Economies Of Scale

What Does Economies Of Scale Mean? The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. There are two types of economies of scale: -External economies - the cost per unit depends on the size of the industry, not the firm. -Internal economies - the cost per unit depends on size of the individual firm. Economies Of Scale Economies of scale gives big companies access to a larger mar et by allowing them to operate with greater geographical reach. !or the more traditional "small to medium# companies, however, size does have its limits. $fter a point, an increase in size "output# actually causes an increase in production costs. This is called %diseconomies of scale%.

What Are Economies Of Scale?

&hen more units of a good or a service can be produced on a larger scale, yet with "on average# less input costs, economies of scale "E'# are said to be achieved. $lternatively, this means that as a company grows and production units increase, a company will have a better chance to decrease its costs. $ccording to theory, economic growth may be achieved when economies of scale are realized. $dam 'mith identified the division of labor and specialization as the two ey means to achieve a larger return on production. Through these two techni(ues, employees would not only be able to concentrate on a specific tas , but with time, improve the s ills necessary to perform their )obs. The tas s could then be performed better and faster. *ence, through such efficiency, time and money could be saved while production levels increased. +ust li e there are economies of scale, diseconomies of scale ",'# also exist. This occurs when production is less than in proportion to inputs. &hat this means is that there are inefficiencies within the firm or industry resulting in rising average costs. Internal and External Economies of Scale $lfred -arshall made a distinction between internal and external economies of scale. &hen a company reduces costs and increases production, internal economies of scale have been achieved. External economies of scale occur outside of a firm, within an industry. Thus, when an industry.s scope of operations expands due to, for example, the creation of a better transportation networ , resulting in a subse(uent decrease in cost for a company wor ing within that industry, external economies of scale are said to have been achieved. &ith external E', all firms within the industry will benefit. Where Are Economies of Scale? In addition to specialization and the division of labor, within any company there are various inputs that may result in the production of a good and/or service. Lower input costs: &hen a company buys inputs in bul - for example, potatoes used to ma e !rench fries at a fast food chain - it can ta e advantage of volume discounts. "In turn, the farmer who sold the potatoes could also be achieving E' if the farm has lowered its average input costs through, for example, buying fertilizer in bul at a volume discount.# Costly inputs: 'ome inputs, such as research and development, advertising, managerial expertise and s illed labor are expensive, but because of the possibility of increased efficiency with such inputs, they can lead to a decrease in the average cost of production and selling. If a company is able to spread the cost of such inputs over an increase in its production units, E' can be realized. Thus, if the fast food chain chooses to spend more money on technology to eventually increase efficiency by lowering the average cost of hamburger assembly, it would also have to increase the number of hamburgers it produces a year in order to cover the increased technology expenditure. Specialized inputs: $s the scale of production of a company increases, a company can employ the use of specialized labor and machinery resulting in greater efficiency. This is because wor ers would be better (ualified for a specific )ob - for example, someone who only ma es !rench fries - and would no longer be spending extra time learning to do wor not within their specialization "ma ing hamburgers or ta ing a customer.s order#. -achinery, such as a dedicated !rench fry ma er, would also have a longer life as it would not have to be over and/or improperly used. Techni ues and Or!anizational inputs: &ith a larger scale of production, a company may also apply better organizational s ills to its resources, such as a clear-cut chain of command, while improving its techniques

