time.  This information has far more value than the other two
systems, but probably actually costs quite a bit less. It is always up-to-date and stock levels are
accurate.

We are so used to this system that we cannot envisage what frustrations and inconvenience the
older systems gave.  The new system is certainly value for money

(vii) The Value of Information

Value of information. From Wikipedia, the free encyclopedia. Value of information
(VOI or VoI) is the amount a decision maker would be willing to pay for information
prior to making a decision.

(viii) Asymmetry of Information

In contract theory and economics, information asymmetry deals with the study of
decisions in transactions where one party has more or better information than the other.
Asymmetric information, also known as information failure, occurs when one party to
an economic transaction possesses greater material knowledge than the other party. ...
Almost all economic transactions involve information asymmetries.

3. Game Theory
Game theory is the study of mathematical models of strategic interaction between rational
decision-makers. ... Today, game theory applies to a wide range of behavioral relations, and is
now an umbrella term for the science of logical decision making in humans, animals, and
computers.
Game theory is the study of mathematical models of strategic interaction between rational
decision-makers. It has applications in all fields of social science, as well as in logic and
computer science. Originally, it addressed zero-sum games, in which one person's gains result in
losses for the other participants.

Strategy and Game Theory

Strategy (game theory) In game theory, a player's strategy is any of the options which he or
she chooses in a setting where the outcome depends not only on their own actions but on the

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actions of others. A player's strategy will determine the action which the player will take at any
stage of the game.

(i) Prisoners’ Dilemma

The prisoner's dilemma is a standard example of a game analyzed in game theory that
shows why two completely rational individuals might not cooperate, even if it appears
that it is in their best interests to do so. It was originally framed by Merrill Flood and
Melvin Dresher while working at RAND in 1950.

What is the prisoner dilemma in ethics?

The Ethics of the Prisoner's Dilemma. The Prisoner's Dilemma is a concept used to model a
strategic interaction in which actors choosing their behaviors rationally according to their own
self-interest make everyone worse off than they could have been otherwise.

(ii) Nash Equilibrium

In economics and game theory) a stable state of a system involving the interaction of
different participants, in which no participant can gain by a unilateral change of strategy
if the strategies of the others remain unchanged.

The Nash equilibrium, named after the mathematician John Forbes Nash Jr., is a
proposed solution of a non-cooperative game involving two or more players in which
each player is assumed to know the equilibrium strategies of the other players, and no
player has anything to gain by changing only their own.

(iii) Mixed Strategies

A pure strategy determines all your moves during the game (and should therefore
specify your moves for all possible other players' moves). A mixed strategy is a
probability distribution over all possible pure strategies (some of which may get zero
weight)
Mixed Strategy Equilibrium. In many games players choose unique actions from the set
of available actions. ... In a pure strategy a player chooses an action for sure, whereas in
a mixed strategy, he chooses a probability distribution over the set of actions available to
him.

(iv)Sequential Games
In game theory, a sequential game is a game where one player chooses their action
before the others choose theirs. Importantly, the later players must have some
information of the first's choice, otherwise the difference in time would have no strategic
effect.

In game theory, a sequential game is a game where one player chooses their action
before the others choose theirs. Importantly, the later players must have some
information of the first's choice, otherwise the difference in time would have no strategic
effect.

(v) Repeated Games

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 Repeated games allow for the study of the interaction between immediate gains and
long-term incentives. A finitely repeated game is a game in which the same one-shot
stage game is played repeatedly over a number of discrete time periods, or rounds.

(vi)Incomplete Information.
Incomplete information, also known as asymmetric information, refers to the contrary,
where not all players know each other's utility functions. John Harsanyi developed the
theory of incomplete information in his “Games with Incomplete Information Played
by 'Bayesian' Players”, 1967.

What is imperfect information in game theory?

Perfect and imperfect information. The perfection of information is an important notion in
game theory when considering sequential and simultaneous games. ... Perfect information
refers to the fact that each player has the same information that would be available at the end of
the game.

What is imperfect microeconomics?

