Economics

IITD_CET142918

Contents
1

Economics

1.1

Denitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2

Microeconomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2.1

Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2.2

Production, cost, and eciency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2.3

Specialization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2.4

Supply and demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2.5

Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2.6

Uncertainty and game theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2.7

Market failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.2.8

Public sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Macroeconomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.3.1

Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.3.2

Business cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.3.3

Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.3.4

Ination and monetary policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

1.3.5

Fiscal policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

1.4

International economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

1.5

Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

1.5.1

Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

1.5.2

Empirical investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

1.5.3

Profession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

1.6

Related subjects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

1.7

History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13

1.7.1

Classical political economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13

1.7.2

Marxism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15

1.7.3

Neoclassical economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15

1.7.4

Keynesian economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16

1.7.5

Chicago school of economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

1.7.6

Other schools and approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

1.8

Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17

1.9

Criticisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18

1.3

ii

CONTENTS
1.9.1

General criticisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18

1.9.2

Criticisms of assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18

1.10 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

1.11 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19

1.12 Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26

1.13 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26

Price

28

2.1

Price theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28

2.2

Price and value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28

2.3

Austrian School theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28

2.4

Price as productive human labour time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29

2.5

Confusion between prices and costs of production . . . . . . . . . . . . . . . . . . . . . . . . . .

29

2.6

Price point . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29

2.7

Other price terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29

2.8

See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30

2.9

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30

2.10 Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30

2.11 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30

Gross domestic product

31

3.1

History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31

3.2

Determining GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

31

3.2.1

Production approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32

3.2.2

Income approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

32

3.2.3

Expenditure approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33

GDP vs GNI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35

3.3.1

International standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36

3.3.2

National measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36

3.3.3

Interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36

3.4

Nominal GDP and adjustments to GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36

3.5

Cross-border comparison and PPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37

3.6

Per unit GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37

3.7

Standard of living and GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37

3.8

Externalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38

3.9

Limitations and criticisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38

3.10 Lists of countries by their GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39

3.11 List of other approaches to the measurement of (economic) progress . . . . . . . . . . . . . . . . .

40

3.12 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41

3.13 Notes and references . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41

3.14 Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42

3.15 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42

3.3

CONTENTS

3.15.1 Global . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42

3.15.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42

3.15.3 Articles and books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42

BSE SENSEX

44

4.1

Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44

4.2

Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44

4.3

Milestones

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44

4.4

The SENSEX since 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46

4.4.1

MayDecember 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46

4.4.2

JulySeptember 2007: Eects of the subprime crisis in the U.S. . . . . . . . . . . . . . . .

46

4.4.3

OctoberDecember 2007: Participatory notes issue . . . . . . . . . . . . . . . . . . . . .

47

4.4.4

May 2009-present . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47

Major SENSEX stock market plunges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48

4.5.1

January 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48

4.5.2

March 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48

4.5.3

Early 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48

4.6

Major falls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49

4.7

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49

4.8

External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50

4.5

iii

Consumer price index

51

5.1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51

5.1.1

Calculating the CPI for a single item . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52

5.1.2

Calculating the CPI for multiple items . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52

Weighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52

5.2.1

Weights and sub-indices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52

5.2.2

Estimating weights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

53

5.2.3

The nature of the data used for weighting . . . . . . . . . . . . . . . . . . . . . . . . . . .

53

5.2.4

Reweighting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54

Owner-occupiers and the price index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54

5.3.1

The economists approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54

5.3.2

Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54

5.3.3

Transaction prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55

5.3.4

Confusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55

5.3.5

Clarity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

56

Consumer Price Indices in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

56

5.4.1

History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57

5.4.2

Chained CPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57

5.5

See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57

5.6

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57

5.7

Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

58

5.2

5.3

5.4

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CONTENTS
5.8

External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

58

5.8.1

58

Specic countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Good (economics)

60

6.1

Utility characteristics of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60

6.2

Types of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60

6.3

Trading of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61

6.4

See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61

6.5

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61

6.6

References

61

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Service (economics)

63

7.1

Characteristics

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

63

7.2

Service denition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

64

7.3

Service specication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65

7.4

Service delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

66

7.5

Service-commodity goods continuum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

66

7.6

List of economic services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

67

7.7

List of countries by tertiary output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

68

7.8

See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

68

7.9

Finding related topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69

7.10 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69

7.10.1 Regarding service characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69

Supply and demand

70

8.1

Graphical representation of supply and demand . . . . . . . . . . . . . . . . . . . . . . . . . . . .

70

8.1.1

Supply schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

70

8.1.2

Demand schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71

Microeconomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71

8.2.1

Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72

8.2.2

Partial equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72

8.3

Other markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73

8.4

Empirical estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73

8.5

Macroeconomic uses of demand and supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73

8.6

History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73

8.7

Criticisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

74

8.8

See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75

8.9

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75

8.10 Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76

8.11 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76

8.12 Text and image sources, contributors, and licenses . . . . . . . . . . . . . . . . . . . . . . . . . .

77

8.12.1 Text . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

77

8.2

CONTENTS

8.12.2 Images . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

81

8.12.3 Content license . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

84

Chapter 1

Economics
This article is about the social science. For other uses, nexus).[3][4]
see Economics (disambiguation).
Besides the traditional concern in production, distribution, and consumption in an economy, economic analysis may be applied throughout society, as in business,
For a topical guide to this subject, see Outline of
nance, health care, and government. Economic analyses
economics.
may also be applied to such diverse subjects as crime,[5]
education,[6] the family, law, politics, religion,[7] social
Economics is the social science that studies economic institutions, war,[8] and science;[9] by considering the ecoactivity to gain an understanding of the processes that nomic aspects of these subjects. Education, for example,
govern the production, distribution and consumption of requires time, eort, and expenses, plus the foregone ingoods and services in an economy.
come and experience, yet these losses can be weighted
The term economics comes from the Ancient Greek against future benets education may bring to the agent
from (oikos, house) and or the economy. At the turn of the 21st century, the exsciences has
(nomos, custom or law), hence rules of the house panding domain of economics in the social
[10]
been
described
as
economic
imperialism.
[1]
(hold for good management)". 'Political economy' was
the earlier name for the subject, but economists in the
late 19th century suggested economics as a shorter term
for economic science to establish itself as a separate
discipline outside of political science and other social
sciences.[2]
Economics focuses on the behavior and interactions of
economic agents and how economies work. Consistent with this focus, primary textbooks often distinguish between microeconomics and macroeconomics.
Microeconomics examines the behavior of basic elements A world map of GDP growth (annualized), from 1990 to 2007.
in the economy, including individual agents and markets,
their interactions, and the outcomes of interactions. In- The ultimate goal of economics is to improve the living
dividual agents may include, for example, households, conditions of people in their everyday life.[11]
rms, buyers, and sellers. Macroeconomics analyzes the
entire economy (meaning aggregated production, consumption, savings, and investment) and issues aecting it,
including unemployment of resources (labor, capital, and 1.1 Denitions
land), ination, economic growth, and the public policies
that address these issues (monetary, scal, and other policies).
Other broad distinctions within economics include those
between positive economics, describing what is, and
normative economics, advocating what ought to be";
between economic theory and applied economics; between rational and behavioral economics; and between mainstream economics (more orthodox and
dealing with the rationality-individualism-equilibrium
nexus) and heterodox economics (more radical and A map of world economies by size of GDP (nominal) in $US,
dealing with the institutions-history-social structure CIA World Factbook, 2011.[12]
1