for production and distribution. Thus, behind the counter employees at the fast food chain may be organized according to those taking in-house orders and those dedicated to drive-thru customers.
Learning inputs: 'imilar to improved organization and techni(ue, with time, the learning processes related to production, selling and distribution can result in improved efficiency - practice ma es perfect0 External economies of scale can also be realized from the above-mentioned inputs as a result of the company.s geographical location. Thus all fast food chains located in the same area of a certain city could benefit from lower transportation costs and a s illed labor force. -oreover, support industries may then begin to develop, such as dedicated fast food potato and/or cattle breeding farms. External economies of scale can also be reaped if the industry lessens the burdens of costly inputs, by sharing technology or managerial expertise, for example. This spillover effect can lead to the creation of standards within an industry. "ut Diseconomies Can Also Occur# $s we mentioned before, diseconomies may also occur. They could stem from inefficient managerial or labor policies, overhiring or deteriorating transportation networ s "external ,'#. !urthermore, as a company.s scope increases, it may have to distribute its goods and services in progressively more dispersed areas. This can actually increase average costs resulting in diseconomies of scale. 'ome efficiencies and inefficiencies are more location specific, while others are not affected by area. If a company has many plants throughout the country, they can all benefit from costly inputs such as advertising. *owever, efficiencies and inefficiencies can alternatively stem from a particular location, such as a good or bad climate for farming. &hen E' or ,' are location specific, trade is used in order to gain access to the efficiencies. Is "i!!er $eally "etter? There is a worldwide debate about the effects of expanded business see ing economies of scale, and conse(uently, international trade and the globalization of the economy. Those who oppose this globalization, as seen in the demonstrations held outside &orld Trade 1rganization "&T1# meetings, have claimed that not only will small business become extinct with the advent of the transnational corporation, the environment will be negatively affected, developing nations will not grow and the consumer and wor force will become increasingly less visible. $s businesses get bigger, the balance of power between demand and supply could become wea er, thus putting the company out of touch with the needs of its consumers. -oreover, it is feared that competition could virtually disappear as large companies begin to integrate and the monopolies created focus on ma ing a buc rather than thin ing of the consumer when determining price. The debate and protests continue. Conclusion The ey to understanding E' and ,' is that the sources vary. $ company needs to determine the net effect of its decisions affecting its efficiency, and not )ust focus on one particular source. Thus, while a decision to increase its scale of operations may result in decreasing the average cost of inputs "volume discounts#, it could also give rise to diseconomies of scale if its subse(uently widened distribution networ is inefficient because not enough transport truc s were invested in as well. Thus, when ma ing a strategic decision to expand, companies need to balance the effects of different sources of E' and ,' so that the average cost of all decisions made is lower, resulting in greater efficiency all around.

Diseconomies Of Scale
What Does Diseconomies Of Scale Mean? $n economic concept referring to a situation in which economies of scale no longer function for a firm. 2ather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.

Diseconomies Of Scale ,iseconomies of scale can sometimes occur for the follow reasons: 3# $ specific process within a plant cannot produce the same (uantity of output as another related process. !or example, if in a product re(uired both gadget $ and gadget 4, diseconomies of scale might occur if gadget 4 is produced at a slower rate than gadget $. 5# $s output increases, costs of transporting the good to distant mar ets can increase enough to offset any economies of scale. !or example, when a firm has a large plant capable of producing a large output located in one location, the more the firm produces, the more it needs to ship to distant locations.

%nit Cost
What Does Unit Cost Mean? The cost incurred by a company to produce, store and sell one unit of a particular product. 6nit costs include all fixed costs "i.e. plant and e(uipment# and all variable costs "labor, materials, etc.# involved in production. Unit Cost 6nit cost is an important metric to loo at when evaluating a %unit grower% stoc , or a stoc that chiefly produces items that have a low fixed cost. 7enerally, the larger a company grows, the lower the unit cost it can achieve through economies of scale.

&roducti'ity
What Does Productivity Mean? $n economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in revenues and other 7,8 components such as business inventories. 8roductivity measures may be examined collectively "across the whole economy# or viewed industry by industry to examine trends in labor growth, wage levels and technological improvement. Productivity 8roductivity gains are vital to the economy because they allow us to accomplish more with less. 9apital and labor are both scarce resources, so maximizing their impact is always a core concern of modern business. 8roductivity enhancements come from technology advances, such as computers and the internet, supply chain and logistics improvements, and increased s ill levels within the wor force. 8roductivity is measured and trac ed by many economists as a clue for predicting future levels of 7,8 growth. The productivity measure commonly reported through the media is based on the ratio of 7,8 to total hours wor ed in the economy during a measuring period: this productivity measure is produced by the 4ureau of ;abor 'tatistics four times per year.