Imperfect information is a situation in which the parties to a transaction have different
information, as when the seller of a used car has more information about its quality than the
buyer. Sellers often have better information about a good than buyers because they are more
familiar with it

4. Production and Cost Functions

What is production and cost analysis?
Cost Analysis. ... In other words, the cost analysis is concerned with determining money value
of inputs (labor, raw material), called as the overall cost of production which helps in deciding
the optimum level of production.
A cost function is a function of input prices and output quantity whose value is the cost of
making that output given those input prices, often applied through the use of the cost curve by
companies to minimize cost and maximize production efficiency.

Production and Cost Functions

Production function: Relates physical output of a production process to physical inputs or
factors of production. marginal cost: The increase in cost that accompanies a unit increase in
output; the partial derivative of the cost function with respect to output.

(i) Marginal productivity

In economics and in particular neoclassical economics, the marginal product or marginal
physical productivity of an input is the change in output resulting from employing one more unit
of a particular input, assuming that the quantities of other inputs are kept constant.

Calculations of Marginal Product. The formula for marginal product is that it equals the
change in the total number of units produced divided by the change in a single variable input. For
example, assume a production line makes 100 toy cars in an hour and the company adds a new
machine to the line.
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(ii) Rate of technical substitution
What is meant by marginal rate of technical substitution?
The marginal rate of technical substitution (MRTS) can be defined as, keeping constant the
total output, how much input 1 have to decrease if input 2 increases by one extra unit. In other
words, it shows the relation between inputs, and the trade-offs amongst them, without changing
the level of total output.

The marginal revenue productivity theory of wages is a theory in neoclassical economics

stating that wages are paid at a level equal to the marginal revenue product of labor, MRP (the
value of the marginal product of labor), which is the increment to revenues caused by the
increment to output produced by the last laborer employed. In a model, this is justified by an
assumption that the firm is profit-maximizing and thus would employ labor only up to the point
that marginal labor costs equal the marginal revenue generated for the firm.[1]

The marginal revenue product (MRP) of a worker is equal to the product of the marginal product
of labour (MP) (the increment to output from an increment to labor used) and the marginal
revenue (MR) (the increment to sales revenue from an increment to output): MRP = MP × MR.
The theory states that workers will be hired up to the point when the marginal revenue product is
equal to the wage rate. If the marginal revenue brought by the worker is less than the wage rate,
then employing that laborer would cause a decrease in profit.

(iii) Returns to scale

Increasing Returns to Scale: Increasing returns to scale or diminishing cost refers to a
situation when all factors of production are increased, output increases at a higher rate. It means
if all inputs are doubled, output will also increase at the faster rate than double.

(iv) Elasticity of substitution

Elasticity of substitution is the elasticity of the ratio of two inputs to a production function
with respect to the ratio of their marginal products. In a competitive market, it measures the
percentage change in the ratio of two inputs used in response to a percentage change in their
prices.

(vi) Cost minimizing inputs

in which we're called to find the optimal input mix or sometimes the cost minimizing
input mix in other words. the firm is deciding. to produce a certain amount of output and
wants to produce that output that quantity of output. at the lowest possible cost.
What is total cost minimization?
Cost minimization is a basic rule used by producers to determine what mix of labor and capital
produces output at the lowest cost. In other words, what the most cost-effective method of
delivering goods and services would be while maintaining a desired level of quality.

(vi) Cost functions and shifts in cost curves

At large output levels, average total cost decreases. An increase in the price of a factor of
production increases costs and shifts the cost curves upward. An increase in fixed cost does not
affect the variable cost or marginal cost curves (TVC, AVC, and MC curves).
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What causes the total product curve to shift?
The shape of the total product curve is a function of teamwork, specialization, and using the
variable input with the fixed inputs. The total product (TP) curve represents the total amount of
output that a firm can produce with a given amount of labor. As the amount of labor changes,
total output changes.

How can manufacturing cost be reduced?

When your manufacturing efforts are not generating the profit margins you desire, there
are a few key cost-reduction ideas you should consider.
1. Reduce Labor Costs. ...
2. Reduce Material Costs. ...
3. Reduce Overhead Costs. ...
4. Invest in Capital.

What is cost maximization?

Changes in total costs and profit maximization. A firm maximizes profit by operating where
marginal revenue equals marginal cost. In the short run, a change in fixed costs has no effect on
the profit maximizing output or price.

Profit Maximization
Economics profit maximization is the short run or long run process by which a firm may
determine the price, input, and output levels that lead to the greatest profit. Neoclassical
economics, currently the mainstream approach to microeconomics, usually models the firm as
maximizing profit.