CHAPTER 1. ECONOMICS

There are a variety of modern denitions of economics.

Some of the dierences may reect evolving views of the
subject or dierent views among economists.[13] Scottish
philosopher Adam Smith (1776) dened what was then
called political economy as an inquiry into the nature and
causes of the wealth of nations, in particular as:
a branch of the science of a statesman or legislator [with the twofold objectives of providing]
a plentiful revenue or subsistence for the people
... [and] to supply the state or commonwealth
with a revenue for the publick services.[14]

are outside its usual focus. This is because war has as the
goal winning it (as a sought after end), generates both cost
and benets; and, resources (human life and other costs)
are used to attain the goal. If the war is not winnable or if
the expected costs outweigh the benets, the deciding actors (assuming they are rational) may never go to war (a
decision) but rather explore other alternatives. We cannot dene economics as the science that studies wealth,
war, crime, education, and any other eld economic analysis can be applied to; but, as the science that studies a
particular common aspect of each of those subjects (they
all use scarce resources to attain a sought after end).

J.-B. Say (1803), distinguishing the subject from its

public-policy uses, denes it as the science of production, distribution, and consumption of wealth.[15] On the
satirical side, Thomas Carlyle (1849) coined "the dismal science" as an epithet for classical economics, in this
context, commonly linked to the pessimistic analysis of
Malthus (1798).[16] John Stuart Mill (1844) denes the
subject in a social context as:

Some subsequent comments criticized the denition as

overly broad in failing to limit its subject matter to analysis of markets. From the 1960s, however, such comments abated as the economic theory of maximizing behavior and rational-choice modeling expanded the domain of the subject to areas previously treated in other
elds.[23] There are other criticisms as well, such as in
scarcity not accounting for the macroeconomics of high
unemployment.[24]

Gary Becker, a contributor to the expansion of economics

into new areas, describes the approach he favors as combin[ing the] assumptions of maximizing behavior, stable preferences, and market equilibrium, used relentlessly
and uninchingly.[25] One commentary characterizes the
remark as making economics an approach rather than a
subject matter but with great specicity as to the choice
process and the type of social interaction that [such] analAlfred Marshall provides a still widely cited denition
ysis involves. The same source reviews a range of dein his textbook Principles of Economics (1890) that exnitions included in principles of economics textbooks and
tends analysis beyond wealth and from the societal to the
concludes that the lack of agreement need not aect the
microeconomic level:
subject-matter that the texts treat. Among economists
more generally, it argues that a particular denition preEconomics is a study of man in the ordinary
sented may reect the direction toward which the author
business of life. It enquires how he gets his inbelieves economics is evolving, or should evolve.[26]
come and how he uses it. Thus, it is on the
one side, the study of wealth and on the other
and more important side, a part of the study of
1.2 Microeconomics
man.[18]
The science which traces the laws of such of
the phenomena of society as arise from the
combined operations of mankind for the production of wealth, in so far as those phenomena are not modied by the pursuit of any other
object.[17]

Lionel Robbins (1932) developed implications of what Main article: Microeconomics

has been termed "[p]erhaps the most commonly accepted
current denition of the subject":[19]
Economics is a science which studies human
behaviour as a relationship between ends and
scarce means which have alternative uses.[20]

1.2.1 Markets
Main article: Markets
Microeconomics examines how entities, forming a
market structure, interact within a market to create a
market system. These entities include private and public players with various classications, typically operating
under scarcity of tradeable units and government regulation. The item traded may be a tangible product such as
apples or a service such as repair services, legal counsel,
or entertainment.

Robbins describes the denition as not classicatory in

pick[ing] out certain kinds of behaviour but rather analytical in focus[ing] attention on a particular aspect
of behaviour, the form imposed by the inuence of
scarcity.[21] He armed that previous economist have
usually centered their studies on the analysis of wealth:
how wealth is created (production), distributed, and consumed; and how wealth can grow.[22] But he said that eco- In theory, in a free market the aggregates (sum of) of
nomics can be used to study other things, such as war, that quantity demanded by buyers and quantity supplied by

1.2. MICROECONOMICS

3
Microeconomics studies individual markets by simplifying the economic system by assuming that activity in
the market being analysed does not aect other markets.
This method of analysis is known as partial-equilibrium
analysis (supply and demand). This method aggregates
(the sum of all activity) in only one market. Generalequilibrium theory studies various markets and their behaviour. It aggregates (the sum of all activity) across all
markets. This method studies both changes in markets
and their interactions leading towards equilibrium.[27]

1.2.2 Production, cost, and eciency

Economists study trade, production and consumption decisions,
such as those that occur in a traditional marketplace.

Main articles: Production theory basics, Opportunity

cost, Economic eciency and Productionpossibility
frontier

In microeconomics, production is the conversion of

inputs into outputs. It is an economic process that uses
inputs to create a commodity or a service for exchange
or direct use. Production is a ow and thus a rate of output per period of time. Distinctions include such production alternatives as for consumption (food, haircuts,
etc.) vs. investment goods (new tractors, buildings, roads,
etc.), public goods (national defense, smallpox vaccinations,
etc.) or private goods (new computers, bananas,
In Virtual Markets, buyer and seller are not present and trade via
etc.),
and
guns vs. butter.
intermediates and electronic information. Pictured: So Paulo
Stock Exchange, Brazil.

sellers will be equal and reach economic equilibrium

over time in reaction to price changes; in practice, various issues may prevent equilibrium, and any equilibrium
reached may not necessarily be morally equitable. For
example, if the supply of healthcare services is limited
by external factors, the equilibrium price may be unaffordable for many who desire it but cannot pay for it.