(eynesian Economics
What Does Keynesian Economics Mean? $n economic theory stating that active government intervention in the mar etplace and monetary policy is the best method of ensuring economic growth and stability. Keynesian Economics $ supporter of <eynesian economics believes it is the government.s )ob to smooth out the bumps in business cycles. Intervention would come in the form of government spending and tax brea s in order to stimulate the economy, and government spending cuts and tax hi es in good times, in order to curb inflation. The <eynesian multiplier was introduced by 2ichard <ahn in the 3=>?s. It showed that any government spending brought about cycles of spending that increased employment and prosperity regardless of the form of the spending. !or example, a @3?? million government pro)ect, whether to build a dam or dig and refill a giant hole, might pay @A? million in pure labor costs. The wor ers then ta e that @A? million and, minus the average saving rate, spend it at various businesses. These businesses now have more money to hire more people to ma e more products, leading to another round of spending. This idea was at the core of the Bew ,eal and the growth of the welfare state. Ta en further, if people didn.t save anything, the economy would be an unstoppable engine running at full employment. <eynesians wanted to counteract saving by taxing savings to force people to spend more. The <eynesian model arbitrarily separated private savings and investment into two separate functions, showing the savings as a drain on the economy and thus ma ing private investment loo inferior to deficit spending. 6nless someone holds his or her savings entirely in cash C and true hoarding li e this is rare - it.s invested either by the individual or by the ban holding the capital. !riedman, among

others, showed that the <eynesian multiplier was both incorrectly formulated and fundamentally flawed. "!or more, read Free Market Maven: Milton Friedman.# 1ne flaw is ignoring how governments finance spending: taxation or debt issues. 2aising taxes ta es the same or more out of the economy as saving: raising funds by bonds causes the government to go in debt. The growth of debt becomes a powerful incentive for the government to raise taxes or inflate the currency to pay it off, thus lowering the purchasing power of each dollar that the wor ers are earning. 8erhaps the biggest flaw is ignoring the fact that saving and investing have a multiplier effect at least e(ual to that of deficit spending, without the debt downside. In the end, it comes down to whether you trust private individuals to spend their own money wisely or whether you thin government officials will do a better )ob. What)s the difference *et+een macroeconomics and microeconomics? -acro- and microeconomics, and their wide array of underlying concepts, have been the sub)ect of a great deal of writings. The field of study is vast: here is a brief summary of what each covers ! -icroeconomics is the study of decisions that people and businesses ma e regarding the allocation of resources and prices of goods and services. This means also ta ing into account taxes and regulations created by governments. -icroeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. !or example, microeconomics would loo at how a specific company could maximize it.s production and capacity so it could lower prices and better compete in its industry. "!ind out more about microeconomics in Understanding Microeconomics.# -acroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not )ust on specific companies, but entire industries and economies. This loo s at economy-wide phenomena, such as 7ross Bational 8roduct "7,8# and how it is affected by changes in unemployment, national income, rate of growth, and price levels. !or example, macroeconomics would loo at how an increase/decrease in net exports would affect a nation.s capital account or how 7,8 would be affected by unemployment rate. "To eep reading on this sub)ect, see Macroeconomic Analysis.# &hile these two studies of economics appear to be different, they are actually interdependent and complement one another since there are many overlapping issues between the two fields. !or example, increased inflation "macro effect# would cause the price of raw materials to increase for companies and in turn affect the end product.s price charged to the public. The bottom line is that microeconomics ta es a bottoms-up approach to analyzing the economy while macroeconomics ta es a top-down approach. 2egardless, both micro- and macroeconomics provide fundamental tools for any finance professional and should be studied together in order to fully understand how companies operate and earn revenues and thus, how an entire economy is managed and sustained. If you are interested in learning more about economics, ta e a loo at Economics Basics Tutorial and Economic Indicators To Know.

Microeconomics
What Does icroeconomics Mean? The branch of economics that analyzes the mar et behavior of individual consumers and firms in an attempt to understand the decision-ma ing process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on patterns of supply and demand and the determination of price and output in individual mar ets "e.g. coffee industry#. icroeconomics The field of economics is bro en down into two distinct areas of study: microeconomics and macroeconomics. -icroeconomics loo s at the smaller picture and focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it. 8eople who have any desire to start their own business or who want to learn the rationale behind the pricing of particular products and services would be more interested in this area. -acroeconomics, on the other hand, loo s at the big picture "hence %macro%#. It focuses on the national economy as a whole and provides a basic nowledge of how things wor in the business world. !or example, people who study this branch of economics would be able to interpret the latest 7ross ,omestic 8roduct figures or explain why a DE rate of unemployment is not necessarily a bad thing. Thus, for an overall perspective of how the entire economy wor s, you need to have an understanding of economics at both the micro and macro levels.