(i) The Nature and Behavior of Firms

Profit Maximization. The monopolist's profit maximizing level of output is found by
equating its marginal revenue with its marginal cost, which is the same profit maximizing
condition that a perfectly competitive firm uses to determine its equilibrium level of output.

(ii) Profit Maximization

In economics, profit maximization is the short run or long run process by which a
firm may determine the price, input, and output levels that lead to the greatest profit.

(iii) Marginal Revenue

In microeconomics, marginal revenue (MR) is the additional revenue that will be
generated by increasing product sales by one unit. In a perfectly competitive market,
the additional revenue generated by selling an additional unit of a good is equal to
the price the firm is able to charge the buyer of the good.

A company calculates marginal revenue by dividing the change in total revenue by

the change in total output quantity. Therefore, the sale price of a single additional
item sold will equal marginal revenue. For example, a company sells 100 items for a
total of $1,000.

Marginal cost is the increase or decrease in total production cost if output is

increased by one more unit. The formula to obtain the marginal cost is change in
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 costs/change in quantity. If the price you charge per unit is greater than the marginal
cost of producing one more unit, then you should produce that unit.

(iv) Short-Run Supply by a Price-Taking Firm

In words, a firm's short-run supply function is the increasing part of its short run
marginal cost curve above the minimum of its average variable cost. The short run
supply function of a firm with "typical" cost curves is shown in the figure. Note: At
the output it chooses, the firm may make a loss.

(v) Profit Functions

Revenue Function, R(x) Total income from producing units. Cost Function, C(x)
Total cost of producing the units. Profit Function, P(x) Total Income minus Total
Cost. Marginal is rate of change of cost, revenue or profit with the respect to the
number of units.

What is the equation of the profit function?

If x represents the number of units sold, we will name these two functions as follows: R(x) = the
revenue function; C(x) = the cost function. Therefore, our profit function equation will be as
follows: P(x) = R(x) - C(x)

(vi) Profit Maximization and Input Demand

The general rule is that the firm maximizes profit by producing that quantity of
output where marginal revenue equals marginal cost. The profit maximization issue
can also be approached from the input side. ... The marginal revenue product is the
change in total revenue per unit change in the variable input.
What are the objectives of profit maximization?
Profit maximization is the main aim of any business and therefore it is also an objective of
financial management. Profit maximization, in financial management, represents the process or
the approach by which profits Earning Per Share (EPS).

What are the condition of profit maximization?

Profit Maximization. The monopolist's profit maximizing level of output is found by equating its
marginal revenue with its marginal cost, which is the same profit maximizing condition that a
perfectly competitive firm uses to determine its equilibrium level of output.

5. Market Structure Model

market structure. Four basic types of market structure are (1) Perfect competition: many
buyers and sellers, none being able to influence prices. (2) Oligopoly: several large sellers who
have some control over the prices. (3) Monopoly: single seller with considerable control over
supply and prices.

What are the 4 types of market structures?

We can use these characteristics to guide our discussion of the four types of market
structures.
 Perfect Competition Market Structure. ...
 Monopolistic Competition Market Structure. ...
 Monopoly Market Structure. ...
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  Oligopoly Market Structure.

The Four Types of Market Structures

There are quite a few different market structures that can characterize an economy. However,
if you are just getting started with this topic, you may want to look at the four basic types of
market structures first. Namely perfect competition, monopolistic competition, oligopoly, and
monopoly. Each of them has their own set of characteristics and assumptions, which in turn
affect the decision making of firms and the profits they can make.

It is important to note that not all of these market structures actually exist in reality, some of
them are just theoretical constructs. Nevertheless, they are of critical importance, because they
can illustrate relevant aspects of competing firms’ decision making. Hence, they will help you
to understand the underlying economic principles. With that being said, let’s look at them in
more detail.

Perfect Competition

Perfect competition describes a market structure, where a large number of small firms compete
against each other. In this scenario, a single firm does not have any significant market power. As
a result, the industry as a whole produces the socially optimal level of output, because none of
the firms have the ability to influence market prices.