Opportunity cost refers to the economic cost of production: the value of the next best opportunity foregone.
Choices must be made between desirable yet mutually exclusive actions. It has been described as expressing the
basic relationship between scarcity and choice..[28] The
opportunity cost of an activity is an element in ensuring
that scarce resources are used eciently, such that the
cost is weighed against the value of that activity in deciding on more or less of it. Opportunity costs are not
restricted to monetary or nancial costs but could be measured by the real cost of output forgone, leisure, or anything else that provides the alternative benet (utility).[29]

Various market structures exist. In perfectly competitive markets, no participants are large enough to have the
market power to set the price of a homogeneous product.
In other words, every participant is a price taker as no Inputs used in the production process include such primary factors of production as labour services, capital
participant inuences the price of a product. In the real
world, markets often experience imperfect competition. (durable produced goods used in production, such as an
existing factory), and land (including natural resources).
Forms include monopoly (in which there is only one seller Other inputs may include intermediate goods used in proof a good), duopoly (in which there are only two sell- duction of nal goods, such as the steel in a new car.
ers of a good), oligopoly (in which there are few sellers of a good), monopolistic competition (in which there Economic eciency describes how well a system generare many sellers producing highly dierentiated goods), ates desired output with a given set of inputs and availmonopsony (in which there is only one buyer of a good), able technology. Eciency is improved if more output is
and oligopsony (in which there are few buyers of a good). generated without changing inputs, or in other words, the
Unlike perfect competition, imperfect competition in- amount of waste is reduced. A widely accepted genvariably means market power is unequally distributed. eral standard is Pareto eciency, which is reached when
Firms under imperfect competition have the potential to no further change can make someone better o without
be price makers, which means that, by holding a dis- making someone else worse o.
proportionately high share of market power, they can in- The productionpossibility frontier (PPF) is an expository gure for representing scarcity, cost, and eciency.
uence the prices of their products.

CHAPTER 1. ECONOMICS
during a business-cycle recession or economic organization of a country that discourages full use of resources.
Being on the curve might still not fully satisfy allocative
eciency (also called Pareto eciency) if it does not produce a mix of goods that consumers prefer over other
points.

Quantity of Guns Produced

Much applied economics in public policy is concerned

with determining how the eciency of an economy can
be improved. Recognizing the reality of scarcity and then
guring out how to organize society for the most ecient use of resources has been described as the essence
of economics, where the subject makes its unique
contribution.[31]

1.2.3 Specialization
Quantity of Butter Produced
An example productionpossibility frontier with illustrative points
marked.

Main articles: Division of labour, Comparative advantage

and Gains from trade
Specialization is considered key to economic eciency

In the simplest case an economy can produce just two

goods (say guns and butter). The PPF is a table or
graph (as at the right) showing the dierent quantity combinations of the two goods producible with a given technology and total factor inputs, which limit feasible total
output. Each point on the curve shows potential total output for the economy, which is the maximum feasible output of one good, given a feasible output quantity of the
other good.
Scarcity is represented in the gure by people being willing but unable in the aggregate to consume beyond the
PPF (such as at X) and by the negative slope of the
curve.[30] If production of one good increases along the
curve, production of the other good decreases, an inverse
relationship. This is because increasing output of one
good requires transferring inputs to it from production of
the other good, decreasing the latter.
The slope of the curve at a point on it gives the trade-o
between the two goods. It measures what an additional
unit of one good costs in units forgone of the other good,
an example of a real opportunity cost. Thus, if one more
Gun costs 100 units of butter, the opportunity cost of one
Gun is 100 Butter. Along the PPF, scarcity implies that
choosing more of one good in the aggregate entails doing
with less of the other good. Still, in a market economy,
movement along the curve may indicate that the choice
of the increased output is anticipated to be worth the cost
to the agents.
By construction, each point on the curve shows productive
eciency in maximizing output for given total inputs. A
point inside the curve (as at A), is feasible but represents
production ineciency (wasteful use of inputs), in that
output of one or both goods could increase by moving in
a northeast direction to a point on the curve. Examples
cited of such ineciency include high unemployment

A map showing the main trade routes for goods within late medieval Europe.

based on theoretical and empirical considerations. Different individuals or nations may have dierent real opportunity costs of production, say from dierences in
stocks of human capital per worker or capital/labour ratios. According to theory, this may give a comparative
advantage in production of goods that make more intensive use of the relatively more abundant, thus relatively
cheaper, input.
Even if one region has an absolute advantage as to the
ratio of its outputs to inputs in every type of output, it may
still specialize in the output in which it has a comparative
advantage and thereby gain from trading with a region
that lacks any absolute advantage but has a comparative
advantage in producing something else.
It has been observed that a high volume of trade occurs
among regions even with access to a similar technology
and mix of factor inputs, including high-income countries. This has led to investigation of economies of scale
and agglomeration to explain specialization in similar but
dierentiated product lines, to the overall benet of respective trading parties or regions.[32]

The general theory of specialization applies to trade

among individuals, farms, manufacturers, service
providers, and economies. Among each of these production systems, there may be a corresponding division
of labour with dierent work groups specializing, or
correspondingly dierent types of capital equipment and
dierentiated land uses.[33]
An example that combines features above is a country
that specializes in the production of high-tech knowledge
products, as developed countries do, and trades with developing nations for goods produced in factories where
labour is relatively cheap and plentiful, resulting in dierent in opportunity costs of production. More total output
and utility thereby results from specializing in production
and trading than if each country produced its own hightech and low-tech products.
Theory and observation set out the conditions such that
market prices of outputs and productive inputs select
an allocation of factor inputs by comparative advantage,
so that (relatively) low-cost inputs go to producing lowcost outputs. In the process, aggregate output may increase as a by-product or by design.[34] Such specialization of production creates opportunities for gains from
trade whereby resource owners benet from trade in the
sale of one type of output for other, more highly valued
goods. A measure of gains from trade is the increased
income levels that trade may facilitate.[35]

Price

1.2. MICROECONOMICS

S
D1

D2

P2
P1

Q1 Q2 Quantity
The supply and demand model describes how prices vary as a result of a balance between product availability and demand. The
graph depicts an increase (that is, right-shift) in demand from
D1 to D2 along with the consequent increase in price and quantity required to reach a new equilibrium point on the supply curve
(S).