Mar!inal Cost Of &roduction

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What Does arginal Cost Of Production Mean? The change in total cost that comes from ma ing or producing one additional item. The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale. The calculation is most often used among manufacturers as a means of isolating an optimum production level. arginal Cost Of Production -anufacturing concerns often examine the cost of adding one more unit to their production schedules. This is because at some point, the benefit of producing one additional unit and generating revenue from that item will bring the overall cost of producing the product line down. The ey to optimizing manufacturing costs is to find that point or level as (uic ly

Macroeconomics
What Does acroeconomics Mean? The field of economics that studies the behavior of the aggregate economy. -acroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels. acroeconomics -acroeconomics is focused on the movement and trends in the economy as a whole, while in microeconomics the focus is placed on factors that affect the decisions made by firms and individuals. The factors that are studied by macro and micro will often influence each other, such as the current level of unemployment in the economy as a whole will affect the supply of wor ers which an oil company can hire from, for example.

Macroeconomic Analysis
&hen the price of a product you want to buy goes up, it affects you. 4ut why does the price go upF Is the demand greater than the supplyF ,id the cost go up because of the raw materials that ma e the 9,F 1r, was it a war in an un nown country that affected the priceF In order to answer these (uestions, we need to turn to macroeconomics. -acroeconomics is the study of the behavior of the economy as a whole. This is different from microeconomics, which concentrates more on individuals and how they ma e economic decisions. Beedless to say, macroeconomy is very complicated and there are many factors that influence it. These factors are analyzed with various economic indicators that tell us about the overall health of the economy. -acroeconomists try to forecast economic conditions to help consumers, firms and governments ma e better decisions. 9onsumers want to now how easy it will be to find wor , how much it will cost to buy goods and services in the mar et, or how much it may cost to borrow money. 4usinesses use macroeconomic analysis to determine whether expanding production will be welcomed by the mar et. &ill consumers have enough money to buy the products, or will the products sit on shelves and collect dustF 7overnments turn to the macroeconomy when budgeting spending, creating taxes, deciding on interest rates and ma ing policy decisions. -acroeconomic analysis broadly focuses on three things: national output "measured by gross domestic product "7,8##, unemployment and inflation. "!or bac ground reading, see The Importance ! In!lation And "#$.# ,ational Output: -D& 1utput, the most important concept of macroeconomics, refers to the total amount of goods and services a country produces, commonly nown as the gross domestic product. The figure is li e a snapshot of the economy at a certain point in time. &hen referring to 7,8, macroeconomists tend to use real 7,8, which ta es inflation into account, as opposed to nominal 7,8, which reflects only changes in prices. The nominal 7,8 figure will be higher if inflation goes up from year to year, so it is not necessarily indicative of higher output levels, only of higher prices. The one drawbac of the 7,8 is that because the information has to be collected after a specified time period has finished, a figure for the 7,8 today would have to be an estimate. 7,8 is nonetheless li e a stepping stone into macroeconomic analysis. 1nce a series of figures is collected over a period of time, they can be compared, and economists and investors can begin to decipher the business cycles, which are made up of the alternating periods between economic recessions "slumps# and expansions "booms# that have occurred over time. !rom there we can begin to loo at the reasons why the cycles too place, which could be government policy, consumer behavior or international phenomena, among other things. 1f course, these figures can be compared across economies as