The idea of perfect competition builds on a number of assumptions: (1) all firms maximize
profits (2) there is free entry and exit to the market, (3) all firms sell completely identical (i.e.
homogenous) goods, (4) there are no consumer preferences. By looking at those assumptions it
becomes quite obvious, that we will hardly ever find perfect competition in reality. This is an
important aspect because it is the only market structure that can (theoretically) result in a socially
optimal level of output.

Probably the best example of a market with almost perfect competition we can find in reality
is the stock market. If you are looking for more information on perfect competition, you can also
check our post on perfect competition vs imperfect competition.

Monopolistic Competition

Monopolistic competition also refers to a market structure, where a large number of small firms
compete against each other. However, unlike in perfect competition, the firms in monopolistic
competition sell similar, but slightly differentiated products. This gives them a certain degree of
market power which allows them to charge higher prices within a certain range.

Monopolistic competition builds on the following assumptions: (1) all firms maximize profits (2)
there is free entry and exit to the market, (3) firms sell differentiated products (4) consumers may
prefer one product over the other. Now, those assumptions are a bit closer to reality than the ones
we looked at in perfect competition. However, this market structure will no longer result in a

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socially optimal level of output, because the firms have more power and can influence market
prices to a certain degree.

An example of monopolistic competition is the market for cereals. There is a huge number of

different brands (e.g. Cap’n Crunch, Lucky Charms, Froot Loops, Apple Jacks). Most of them
probably taste slightly different, but at the end of the day, they are all breakfast cereals.

Oligopoly

An oligopoly describes a market structure which is dominated by only a small number of firms.
This results in a state of limited competition. The firms can either compete against each other
or collaborate (see also Cournot vs. Bertrand Competition). By doing so they can use their
collective market power to drive up prices and earn more profit.

The oligopolistic market structure builds on the following assumptions: (1) all firms maximize
profits, (2) oligopolies can set prices, (3) there are barriers to entry and exit in the market, (4)
products may be homogenous or differentiated, and (5) there is only a few firms that dominate
the market. Unfortunately, it is not clearly defined what a «few» firms means exactly. As a rule
of thumb, we say that an oligopoly typically consists of about 3-5 dominant firms.

To give an example of an oligopoly, let’s look at the market for gaming consoles. This market is
dominated by three powerful companies: Microsoft, Sony, and Nintendo. This leaves all of them
with a significant amount of market power.

Monopoly

A monopoly refers to a market structure where a single firm controls the entire market. In this
scenario, the firm has the highest level of market power, as consumers do not have any
alternatives. As a result, monopolies often reduce output to increase prices and earn more profit.

The following assumptions are made when we talk about monopolies: (1) the monopolist
maximizes profit, (2) it can set the price, (3) there are high barriers to entry and exit, (4) there is
only one firm that dominates the entire market.

From the perspective of society, most monopolies are usually not desirable, because they result
in lower outputs and higher prices compared to competitive markets. Therefore, they are often
regulated by the government. An example of a real-life monopoly could be Monsanto. About
80% of all corn harvested in the US is trademarked by this company. That gives Monsanto an
extremely high level of market power. You can find additional information about monopolies our
post on monopoly power.

In a Nutshell

There are four basic types of market structures: perfect competition, imperfect competition,
oligopoly, and monopoly. Perfect competition describes a market structure, where a large
number of small firms compete against each other with homogenous products. Meanwhile,
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monopolistic competition refers to a market structure, where a large number of small firms
compete against each other with differentiated products. An Oligopoly describes a market
structure where a small number of firms compete against each other. And last but not least a
monopoly refers to a market structure where a single firm controls the entire market.

Competitive Model
(i) Short-Run Price Determination
Short-run price is determined by short-run equilibrium between demand and supply.
Supply curve in the short run under perfect competition is a lateral summation of the short-
run marginal cost curves of the firm.

The short run is the concept that, within a certain period in the future, at least one input is
fixed while others are variable. In economics, it expresses the idea that an economy behaves
differently depending on the length of time it has to react to certain stimuli.

How price is determined?

Let us begin on the elementary level and say that prices are determined by supply and demand.
If the relative demand for a product increases, consumers will be willing to pay more for it. ...
All four — demand, supply, cost, and price — are interrelated. A change in one will bring
changes in the others.

What is PRICE DETERMINATION? The interaction between the demand and supply in
the free market that is used to determine the costs for a goods or service.