unchanged). As the price of a commodity falls, consumers move toward it from relatively more expensive
goods (the substitution eect). In addition, purchasing
power from the price decline increases ability to buy (the
1.2.4 Supply and demand
income eect). Other factors can change demand; for example an increase in income will shift the demand curve
Main article: Supply and demand
Prices and quantities have been described as the most for a normal good outward relative to the origin, as in the
directly observable attributes of goods produced and ex- gure. All determinants are predominantly taken as conchanged in a market economy.[36] The theory of supply stant factors of demand and supply.
and demand is an organizing principle for explaining how Supply is the relation between the price of a good and
prices coordinate the amounts produced and consumed. the quantity available for sale at that price. It may be
In microeconomics, it applies to price and output deter- represented as a table or graph relating price and quanmination for a market with perfect competition, which in- tity supplied. Producers, for example business rms, are
cludes the condition of no buyers or sellers large enough hypothesized to be prot-maximizers, meaning that they
to have price-setting power.
attempt to produce and supply the amount of goods that
For a given market of a commodity, demand is the re- will bring them the highest prot. Supply is typically represented as a directly proportional relation between price
lation of the quantity that all buyers would be prepared
to purchase at each unit price of the good. Demand is and quantity supplied (other things unchanged).
That is, the higher the price at which the good can be sold,
the more of it producers will supply, as in the gure. The
higher price makes it protable to increase production.
Just as on the demand side, the position of the supply can
shift, say from a change in the price of a productive input
or a technical improvement. The Law of Supply states
that, in general, a rise in price leads to an expansion in
supply and a fall in price leads to a contraction in supply.
Here as well, the determinants of supply, such as price
The law of demand states that, in general, price and of substitutes, cost of production, technology applied and
quantity demanded in a given market are inversely re- various factors inputs of production are all taken to be
lated. That is, the higher the price of a product, the constant for a specic time period of evaluation of supply.
less of it people would be prepared to buy (other things Market equilibrium occurs where quantity supplied
often represented by a table or a graph showing price
and quantity demanded (as in the gure). Demand theory describes individual consumers as rationally choosing
the most preferred quantity of each good, given income,
prices, tastes, etc. A term for this is constrained utility
maximization (with income and wealth as the constraints
on demand). Here, utility refers to the hypothesized relation of each individual consumer for ranking dierent
commodity bundles as more or less preferred.

6
equals quantity demanded, the intersection of the supply and demand curves in the gure above. At a price
below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. This is posited
to bid the price up. At a price above equilibrium, there
is a surplus of quantity supplied compared to quantity
demanded. This pushes the price down. The model of
supply and demand predicts that for given supply and
demand curves, price and quantity will stabilize at the
price that makes quantity supplied equal to quantity demanded. Similarly, demand-and-supply theory predicts a
new price-quantity combination from a shift in demand
(as to the gure), or in supply.
For a given quantity of a consumer good, the point on
the demand curve indicates the value, or marginal utility, to consumers for that unit. It measures what the consumer would be prepared to pay for that unit.[37] The corresponding point on the supply curve measures marginal
cost, the increase in total cost to the supplier for the corresponding unit of the good. The price in equilibrium is
determined by supply and demand. In a perfectly competitive market, supply and demand equate marginal cost
and marginal utility at equilibrium.[38]
On the supply side of the market, some factors of production are described as (relatively) variable in the short run,
which aects the cost of changing output levels. Their usage rates can be changed easily, such as electrical power,
raw-material inputs, and over-time and temp work. Other
inputs are relatively xed, such as plant and equipment
and key personnel. In the long run, all inputs may be
adjusted by management. These distinctions translate to
dierences in the elasticity (responsiveness) of the supply curve in the short and long runs and corresponding
dierences in the price-quantity change from a shift on
the supply or demand side of the market.

CHAPTER 1. ECONOMICS
of labour employed and the price of labour (the wage
rate) depends on the demand for labour (from employers for production) and supply of labour (from potential workers). Labour economics examines the interaction of workers and employers through such markets to
explain patterns and changes of wages and other labour
income, labour mobility, and (un)employment, productivity through human capital, and related public-policy
issues.[39]
Demand-and-supply analysis is used to explain the behavior of perfectly competitive markets, but as a standard of comparison it can be extended to any type of
market. It can also be generalized to explain variables
across the economy, for example, total output (estimated
as real GDP) and the general price level, as studied in
macroeconomics.[40] Tracing the qualitative and quantitative eects of variables that change supply and demand,
whether in the short or long run, is a standard exercise in
applied economics. Economic theory may also specify
conditions such that supply and demand through the market is an ecient mechanism for allocating resources.[41]

1.2.5 Firms
Main articles: Theory of the rm, Industrial organization, Business economics and Managerial economics

People frequently do not trade directly on markets. Instead, on the supply side, they may work in and produce through rms. The most obvious kinds of rms
are corporations, partnerships and trusts. According to
Ronald Coase people begin to organise their production
in rms when the costs of doing business becomes lower
than doing it on the market.[42] Firms combine labour and
capital, and can achieve far greater economies of scale
Marginalist theory, such as above, describes the con(when the average cost per unit declines as more units
sumers as attempting to reach most-preferred positions,
are produced) than individual market trading.
subject to income and wealth constraints while producers attempt to maximize prots subject to their own con- In perfectly competitive markets studied in the theory
straints, including demand for goods produced, technol- of supply and demand, there are many producers, none
ogy, and the price of inputs. For the consumer, that of which signicantly inuence price. Industrial orgapoint comes where marginal utility of a good, net of nization generalizes from that special case to study the
price, reaches zero, leaving no net gain from further con- strategic behavior of rms that do have signicant control
sumption increases. Analogously, the producer com- of price. It considers the structure of such markets and
pares marginal revenue (identical to price for the per- their interactions. Common market structures studied befect competitor) against the marginal cost of a good, sides perfect competition include monopolistic competi[43]
with marginal prot the dierence. At the point where tion, various forms of oligopoly, and monopoly.
marginal prot reaches zero, further increases in produc- Managerial economics applies microeconomic analysis to
tion of the good stop. For movement to market equilib- specic decisions in business rms or other management
rium and for changes in equilibrium, price and quantity units. It draws heavily from quantitative methods such
also change at the margin": more-or-less of something, as operations research and programming and from statisrather than necessarily all-or-nothing.
tical methods such as regression analysis in the absence
Other applications of demand and supply include the
distribution of income among the factors of production,
including labour and capital, through factor markets. In
a competitive labour market for example the quantity

of certainty and perfect knowledge. A unifying theme

is the attempt to optimize business decisions, including
unit-cost minimization and prot maximization, given the
rms objectives and constraints imposed by technology
and market conditions.[44]

1.2. MICROECONOMICS

1.2.6

Uncertainty and game theory

7
sure (say reckless drivers), and moral hazard, such that
insurance results in riskier behavior (say more reckless
driving).[53]