well. *ence, we can determine which foreign countries are economically strong or wea . 4ased on what they learn from the past, analysts can then begin to forecast the future state of the economy. It is important to remember that what determines human behavior and ultimately the economy can never be forecasted completely. %nemployment The unemployment rate tells macroeconomists how many people from the available pool of labor "the labor force# are unable to find wor . "!or more about employment, see %urveying The Employment &eport.# -acroeconomists have come to agree that when the economy has witnessed growth from period to period, which is indicated in the 7,8 growth rate, unemployment levels tend to be low. This is because with rising "real# 7,8 levels, we now that output is higher, and, hence, more laborers are needed to eep up with the greater levels of production. Inflation The third main factor that macroeconomists loo at is the inflation rate, or the rate at which prices rise. Inflation is primarily measured in two ways: through the 9onsumer 8rice Index "98I# and the 7,8 deflator. The 98I gives the current price of a selected bas et of goods and services that is updated periodically. The 7,8 deflator is the ratio of nominal 7,8 to real 7,8. "!or more on this, see The 'onsumer $rice Inde(: A Friend To Investors and The 'onsumer $rice Inde( 'ontroversy.# If nominal 7,8 is higher than real 7,8, we can assume that the prices of goods and services has been rising. 4oth the 98I and 7,8 deflator tend to move in the same direction and differ by less than 3E. "If you.d li e to learn more about inflation, chec out All A)out In!lation.# Demand and Disposa*le Income &hat ultimately determines output is demand. ,emand comes from consumers "for investment or savings - residential and business related#, from the government "spending on goods and services of federal employees# and from imports and exports. ,emand alone, however, will not determine how much is produced. &hat consumers demand is not necessarily what they can afford to buy, so in order to determine demand, a consumer.s disposable income must also be measured. This is the amount of money after taxes left for spending and/or investment. In order to calculate disposable income, a wor er.s wages must be (uantified as well. 'alary is a function of two main components: the minimum salary for which employees will wor and the amount employers are willing to pay in order to eep the wor er in employment. 7iven that the demand and supply go hand in hand, the salary level will suffer in times of high unemployment, and it will prosper when unemployment levels are low. ,emand inherently will determine supply "production levels# and an e(uilibrium will be reached: however, in order to feed demand and supply, money is needed. The central ban "the !ederal 2eserve in the 6.'.# prints all money that is in circulation in the economy. The sum of all individual demand determines how much money is needed in the economy. To determine this, economists loo at the nominal 7,8, which measures the aggregate level of transactions, to determine a suitable level of money supply. -reasin! the En!ine of the Economy . What the -o'ernment Can Do onetary Policy $ simple example of monetary policy is the central ban .s open-mar et operations. "!or more detail, see the Federal &eserve Tutorial.# &hen there is a need to increase cash in the economy, the central ban will buy government bonds "monetary expansion#. These securities allow the central ban to in)ect the economy with an immediate supply of cash. In turn, interest rates, the cost to borrow money, will be reduced because the demand for the bonds will increase their price and push the interest rate down. In theory, more people and businesses will then buy and invest. ,emand for goods and services will rise and, as a result, output will increase. In order to cope with increased levels of production, unemployment levels should fall and wages should rise. 1n the other hand, when the central ban needs to absorb extra money in the economy, and push inflation levels down, it will sell its T-bills. This will result in higher interest rates "less borrowing, less spending and investment# and less demand, which will ultimately push down price level "inflation# but will also result in less real output. !iscal Policy The government can also increase taxes or lower government spending in order to conduct a fiscal contraction. &hat this will do is lower real output because less government spending means less disposable income for consumers. $nd, because more of consumers. wages will go to taxes, demand as well as output will decrease. $ fiscal expansion by the government would mean that taxes are decreased or government spending is increased. Ether way, the result will be growth in real output because the government will stir demand with increased spending. In the meantime, a consumer with more disposable income will be willing to buy more.

$ government will tend to use a combination of both monetary and fiscal options when setting policies that deal with the macroeconomy. Conclusion The performance of the economy is important to all of us. &e analyze the macroeconomy by primarily loo ing at national output, unemployment and inflation. $lthough it is consumers who ultimately determine the direction of the economy, governments also influence it through fiscal and monetary policy.

Mar!inal Cost Of &roduction

What Does arginal Cost Of Production Mean? The change in total cost that comes from ma ing or producing one additional item. The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale. The calculation is most often used among manufacturers as a means of isolating an optimum production level. arginal Cost Of Production -anufacturing concerns often examine the cost of adding one more unit to their production schedules. This is because at some point, the benefit of producing one additional unit and generating revenue from that item will bring the overall cost of producing the product line down. The ey to optimizing manufacturing costs is to find that point or level as (uic ly as possible.

