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Showing posts from June, 2019

Difference between Cournot duopoly and stackleberg duopoly

1.Stackelberg's model is a sequentialg gamewhile Cournot's is a simultaneous game. 2. In Stackleberg one firm is a leader and move first while other follows while in Cournot both firms play simulataneously. 3. In stackleberg we calculate only follower's reaction function while in Cournot we calculate both firms reaction function 4. In Stackelberg duopolies, the quantitys sold by the leader is greater than theq sold by the follower, while in Cournot duopolies quantity are the same for both firms. 5. Profit of stacklebergs leader is greater than follower while in Cournot profit of both firm stays same. 6. Profit of stackleberg leader is always grater than profit of any of the firms in Cournot model 7. Price in Cournot model is higher than Stackleberg Model.

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What is Cournot Model ? What are the assumptions of the model, How to calculate equilibrium With numerical ?

Cournot model is developed by Augustin Cournot.

Theory : Under this number of firms compete with each other indipendently and simultaneously Assumptions : All firms produce Homogenous productFirms do not collude or cooperateFirms have market power (each firms output decision affects good price)Number of firms are fixedTo calculate equilibrium quantity and profit And reaction function for both firms .

And reaction function for both firms would be

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Costs of Unemployment and Inflation

Costs of Unemployment and Inflation
In an economy both Unemployment and Inflation adversely affects economy.
Unemployment occurs when there is eligible persons looking for a job but unable to find work and Inflation means when there is overall increases in price level of the economy.
Costs of Unemployment1. Unemployment causes the loss of potential output.
2. It causes the loss of valuable resources like (Manpower).
3. At the household level it causes the loss of income and consequent deterioration in standard of living of the household.
4. Unemployment opens the door for illegal activities in the economy that will lead to higher illegal activities,(drugs supply, contract killing, etc).

Costs of Inflation 1. Inflation decreases the purchasing power of currency due to the rise in prices across the economy.
2. Inflation reduces real income of fixed income groups ( salaried class) as their income does not change at the same pace as price rise.
3. When there is a price rise borrowers gain in fixed …

Philips Curve, graph of Philips curve, equation of Philips.

Philips curve is named after A.W. Philips. Philips Curve describes the relationship between unemployment and inflation.
In 1958, When Philips was professor at London School Of Economics, he took time series  data on the rate of unemployment and the rate of increase in nominal wage rate of the UK for period from 1861 to 1957 and he established the following relationship,

  w = a - bu w is the wage rate  a, b are constant  u is the rate of unemployment.
He found that there exist an inverse relationship between Wage(w) rate and Unemployment(u).  The policy implication for such a result was "An Economy can't have both low inflation and low unemployment simultaneously."
Graph of the Philips curve - TT is the graph of the Philips curve on the Y axis Inflation rate and on the x axis Unemployment rate.

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Unemployment, unemployment rate, and types of unemployment

Unemployment is a situation in which a eligible person searching for the job is unable to find job and Unemployment rate is calculated by dividing the number of unemployed people to all the people in labourforce. Labourforce include employed people as well as unemployed people searching for job and it doesn't include people who are retired or too ill to work or simply not looking for work.

Unemployment rate formulaUnemployment Rate = Unemployed people /  labourforceTypes of UnemploymentThere are mainly three kind of unemployment Frictional, Structural and Cyclical Unemployment.
1.Frictional unemployment- Frictional unemployment takes place because people switch over from one job to another. In many cases the tenure of job gets over and worker remain unemployed till they got another job and in other cases workers migrate from one region to another region in search for better jobs in this searching period they remain unemployed for sort term and this unemployment is called Frictional …

The Ramsey Model of growth

Frank Ramsey  (Philosopher and Mathematician ) derived a theory about inter-temporal consumption and optimal saving function using the standard utilitarian philosophy of Jeremy Bentham. The basic point of Ramsey's Model is that it is a prescriptive theory and not merely predictive. Society has to choose optimal economic growth. Society as being represented by 'representative agent' or a central planning agency. This representative agent or central planner maximizes an objective function.  In optimal growth of Ramsey type the utility function most often used is 
U = U(C/L) or U = U(c) where c = C/L above equation means that only consumption is used as a proxy for all welfare inducing activity .

Let the time period be 0,1,2,......T(starting period is denoted by 0) and there is consumption stream in this period (C₀.C₁C₂,.....Cᴛ). The optimization problem is to choose that consumption sequence that maximizes utility. Let U(0), U(1), U(2),...U(T) be the value of utility function at t…

The Real business cycle (RBC)

Real Busiess Cycle Theory (RBC) explains why there are fluctuations in businesses.
RBC model ignores the role of monetary forces and believe, like the classical economist, that money is veil. They insist that Production, supply shocks etc are the real forces behind the fluctuations, and they play down the role of demand side factors of the economy. RBC theory emphasis on relative prices rather than actual prices, believes that money is neutral, and also because it lays emphasis on supply side forces, this theory displays similarity with the earlier classical theorist of growth and development. It is for this reason RBC theory is sometimes put together with some other theories and dubbed 'Neo Classical'.