Main articles: Information economics, Game theory and

Both problems may raise insurance costs and reduce efFinancial economics
ciency by driving otherwise willing transactors from
the market ("incomplete markets"). Moreover, atUncertainty in economics is an unknown prospect of
tempting to reduce one problem, say adverse selecgain or loss, whether quantiable as risk or not. Withtion by mandating insurance, may add to another, say
out it, household behavior would be unaected by unmoral hazard. Information economics, which studies
certain employment and income prospects, nancial and
such problems, has relevance in subjects such as insurcapital markets would reduce to exchange of a single
ance, contract law, mechanism design, monetary ecoinstrument in each market period, and there would be no
nomics, and health care.[53] Applied subjects include
communications industry.[45] Given its dierent forms,
market and legal remedies to spread or reduce risk,
there are various ways of representing uncertainty and
such as warranties, government-mandated partial insurmodelling economic agents responses to it.[46]
ance, restructuring or bankruptcy law, inspection, and
Game theory is a branch of applied mathematics that con- regulation for quality and information disclosure.[54][47]
siders strategic interactions between agents, one kind of
uncertainty. It provides a mathematical foundation of
industrial organization, discussed above, to model dier- 1.2.7 Market failure
ent types of rm behavior, for example in an oligopolistic
industry (few sellers), but equally applicable to wage Main articles: Market failure, Government failure,
negotiations, bargaining, contract design, and any situ- Information economics, Environmental economics and
ation where individual agents are few enough to have Agricultural economics
perceptible eects on each other. As a method heavily The term "market failure" encompasses several probused in behavioral economics, it postulates that agents
choose strategies to maximize their payos, given the
strategies of other agents with at least partially conicting interests.[47][48]
In this, it generalizes maximization approaches developed
to analyze market actors such as in the supply and demand
model and allows for incomplete information of actors.
The eld dates from the 1944 classic Theory of Games
and Economic Behavior by John von Neumann and Oskar
Morgenstern. It has signicant applications seemingly
outside of economics in such diverse subjects as formulation of nuclear strategies, ethics, political science, and
evolutionary biology.[49]
Risk aversion may stimulate activity that in wellfunctioning markets smooths out risk and communicates information about risk, as in markets for insurance,
commodity futures contracts, and nancial instruments.
Financial economics or simply nance describes the allocation of nancial resources. It also analyzes the pricing of nancial instruments, the nancial structure of
companies, the eciency and fragility of nancial markets,[50] nancial crises, and related government policy or
regulation.[51]
Some market organizations may give rise to ineciencies
associated with uncertainty. Based on George Akerlof's
"Market for Lemons" article, the paradigm example is
of a dodgy second-hand car market. Customers without knowledge of whether a car is a lemon depress its
price below what a quality second-hand car would be.[52]
Information asymmetry arises here, if the seller has more
relevant information than the buyer but no incentive to
disclose it. Related problems in insurance are adverse selection, such that those at most risk are most likely to in-

Pollution can be a simple example of market failure. If costs of

production are not borne by producers but are by the environment, accident victims or others, then prices are distorted.

lems which may undermine standard economic assumptions. Although economists categorise market failures
dierently, the following categories emerge in the main
texts.[55]
Information asymmetries and incomplete markets may
result in economic ineciency but also a possibility of
improving eciency through market, legal, and regulatory remedies, as discussed above.
Natural monopoly, or the overlapping concepts of practical and technical monopoly, is an extreme case of
failure of competition as a restraint on producers. Extreme economies of scale are one possible cause.
Public goods are goods which are undersupplied in a typical market. The dening features are that people can

CHAPTER 1. ECONOMICS

consume public goods without having to pay for them and

that more than one person can consume the good at the Public nance is the eld of economics that deals with
same time.
budgeting the revenues and expenditures of a public secExternalities occur where there are signicant social costs tor entity, usually government. The subject addresses
or benets from production or consumption that are not such matters as tax incidence (who really pays a particreected in market prices. For example, air pollution ular tax), cost-benet analysis of government programs,
may generate a negative externality, and education may eects on economic eciency and income distribution
generate a positive externality (less crime, etc.). Govern- of dierent kinds of spending and taxes, and scal polments often tax and otherwise restrict the sale of goods itics. The latter, an aspect of public choice theory,
that have negative externalities and subsidize or otherwise models public-sector behavior analogously to microecopromote the purchase of goods that have positive exter- nomics, involving interactions of self-interested voters,
nalities in an eort to correct the price distortions caused politicians, and bureaucrats.[59]
by these externalities.[56] Elementary demand-and-supply Much of economics is positive, seeking to describe and
theory predicts equilibrium but not the speed of adjust- predict economic phenomena. Normative economics
ment for changes of equilibrium due to a shift in demand seeks to identify what economies ought to be like.
or supply.[57]
Welfare economics is a normative branch of economics
In many areas, some form of price stickiness is postulated that uses microeconomic techniques to simultaneously
to account for quantities, rather than prices, adjusting in determine the allocative eciency within an economy
the short run to changes on the demand side or the supply and the income distribution associated with it. It attempts
side. This includes standard analysis of the business cy- to measure social welfare by examining the economic accle in macroeconomics. Analysis often revolves around tivities of the individuals that comprise society.[60]
causes of such price stickiness and their implications for
reaching a hypothesized long-run equilibrium. Examples of such price stickiness in particular markets include
wage rates in labour markets and posted prices in markets 1.3 Macroeconomics
deviating from perfect competition.

italic
- writ of ownership
underlined - goods or services
bold - money (with symbol)

FLOW NOTATION
IS INDICATED BY
LETTER-FACE

social and urban services

personal (income) tax - welfare - pensions Th
land title + improvements to the surroundings
land tax (revenue)Tl
LAND-LORD

GOVERNMENT

Cg appropriations

G (M)

supply of
public services

industrial/rural
service

Rh ground
rents

Rp

Tc
property
tax

Tp purchase
tax & V.A.T.
- subsidies

Environmental scientist sampling water

Some specialised elds of economics deal in market failure more than others. The economics of the public sector is one example. Much environmental economics concerns externalities or "public bads".

wages
Wp
labour

PRODUCER
P

consumer
goods
purchases Ch

Hire- fees Hh

CAPITALIST

Hp
yield
capital Cc
outlay

banker's
credits prime-rate
of return
M - r (M)

investment
- dividends
+ mortgages
- interest
I - r ( I )

capital
goods
HOUSEHOLDER
H

bonds

security

access
to land

cash
Hl

FINANCEINSTITUTION
F (S)

C ( I )

durable
goods
residences and

shares &
contracts

certificates

non-productive durables

savings - loans - interest S - r (S)

"understanding"

Policy options include regulations that reect cost-benet

analysis or market solutions that change incentives, such
as emission fees or redenition of property rights.[58]

1.2.8

Public sector

organized money transfer

The circulation of money in an economy in a macroeconomic

model.