(ii) Long-Run Equilibrium

Long Run Equilibrium of the Firm. In the long run, a firm achieves equilibrium when it
adjusts its plant/s to produce output at the minimum point of their long-run Average Cost
(AC) curve. ... These changes continue until the remaining firms in the industry cover their
total costs and normal profits.

A short run competitive equilibrium is a situation in which, given the firms in the market,
the price is such that that total amount the firms wish to supply is equal to the total amount
the consumers wish to demand.

(iii) Comparative Statics Analysis of Long-Run Equilibrium

comparative statics is the comparison of two different economic outcomes, before and after
a change in some underlying exogenous parameter. As a type of static analysis it compares
two different equilibrium states, after ... using only the first derivatives of the terms that
appear in the equilibrium equations.

(iv) Producer Surplus in the Long Run

long run the market supply curve is perfectly elastic reflecting zero profit and zero
producer surplus. If the number of firms is fixed (as in the short run), the market supply is
the horizontal sum of individual supplies and producer surplus is the sum of the individual
firms' producer surpluses.

(vi)Economic Efficiency and Welfare Analysis

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 Economic Efficiency and Welfare. Measuring economic efficiency is often subjective,
relying on assumptions about the social good, or welfare, created and how well that
serves consumers. ... Even if economic equilibrium is reached, the standard of living of
all individuals within the economy may not be equal.

Welfare economics focuses on the optimal allocation of resources and goods and how
the allocation of these resources affects social welfare. ... Welfare economics is a
subjective study that may assign units of welfare or utility to create models that measure
the improvements to individuals based on their personal scales.

(vii) Price Controls and Shortages

A shortage is an excess of the quantity of a good buyers are seeking to buy over the
quantity sellers are willing and able to sell. In a shortage, there are people willing and
able to pay the controlled price of a good, but they cannot obtain it. ... In a free market
the effect of such a scarcity is a high price.

How does price controls help the economy?

They are a way to regulate prices and set either above or below the market equilibrium:
Maximum prices can reduce the price of food to make it more affordable, but the drawback is a
maximum price may lead to lower supply and a shortage. Minimum prices can increase the
price producers receive.

How does price control affect supply and demand?

If there is a decrease in supply of goods and services while demand remains the same, prices
tend to rise to a higher equilibrium price and a lower quantity of goods and services. ...
However, when demand increases and supply remains the same, the higher demand leads to a
higher equilibrium price and vice versa.

(vii) Tax Incidence Analysis

Tax incidence is said to "fall" upon the group that ultimately bears the burden of, or
ultimately has to pay, the tax. The key concept is that the tax incidence or tax burden does
not depend on where the revenue is collected, but on the price elasticity of demand and price
elasticity of supply.

Monopoly
'Monopoly' Definition: A market structure characterized by a single seller, selling a unique
product in the market. In a monopoly market, the seller faces no competition, as he is the sole
seller of goods with no close substitute. ... He enjoys the power of setting the price for his goods.

(i) Profit Maximization and Output Choice

Profit Maximization Rule. The Profit Maximization Rule states that if a firm chooses to
maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal
to Marginal Revenue (MR) and the Marginal Cost curve is rising. In other words, it must
produce at a level where MC = MR.

How do you determine if a firm should shut down?

In the short run, a firm that is operating at a loss (where the revenue is less that the total cost or
the price is less than the unit cost) must decide to operate or temporarily shutdown. The
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shutdown rule states that “in the short run a firm should continue to operate if price exceeds
average variable costs. ”

(ii) Monopoly and Resource Allocation

Monopoly and Resource Allocation: Monopoly is a market situation in which there is only
one firm producing and selling a product with barriers to entry of other firms. The
monopoly product has no close substitutes which mean that no other firm produces a similar
product.

(iii) Monopoly, Product Quality, and Durability

(iv) Price Discrimination

Price discrimination is a selling strategy that charges customers different prices for the same
product or service, based on what the seller thinks they can get the customer to agree to. In
pure price discrimination, the seller charges each customer the maximum price he or she
will pay.

Price discrimination is a microeconomic pricing strategy where identical or largely similar

goods or services are transacted at different prices by the same provider in different markets.
... The optimal incarnation of this is called perfect price discrimination and maximizes the
price that each customer is willing to pay.