/on!.$un A'era!e Total Cost . /$ATC

What Does Long"#un $verage %otal Cost " L#$%C Mean? $ business metric that represents the average cost per unit of output over the long run, where all inputs are considered to be variable. ;ong-term unit costs are almost always less than short-term unit costs because in a long-term time frame, companies have the flexibility to change big components of their operations, such as factories, to achieve optimal efficiency. $ goal of both company management and investors is to determine the lower bounds of ;2$T9. Long"#un $verage %otal Cost " L#$%C !or instance, if a manufacturing company builds a new, larger plant for production, it is assumed that the ;2$T9 per unit would eventually become lower than at the old plant as the company ta es advantage of certain economies of scale

0aria*le Cost
What Does &aria'le Cost Mean? $ cost that changes in proportion to a change in a company.s activity or business. &aria'le Cost $ good example of variable cost is the fuel for an airline. This cost changes with the number of flights and how long the trips are.

%tility
What Does Utility Mean? 3. $n economic term referring to the total satisfaction received from consuming a good or service. 5. $ company that generates, transmits and/or distributes electricity, water and/or gas from facilities that it owns and/or operates. In'estopedia explains Utility 3. $ consumer.s utility is hard to measure. *owever, we can determine it indirectly with consumer behavior theories, which assume that consumers will strive to maximize their utility. 6tility is a concept that was introduced by ,aniel 4ernoulli. *e believed that for the usual person, utility increased with wealth but at a decreasing rate. 5. 'ince consumer demand for utilities does not change dramatically with a change in price, these companies are regulated by the state or provincial and federal governments.

Total %tility
What Does %otal Utility Mean? The aggregate level of satisfaction or fulfillment that a consumer receives through the consumption of a specific good or service. Each individual unit of a good or service has its own marginal utility, and the total utility is simply the sum of all the marginal utilities of the individual units. 9lassical economic theory suggests that all consumers want to get the highest possible level of total utility for the money they spend. %otal Utility To better understand total utility, one must understand the law of diminishing marginal utility, which states that as more of a single good or service is consumed, the additional "marginal# satisfaction drops. The first good consumed provides the highest marginal utility, the second good has a lower marginal utility, and so on. Therefore, total utility grows less rapidly with each additional unit of the same good or service. In order to maximize total utility "which is the inherent goal of all consumers#, consumers will loo to combine different combinations of goods and services. 7iven their limited resources "money#, consumers will ma e choices in an attempt to increase their total utility with each additional unit of consumption.

Mar!inal %tility
What Does arginal Utility Mean? The additional satisfaction a consumer gains from consuming one more unit of a good or service. arginal Utility !or example, if you were really thirsty you.d get a certain amount of satisfaction from a glass of water. This satisfaction would probably decrease with the second glass, and then even more with the third glass. The additional amount of satisfaction that comes with each additional glass of water is marginal utility.

/a+ of Diminishin! Mar!inal $eturns

What Does Law of Diminis(ing arginal #eturns Mean? $ law of economics stating that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee. Law of Diminis(ing arginal #eturns 9onsider a factory that employs laborers to produce its product. If all other factors of production remain constant, at some point each additional laborer will provide less output than the previous laborer. $t this point, each additional employee provides less and less return. If new employees are constantly added, the plant will eventually become so crowded that additional wor ers actually decrease the efficiency of the other wor ers, decreasing the production of the factory.

/a+ Of Diminishin! Mar!inal %tility

What Does Law Of Diminis(ing arginal Utility Mean? $ law of economics stating that as a person increases consumption of a product - while eeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product. Law Of Diminis(ing arginal Utility This is the premise on which buffet-style restaurants operate. They entice you with %all you can eat,% all the while nowing each additional plate of food provides less utility than the one before. $nd despite their enticement, most people will eat only until the utility they derive from additional food is slightly lower than the original. !or example, say you go to a buffet and the first plate of food you eat is very good. 1n a scale of ten you would give it a ten.

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Bow your hunger has been somewhat tamed, but you get another full plate of food. 'ince you.re not as hungry, your en)oyment rates at a seven at best. -ost people would stop before their utility drops even more, but say you go bac to eat a third full plate of food and your utility drops even more to a three. If you ept eating, you would eventually reach a point at which your eating ma es you sic , providing dissatisfaction, or .dis-utility..