Main articles: Economics of the public sector and Public

Main article: Macroeconomics
nance
See also: Welfare economics

1.3. MACROECONOMICS

Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions top down,
that is, using a simplied form of general-equilibrium
theory.[61] Such aggregates include national income and
output, the unemployment rate, and price ination and
subaggregates like total consumption and investment
spending and their components. It also studies eects of
monetary policy and scal policy.

of study. During the Great Depression of the 1930s,

John Maynard Keynes authored a book entitled The General Theory of Employment, Interest and Money outlining
the key theories of Keynesian economics. Keynes contended that aggregate demand for goods might be insucient during economic downturns, leading to unnecessarily high unemployment and losses of potential output.

He therefore advocated active policy responses by the

public sector, including monetary policy actions by the
central bank and scal policy actions by the government
to stabilize output over the business cycle.[66] Thus, a central conclusion of Keynesian economics is that, in some
situations, no strong automatic mechanism moves output
and employment towards full employment levels. John
Macroeconomic analysis also considers factors aect- Hicks' IS/LM model has been the most inuential intering the long-term level and growth of national income. pretation of The General Theory.
Such factors include capital accumulation, technological Over the years, understanding of the business cycle has
change and labour force growth.[64]
branched into various research programs, mostly related
to or distinct from Keynesianism. The neoclassical synthesis refers to the reconciliation of Keynesian economics
1.3.1 Growth
with neoclassical economics, stating that Keynesianism is
correct in the short run but qualied by neoclassical-like
Main article: Economic growth
considerations in the intermediate and long run.[67]
Since at least the 1960s, macroeconomics has been
characterized by further integration as to micro-based
modeling of sectors, including rationality of players,
ecient use of market information, and imperfect competition.[62] This has addressed a long-standing concern
about inconsistent developments of the same subject.[63]

Growth economics studies factors that explain economic

growth the increase in output per capita of a country
over a long period of time. The same factors are used to
explain dierences in the level of output per capita between countries, in particular why some countries grow
faster than others, and whether countries converge at the
same rates of growth.
Much-studied factors include the rate of investment,
population growth, and technological change. These are
represented in theoretical and empirical forms (as in
the neoclassical and endogenous growth models) and in
growth accounting.[65]

New classical macroeconomics, as distinct from the

Keynesian view of the business cycle, posits market
clearing with imperfect information. It includes Friedmans permanent income hypothesis on consumption and
"rational expectations" theory,[68] lead by Robert Lucas,
and real business cycle theory.[69]
In contrast, the new Keynesian approach retains the rational expectations assumption, however it assumes a variety of market failures. In particular, New Keynesians
assume prices and wages are "sticky", which means they
do not adjust instantaneously to changes in economic
conditions.[70]

Thus, the new classicals assume that prices and wages adjust automatically to attain full employment, whereas the
new Keynesians see full employment as being automati1.3.2 Business cycle
cally achieved only in the long run, and hence government
and central-bank policies are needed because the long
Main article: Business cycle
See also: Circular ow of income, Aggregate supply, run may be very long.
Aggregate demand and Unemployment
The economics of a depression were the spur for the creExpansion

Boom

Recession Depression

A basic illustration of economic/business cycles.

1.3.3 Unemployment

Main article: Unemployment

The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without jobs in the labour force. The labour force
only includes workers actively looking for jobs. People
who are retired, pursuing education, or discouraged from
seeking work by a lack of job prospects are excluded from
the labor force. Unemployment can be generally broken down into several types that are related to dierent
causes.[71]

ation of macroeconomics as a separate discipline eld Classical models of unemployment occurs when wages

10

CHAPTER 1. ECONOMICS
because it is useful to others.

The percentage of the US population employed, 19952012.

are too high for employers to be willing to hire more

workers. Wages may be too high because of minimum
wage laws or union activity. Consistent with classical unemployment, frictional unemployment occurs when appropriate job vacancies exist for a worker, but the length
of time needed to search for and nd the job leads to a
period of unemployment.[71]
Structural unemployment covers a variety of possible
causes of unemployment including a mismatch between
workers skills and the skills required for open jobs.[72]
Large amounts of structural unemployment can occur
when an economy is transitioning industries and workers nd their previous set of skills are no longer in demand. Structural unemployment is similar to frictional
unemployment since both reect the problem of matching workers with job vacancies, but structural unemployment covers the time needed to acquire new skills not just
the short term search process.[73]

As a medium of exchange, money facilitates trade. It

is essentially a measure of value and more importantly,
a store of value being a basis for credit creation. Its
economic function can be contrasted with barter (nonmonetary exchange). Given a diverse array of produced
goods and specialized producers, barter may entail a
hard-to-locate double coincidence of wants as to what is
exchanged, say apples and a book. Money can reduce the
transaction cost of exchange because of its ready acceptability. Then it is less costly for the seller to accept money
in exchange, rather than what the buyer produces.[76]
At the level of an economy, theory and evidence are consistent with a positive relationship running from the total
money supply to the nominal value of total output and to
the general price level. For this reason, management of
the money supply is a key aspect of monetary policy.[77]

1.3.5 Fiscal policy

Main articles: Fiscal policy and Government spending

Governments implement scal policy that inuence

macroeconomic conditions by adjusting spending and
taxation policies to alter aggregate demand. When aggregate demand falls below the potential output of the economy, there is an output gap where some productive capacity is left unemployed. Governments increase spending and cut taxes to boost aggregate demand. Resources
While some types of unemployment may occur regard- that have been idled can be used by the government.
less of the condition of the economy, cyclical unemployment occurs when growth stagnates. Okuns law repre- For example, unemployed home builders can be hired to
sents the empirical relationship between unemployment expand highways. Tax cuts allow consumers to increase
and economic growth.[74] The original version of Okuns their spending, which boosts aggregate demand. Both tax
law states that a 3% increase in output would lead to a 1% cuts and spending have multiplier eects where the initial
increase in demand from the policy percolates through the
decrease in unemployment.[75]
economy and generates additional economic activity.
The eects of scal policy can be limited by crowding
out. When there is no output gap, the economy is producing at full capacity and there are no excess producMain articles: Ination and Monetary policy
tive resources. If the government increases spending in
See also: Money, Quantity theory of money, Monetary this situation, the government use resources that otherpolicy and History of money
wise would have been used by the private sector, so there
is no increase in overall output. Some economists think
Money is a means of nal payment for goods in most that crowding out is always an issue while others do not
price system economies and the unit of account in which think it is a major issue when output is depressed.
prices are typically stated. An apt statement by Francis Skeptics of scal policy also make the argument of
Amasa Walker, a well-known economist is, Money is Ricardian equivalence. They argue that an increase in
what money does. Money has a general acceptability, debt will have to be paid for with future tax increases,
a relative consistency in value, divisibility, durability, which will cause people to reduce their consumption and
portability, elastic in supply and survives with mass pub- save money to pay for the future tax increase. Under Rilic condence. It includes currency held by the nonbank cardian equivalence, any boost in demand from scal polpublic and checkable deposits. It has been described as icy will be oset by the increased savings rate intended to
a social convention, like language, useful to one largely pay for future higher taxes.