(v) Regulation of Monopoly

The government may wish to regulate monopolies to protect the interests of consumers. For
example, monopolies have the market power to set prices higher than in competitive
markets. The government can regulate monopolies through price capping, yardstick
competition and preventing the growth of monopoly power.

Disadvantages of Monopoly. In general, a monopolistic market structure would produce

less output and charge higher prices which leads to a decline in consumer surplus and a
deadweight welfare loss. ... A monopoly tends to be less motivated towards economic
efficiency such as cutting costs or increasing productivity.

Imperfect Competition
In economic theory, imperfect competition is a type of market structure showing some but not all
features of competitive markets. Forms of imperfect competition include: Monopolistic
competition: A situation in which many firms with slightly different products compete.

(i) Bertrand Model

Bertrand competition is a model of competition used in economics, named after Joseph
Louis François Bertrand (1822–1900). It describes interactions among firms (sellers) that
set prices and their customers (buyers) that choose quantities at the prices set.

That means, unlike in a market with perfect competition, they are no longer price takers, but
price makers. ... They are called Cournot and Bertrand Competition (both named after
their inventors). The main difference between the two is the firm's initial decision to set a
fixed price or a fixed quantity.

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 (ii) Cournot Model
Cournot competition is an economic model used to describe an industry structure in which
companies compete on the amount of output they will produce, which they decide on
independently of each other and at the same time.

What is the Cournot equilibrium?

All firms choose output (quantity) simultaneously. The basic Cournot assumption is that each
firm chooses its quantity, taking as given the quantity of its rivals. The resulting equilibrium is a
Nash equilibrium in quantities, called a Cournot (Nash) equilibrium.

(iii) Product Differentiation

In economics and marketing, product differentiation (or simply differentiation) is the
process of distinguishing a product or service from others, to make it more attractive to a
particular target market. This involves differentiating it from competitors' products as well
as a firm's own products.
Why product differentiation is important?
Product Differentiation Strategy. A good product differentiation strategy may gain brand
loyalty, which is paramount to any successful business. ... Today's financial climate contains
businesses in an intensely competitive market. If a product does not have consistently high
quality, consumers will turn to competitors.

(iv) Tacit Collusion

Tacit collusion occurs where firms undergo actions that are likely to minimize a response
from another firm, e.g. avoiding the opportunity to price cut an opposition. Put another way,
two firms agree to play a certain strategy without explicitly saying so.

Is tacit collusion illegal?

Collusion is illegal in the United States, Canada and most of the EU due to antitrust laws, but
implicit collusion in the form of price leadership and tacit understandings still takes place.

(v) Longer-Run Decisions: Investment, Entry, and Exit

Entry and exit decisions in the long run. The line between the short run and the long run
cannot be defined precisely with a stopwatch, or even with a calendar. ... If a business is
making a profit in the short run, it has an incentive to expand existing factories or to build
new ones.

Why does exit occur?

Free entry is a term used by economists to describe a condition in which can sellers freely enter
the market for an economic good by establishing production and beginning to sell the product.
Along these same lines, free exit occurs when a firm can exit the market without limit when
economic losses are being incurred.

(vii) Strategic Entry Deterrence

strategic entry deterrence refers to any action taken by an existing business in a
particular market that discourages potential entrants from entering into competition
in that market. Such actions, or barriers to entry, can include hostile takeovers,
product differentiation through heavy spending on new product development,
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 capacity expansion to achieve lower unit costs, and predatory pricing.[1] These
actions are sometimes deemed anti-competitive and could be subject to various
competition laws.

(vii)Signaling
In contract theory, signalling (or signaling; see spelling differences) is the idea that one
party (termed the agent) credibly conveys some information about itself to another party (the
principal).

What are the 4 types of cell signaling?

There are four basic categories of chemical signaling found in multicellular organisms:
paracrine signaling, autocrine signaling, endocrine signaling, and signaling by direct contact.

Asymmetric Information
(i) Principal-Agent Model
The principle agent problem arises when one party (agent) agrees to work in favor of
another party (principle) in return for some incentives. Such an agreement may incur huge costs
for the agent, thereby leading to the problems of moral hazard and conflict of interest.

(ii) Hidden Actions

Hidden action refers to when the principal is not able to observe exactly how much effort
the agent really puts forth because monitoring is costly and precise measures of the agent’s
behaviour are not available.