E uili*rium
What Does E)uili'rium Mean? The state in which mar et supply and demand balance each other and, as a result, prices become stable. 7enerally, when there is too much supply for goods or services, the price goes down, which results in higher demand. The balancing effect of supply and demand results in a state of e(uilibrium. In'estopedia explains E)uili'rium The e(uilibrium price is where the supply of goods matches demand. &hen a ma)or index experiences a period of consolidation or sideways momentum, it can be said that the forces of supply and demand are relatively e(ual and that the mar et is in a state of e(uilibrium

-ross Domestic &roduct . -D&

What Does *ross Domestic Product " *DP Mean? The monetary value of all the finished goods and services produced within a country.s borders in a specific time period, though 7,8 is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. -D& 1 C 2 - 2 I 2 ,3 where: %C% is e(ual to all private consumption, or consumer spending, in a nation.s economy %-% is the sum of government spending %I% is the sum of all the country.s businesses spending on capital %,3% is the nation.s total net exports, calculated as total exports minus total imports. "BG H Exports - Imports# *ross Domestic Product " *DP 7,8 is commonly used as an indicator of the economic health of a country, as well as to gauge a country.s standard of living. 9ritics of using 7,8 as an economic measure say the statistic does not ta e into account the underground economy - transactions that, for whatever reason, are not reported to the government. 1thers say that 7,8 is not intended to gauge material well-being, but serves as a measure of a nation.s productivity, which is unrelated.

Supply
What Does Supply Mean? $ fundamental economic concept that describes the total amount of a specific good or service that is available to consumers. 'upply can relate to the amount available at a specific price or the amount available across a range of prices if displayed on a graph. This relates closely to the demand for a good or service at a specific price: all else being e(ual, the supply provided by producers will rise if the price rises because all firms loo to maximize profits. Supply 'upply and demand trends form the basis of the modern economy. Each specific good or service will have its own supply and demand patterns based on price, utility and personal preference. If people demand a good and are willing to pay more for it, producers will add to the supply. $s the supply increases, the price will fall given the same level of demand. Ideally, mar ets will reach a point of e(uilibrium where the supply e(uals the demand "no excess supply and no shortages# for a given price point: at this point ,consumer utility and producer profits are maximized.

Demand
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What Does Demand Mean? $n economic principle that describes a consumerIs desire and willingness to pay a price for a specific good or service. *olding all other factors constant, the price of a good or service increases as its demand increases and vice versa. Demand Thin of demand as your willingness to go out and buy a certain product. !or example, mar et demand is the total of what everybody in the mar et wants. 4usinesses often spend a considerable amount of money in order to determine the amount of demand that the public has for its products and services. Incorrect estimations will either result in money left on the table if itIs underestimated or losses if itIs overestimated.

/a+ Of Demand
What Does Law Of Demand Mean? $ microeconomic law that states that, all other factors being e(ual, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa.

Law Of Demand This law summarizes the effect price changes have on consumer behavior. !or example, a consumer will purchase more pizzas if the price of pizza falls. The opposite is true if the price of pizza increases.

Accelerator Theory
What Does $ccelerator %(eory Mean? $n economic theory that suggests that as demand or income increases in an economy, so does the investment made by firms. !urthermore, accelerator theory suggests that when demand levels result in an excess in demand, firms have two choices of how to meet demand. 2aise prices to cause demand to drop. Increase investment to match demand. The accelerator theory proposes that most companies choose to increase production thus increase their profits. The theory further explains how this growth attracts more investors, which accelerates growth. $ccelerator %(eory The accelerator theory was developed early in the twentieth century by Thomas Bixon 9arver and $lbert $ftalion, among others. $lthough this theory was conceived before <eynesian economics, it emerged )ust as the <eynesian theory came to dominate the economic mindset of the twentieth century. 9ritics argue that accelerator theory should not be used because it eliminates the possibility of controlling demand through price controls. *owever, empirical research on the accelerator theory has supported its use. The accelerator theory is interpreted to create economic policies. !or example, would it be better to use tax cuts to create more disposable income for consumers who would then demand more products, or would it be faster to give those cuts to business, which will then be able to use more capital for growthF Every government and their economists create their own interpretation of accelerator theory and the (uestions it can be used to answer.

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