1.3.4

Ination and monetary policy

1.5. PRACTICE

11

1.4 International economics

game theory, and computer science.[81] Professional

economists are expected to be familiar with these tools,
Main articles: International economics and Economic while a minority specialize in econometrics and mathematical methods.
system
International trade studies determinants of goods-and-

1.5.1 Theory

A world map showing GDP (PPP) per capita, 2011.

services ows across international boundaries. It also

concerns the size and distribution of gains from trade.
Policy applications include estimating the eects of
changing tari rates and trade quotas. International nance is a macroeconomic eld which examines the ow
of capital across international borders, and the eects of
these movements on exchange rates. Increased trade in
goods, services and capital between countries is a major
eect of contemporary globalization.[78]
The distinct eld of development economics examines
economic aspects of the economic development process
in relatively low-income countries focusing on structural
change, poverty, and economic growth. Approaches in
development economics frequently incorporate social and
political factors.[79]

Mainstream economic theory relies upon a priori quantitative economic models, which employ a variety of concepts. Theory typically proceeds with an assumption of
ceteris paribus, which means holding constant explanatory variables other than the one under consideration.
When creating theories, the objective is to nd ones
which are at least as simple in information requirements,
more precise in predictions, and more fruitful in generating additional research than prior theories.[82]
In microeconomics, principal concepts include supply
and demand, marginalism, rational choice theory,
opportunity cost, budget constraints, utility, and the
theory of the rm.[83][84] Early macroeconomic models
focused on modeling the relationships between aggregate
variables, but as the relationships appeared to change over
time macroeconomists, including new Keynesians, reformulated their models in microfoundations.[70]
The aforementioned microeconomic concepts play a major part in macroeconomic models for instance, in
monetary theory, the quantity theory of money predicts
that increases in the money supply increase ination, and
ination is assumed to be inuenced by rational expectations. In development economics, slower growth in developed nations has been sometimes predicted because
of the declining marginal returns of investment and capital, and this has been observed in the Four Asian Tigers.
Sometimes an economic hypothesis is only qualitative,
not quantitative.[85]

Economic systems is the branch of economics that studies

the methods and institutions by which societies determine
the ownership, direction, and allocation of economic resources. An economic system of a society is the unit of Expositions of economic reasoning often use twodimensional graphs to illustrate theoretical relationships.
analysis.
At a higher level of generality, Paul Samuelson's treatise
Among contemporary systems at dierent ends of the orFoundations of Economic Analysis (1947) used matheganizational spectrum are socialist systems and capitalist
matical methods to represent the theory, particularly as to
systems, in which most production occurs in respectively
maximizing behavioral relations of agents reaching equistate-run and private enterprises. In between are mixed
librium. The book focused on examining the class of
economies. A common element is the interaction of
statements called operationally meaningful theorems in
economic and political inuences, broadly described as
economics, which are theorems that can conceivably be
political economy. Comparative economic systems studrefuted by empirical data.[86]
ies the relative performance and behavior of dierent
economies or systems.[80]

1.5.2 Empirical investigation

1.5 Practice

Main articles: Econometrics and Experimental economics

Main articles: Economic methodology, Mathematical

economics and Schools of economics
Economic theories are frequently tested empirically,
largely through the use of econometrics using economic
Contemporary economics uses mathematics. Economists data.[87] The controlled experiments common to the
draw on the tools of calculus, linear algebra, statistics, physical sciences are dicult and uncommon in

12
economics,[88] and instead broad data is observationally
studied; this type of testing is typically regarded as
less rigorous than controlled experimentation, and the
conclusions typically more tentative. However, the eld
of experimental economics is growing, and increasing
use is being made of natural experiments.
Statistical methods such as regression analysis are common. Practitioners use such methods to estimate the size,
economic signicance, and statistical signicance (signal strength) of the hypothesized relation(s) and to adjust for noise from other variables. By such means, a hypothesis may gain acceptance, although in a probabilistic,
rather than certain, sense. Acceptance is dependent upon
the falsiable hypothesis surviving tests. Use of commonly accepted methods need not produce a nal conclusion or even a consensus on a particular question, given
dierent tests, data sets, and prior beliefs.
Criticism based on professional standards and nonreplicability of results serve as further checks against bias,
errors, and over-generalization,[84][89] although much
economic research has been accused of being nonreplicable, and prestigious journals have been accused of
not facilitating replication through the provision of the
code and data.[90] Like theories, uses of test statistics
are themselves open to critical analysis,[91] although critical commentary on papers in economics in prestigious
journals such as the American Economic Review has declined precipitously in the past 40 years. This has been
attributed to journals incentives to maximize citations in
order to rank higher on the Social Science Citation Index
(SSCI).[92]

CHAPTER 1. ECONOMICS

1.5.3 Profession
Main article: Economist
The professionalization of economics, reected in the
growth of graduate programs on the subject, has been described as the main change in economics since around
1900.[95] Most major universities and many colleges
have a major, school, or department in which academic
degrees are awarded in the subject, whether in the liberal
arts, business, or for professional study.
In the private sector, professional economists are employed as consultants and in industry, including banking
and nance. Economists also work for various government departments and agencies, for example, the national
Treasury, Central Bank or Bureau of Statistics.
The Nobel Memorial Prize in Economic Sciences (commonly known as the Nobel Prize in Economics) is a prize
awarded to economists each year for outstanding intellectual contributions in the eld.