(iii) Owner-Manager Relationship

As your business grows, it may become necessary to delegate decision-making to
managers. This is an owner-manager relationship. In addition, you must hire people to act on
your behalf, such as purchasing agents, finance managers and salespeople. This is a principal-
agent relationship.

(iv) Moral Hazard in Insurance

'Moral Hazard' Definition: Moral hazard is a situation in which one party gets involved in a
risky event knowing that it is protected against the risk and the other party will incur the cost. It
arises when both the parties have incomplete information about each other.

(v) Adverse Selection in Insurance

Adverse selection refers generally to a situation in which sellers have information that
buyers do not have, or vice versa, about some aspect of product quality. In the case of insurance,
adverse selection is the tendency of those in dangerous jobs or high-risk lifestyles to purchase
life insurance.

(vii) Market Signaling

Market Signal. Unintentional or passive passage of information or indication between
participants of a market. For example If a firm issues bonds it indirectly shows that it
needs capital and also desires to retain control thus instead of equity capital it prefers loan
capital.
Signalling (economics) in contract theory, signaling (or signalling see spelling
differences) is the idea that one party (termed agent) credibly conveys some information
24
 about itself to another (the principal) a price signal conveyed consumers and producers,
via charged for product or service, which provides increase.

(viii) Auctions
An auction is a sales process in which potential buyers place competitive bids on assets
or services, either in an open format or closed. The asset or service in question will be
sold to the party that places the highest bid in an open auction, and usually to the highest
bidder in a closed auction.
An Auction is where property is sold at a specific time and place to the highest bidder.
Most auctions require a person to get a bidder number or other identifying item prior to
bidding. ... There are many reasons but if you look at many of the high record setting
prices that people get for property is done at auction.

6. Externalities

Externalities and Public Goods

Externalities and Public Goods
(i) Externalities and Allocative Inefficiency
An externality is an economic term referring to a cost or benefit incurred or received by a third
party who has no control over how that cost or benefit was created.

An externality can be both positive or negative, and can stem from either the production or
consumption of a good or service. The costs and benefits can be both private—to an individual
or an organization—or social, meaning it can affect society as a whole

(ii) Solutions to the Externality Problem

Externalities, Problems, And Solutions. occurs when actions of one party make another party
worse off or better off. Yet, the first party neither bears the cost or receives the benefits of doing
so. ... Private benefits and costs PLUS any benefits and costs to any actor affected
by externality.

What causes externality?

Reasons for market failure include: Positive and negative externalities: anexternality is an
effect on a third party that is caused by the consumption or production of a good or service. A
positive externality is a positive spillover that results from the consumption or production of a
good or service.

(iii) Attributes of Public Goods

The two characteristics of public goods are non-rivalry and non-excludability. Non-rivalry
means that the consumption of the good by one consumer does not decrease the availability of
the good to other consumers. Consider the street lights. One consumer's use of street lights does
not decrease others' use.

(iv) Public Goods and Resource Allocation

In economics, a public good is a good that is both non-excludable and non-rivalrous in that

individuals cannot be excluded from use or could be enjoyed without paying for it, and where

25
use by one individual does not reduce availability to others or the goods can be effectively
consumed simultaneously by more than one person.[1] This is in contrast to a common
good which is non-excludable but is rivalrous to a certain degree.

Allocation of Resources and Provision of Public Goods. Resources can be defined in different

ways. They can be considered as the available factors of production: labour, land (including
mineral wealth and fisheries), capital and enterprise.

(ix) Lindahl Pricing of Public Goods

A Lindahl tax is a form of taxation conceived by ErikLindahl in which individuals pay
for public goodsaccording to their marginal benefits. In other words, they pay according to the
amount of satisfaction or utility they derive from the consumption of an additional unit of
the public good.

(x) Voting and Resource Allocation

Once it is admitted that the state is necessary, positive public choice analyzes how it assumes its
missions of allocative efficiency and redistribution. ... Another section looks at
the analysis of voting. It discusses problems with using voting to allocate resources, such as
cycling and the median voter theorem.

Public choice or public choice theory is "the use of economic tools to deal with traditional
problems of political science". Its content includes the study of political behavior. ... Since voter
behavior influences the behavior of public officials, public-choice theory often uses results from
social-choice theory.

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