There can be several kind of shocks in the economy. these shock can originate on the demand side as well as on the supply side or shocks can originate from the monetary or fiscal policies. The RBC theorist focus on the Productivity shocks. Productivity shocks can be of several ty…

Harrod Domar model vs Solow model

1. In the Harrod Domar model the captal output ratio is fixed but in the Solow model the capital output ratio is not exogenously fixed. It is endogenously determined. 
2. Harrod Domar model assumes constant marginal retuen to capital while Solow assumes decreasing marginal returns to capital.
3. The process of adjustment in the variables is different in the two models. In the HD model, there are two knife-edges: the balance between the actual and warranted rates of growth, and between the warranted and natural rates of growth, but Solow’s model does not address this issue, and instead assumes that planned investment equals planned savings at all times. This is, of course, again because s, v, n were all fixed in the HD model, whereas in the Solow model, there is a spectrum of values that that v, that is, the capital output ratio can take, and adjust to that value at which the warranted rate of growth equals the natural rate of growth.

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Harrod Domar model, assumptions of Harrod Domar model, it's working and limitations of Harrod Domar model

Harrod domar model is an economic growth model, the model suggest that economic growth rates depend upon two things savings and capital output ratio. Higher savings enables higher investment thus higher growth rate , while lower-output ratio means Investment is more efficient thus the growth rate will be higher.
Mathematically growth rate (g) α level of savings  growth rate (g) α 1/capital output ratio(k)

Assumtions of the Harrod Model- 1. Savings leads to investment S= I
2. Investment leads to change in capital stocks I= ΔK
3. Constant capital output ratio (r) = K/Y.
4. There is no government intervention it the functioning of the economy.
5. A full- employment level of income already exist.
6. There are no lags in adjustment of variables.
7. Average propensity to save (aps) equals to marginal propensity      to save (mps) that means absolute change equals to relative change.
Harrod model is depends upon three growth rates a) Actual growth rates (G). b) Wwarranted growth rates (Gw).
c) Natural gr…

Solow growth model assumptions of solow growth model and steady state in solow model

The SolowGrowth model is an exogenous model of economic Growth  that analyzes changes in the level of output in an economy over time as a result of changes in the population growth rate, the savings rate, and the rate of technological progress.

Assumptions of the Solow growth model:
1. One composite good produced which is either consumed or accumulated in capital form
2. Homogeneous labour
3. Two factors of production— Capital (K) and Labour
4. Constant Return to Scale (CRS) production function
5. Economy exhibits diminishing returns in the labor and capital inputs.
6. Marginal Propensity to Save (s)—assumed constant
7. Exogenously given labour force growth rate (n)
8. Closed economy and Laissez Faire

Structure of the solow growth model:

Suppose that there is no depreciation, Consider aggregate production function.
Y=F(K,L) Where Y is the aggregate output K is the aggregate capital and L is the labour force
We have already assumed that production function exhibit constant returns to scale that mean…

Economic growth vs Economic development

Economic growth, is an increase in the level of output of goods and services measured in terms of value added thus we can say Economic growth is a narrow concept while Economic development is the progressive change in the socio-economic structure of the economy thus Economic development is a broader concept.
Economic growth is only a quantitatively concept, it means we can study or read the data mathematically but Economic development is the quantitatively as well as qualitatively concept means that it's not necessary that we can read data mathematically for example improvement in the Education.
Economic development accounts for the structural , institutional and technical change in the economy (the economy will move from primary oriented to secondary and tertiary oriented sector) thus there is a shift in labor force from primary sector to secondary and tertiary sector but for Economic growth it is not necessarily the case.
Economic growth ignores the distribution of the income in th…

Economic development and its features

Economic development is advancement of economic growth , in economic growth there is a increase in the overall output in the economy but in economic development there is a progressively change in socioeconomic structure of the economy. Economic development involves a steady decline in agriculture's share and corresponding rise in the share of industrial as well as service sector. This transformation in economic structure also shift occupational structure of labor force and improves skill and productivity. 
To understand better suppose in last twenty years two kid are brought up One kid has got education , he knows how to use technology, knows his social rights. while other kid has not got education and doesn't know about technology social rights. But now both are 20 years old,  if you compare these to then first kid is the example of economic development but the other is the example of growth. so Economic growth is the narrow concept while economic development is the broader co…

Limitation of Economic growth

There are some limitation in economic growth

It's not necessary that economic growth distributed among economy evenly there are evidence to suggest that in the sort run income inequality increases beside this the economic growth leads to more pressure on environment and it is result in pollution (air,water,noise), for low income economy to grow they need electric power since they are less technological advance so they use coal to meet up power demand (Electricity, transportation(railway)).Thus it will increase pollution level in the economy. When economy want to grow faster in that case they will use more resources. The faster they use resources the less time resources will last. for example Crude oil and Coal resources are shrinking very fast. 

Extensive and Intensive growth

Extensive growth is overall increases in the total output of the economy or There are quantitatively increases in labor (L) , Capital (K) and output (Y).

Intensive Growth - Intensive growth is derived from gains in overall productivity ( Efficiency , better utilization of capital). When labor of a firm start producing more unit of output with the same unit of labor or same unit of capital(technology improvement) start produces more unit of output.

Economic Growth, example of economic growth Causes of economic growth and effects of Economic growth

Economic Growth
It is an increase in level of output of goods and services and measured in terms of value added. Process of economic growth is essentially a dynamic concept and it refers to the continuous expansion in level of output i.e. it refers to forces that generate a positive rate of change over time. For an individual it’s an increase in income, for a firm it’s an increase in profit.

According to Poul Romer“Economic growth occurs whenever economic agent takes resources and rearrange them in ways that are more valuable.”
Economic growth exampleEconomic growth is a quantitatively concept which means it’s value can be derived or can interpret mathematically , for example suppose one month ago individual (X) had income of 1000$ now his income rose to 1200$ so for this individual(X) the Economic growth is 200$.

Sources of Economic Growth or causes of economic growth

Economic growth is a complex process and involves several interrelated factors. Economist stress the importance of thre…