1.6 Related subjects

Main articles: Law and Economics, Natural resource
economics, Philosophy and economics and Political
economy

Economics is one social science among several and

has elds bordering on other areas, including economic
In applied economics, input-output models employing geography, economic history, public choice, energy
linear programming methods are quite common. Large economics, cultural economics, family economics and
amounts of data are run through computer programs to institutional economics.
analyze the impact of certain policies; IMPLAN is one
Law and economics, or economic analysis of law, is an
well-known example.
approach to legal theory that applies methods of ecoExperimental economics has promoted the use of nomics to law. It includes the use of economic concepts
scientically controlled experiments. This has reduced to explain the eects of legal rules, to assess which legal
long-noted distinction of economics from natural sci- rules are economically ecient, and to predict what the
ences allowed direct tests of what were previously taken legal rules will be.[96] A seminal article by Ronald Coase
as axioms.[93] In some cases these have found that the ax- published in 1961 suggested that well-dened property
ioms are not entirely correct; for example, the ultimatum rights could overcome the problems of externalities.[97]
game has revealed that people reject unequal oers.
Political economy is the interdisciplinary study that
In behavioral economics, psychologist Daniel Kahneman combines economics, law, and political science in exwon the Nobel Prize in economics in 2002 for his and plaining how political institutions, the political enviAmos Tversky's empirical discovery of several cognitive ronment, and the economic system (capitalist, socialist,
biases and heuristics. Similar empirical testing occurs in mixed) inuence each other. It studies questions such as
neuroeconomics. Another example is the assumption of how monopoly, rent-seeking behavior, and externalities
narrowly selsh preferences versus a model that tests for should impact government policy.[98] Historians have emselsh, altruistic, and cooperative preferences.[94] These ployed political economy to explore the ways in the past
techniques have led some to argue that economics is a that persons and groups with common economic intergenuine science.[10]
ests have used politics to eect changes benecial to their
interests.[99]
Energy economics is a broad scientic subject area
which includes topics related to energy supply and energy
demand. Georgescu-Roegen reintroduced the concept

1.7. HISTORY

13

of entropy in relation to economics and energy from

thermodynamics, as distinguished from what he viewed
as the mechanistic foundation of neoclassical economics
drawn from Newtonian physics. His work contributed
signicantly to thermoeconomics and to ecological economics. He also did foundational work which later developed into evolutionary economics.[100]

ourished from the 16th to 18th century in a prolic pamphlet literature, whether of merchants or statesmen. It
held that a nations wealth depended on its accumulation
of gold and silver. Nations without access to mines could
obtain gold and silver from trade only by selling goods
abroad and restricting imports other than of gold and silver. The doctrine called for importing cheap raw mateThe sociological subeld of economic sociology arose, rials to be used in manufacturing goods, which could be
exported, and for state regulation to impose protective
primarily through the work of mile Durkheim, Max
goods and prohibit manWeber and Georg Simmel, as an approach to analysing taris on foreign manufactured
ufacturing in the colonies.[103]
the eects of economic phenomena in relation to the
overarching social paradigm (i.e. modernity).[101] Clas- Physiocrats, a group of 18th century French thinkers and
sic works include Max Weber's The Protestant Ethic and writers, developed the idea of the economy as a circular
the Spirit of Capitalism (1905) and Georg Simmel's The ow of income and output. Physiocrats believed that only
Philosophy of Money (1900). More recently, the works agricultural production generated a clear surplus over
of Mark Granovetter, Peter Hedstrom and Richard Swed- cost, so that agriculture was the basis of all wealth. Thus,
berg have been inuential in this eld.
they opposed the mercantilist policy of promoting manufacturing and trade at the expense of agriculture, including import taris. Physiocrats advocated replacing
administratively costly tax collections with a single tax
1.7 History
on income of land owners. In reaction against copious
mercantilist trade regulations, the physiocrats advocated
Main articles: History of economic thought and History a policy of laissez-faire, which called for minimal governof macroeconomic thought
ment intervention in the economy.[104]
Economic writings date from earlier Mesopotamian,
Greek, Roman, Indian subcontinent, Chinese, Persian,
and Arab civilizations. Notable writers from antiquity
through to the 14th century include Aristotle, Xenophon,
Chanakya (also known as Kautilya), Qin Shi Huang,
Thomas Aquinas, and Ibn Khaldun. Joseph Schumpeter described Aquinas as coming nearer than any other
group to being the 'founders of scientic economics as
to monetary, interest, and value theory within a naturallaw perspective.[102]

A 1638 painting of a French seaport during the heyday of

mercantilism.

Adam Smith (17231790) was an early economic

theorist.[105] Smith was harshly critical of the mercantilists but described the physiocratic system with all its
imperfections as perhaps the purest approximation to
the truth that has yet been published on the subject.[106]

1.7.1 Classical political economy

Main article: Classical economics
The publication of Adam Smith's The Wealth of Nations
in 1776, has been described as the eective birth of economics as a separate discipline.[107] The book identied
land, labor, and capital as the three factors of production
and the major contributors to a nations wealth, as distinct from the Physiocratic idea that only agriculture was
productive.
Smith discusses potential benets of specialization by
division of labour, including increased labour productivity and gains from trade, whether between town and country or across countries.[108] His theorem that the division of labor is limited by the extent of the market has
been described as the core of a theory of the functions of
rm and industry" and a fundamental principle of economic organization.[109] To Smith has also been ascribed
the most important substantive proposition in all of economics and foundation of resource-allocation theory
that, under competition, resource owners (of labour, land,
and capital) seek their most protable uses, resulting in
an equal rate of return for all uses in equilibrium (adjusted for apparent dierences arising from such factors
as training and unemployment).[110]

Two groups, later called mercantilists and physiocrats, more directly inuenced the subsequent development of the subject. Both groups were associated with
the rise of economic nationalism and modern capitalism
in Europe. Mercantilism was an economic doctrine that In an argument that includes one of the most famous pas-

14

CHAPTER 1. ECONOMICS
the invisible hand in a framework that includes limiting restrictions on competition and foreign trade by government and industry in the same chapter[118] and elsewhere regulation of banking and the interest rate,[119] provision of a natural system of liberty national defence, an egalitarian justice and legal system, and certain institutions and public works with general benets to the whole society that might otherwise be unprotable to produce, such as education[120] and roads,
canals, and the like.[121][122] An inuential introductory
textbook includes parallel discussion and this assessment:
Above all, it is Adam Smiths vision of a self-regulating
invisible hand that is his enduring contribution to modern
economics.[123]
The Rev. Thomas Robert Malthus (1798) used the idea
of diminishing returns to explain low living standards.
Human population, he argued, tended to increase geometrically, outstripping the production of food, which increased arithmetically. The force of a rapidly growing
population against a limited amount of land meant diminishing returns to labour. The result, he claimed, was
chronically low wages, which prevented the standard of
living for most of the population from rising above the
subsistence level.[124] Economist Julian Lincoln Simon
has criticised Malthuss conclusions.[125]

The publication of Adam Smith's The Wealth of Nations in 1776

is considered to be the rst formalisation of economic thought.

sages in all economics,[111] Smith represents every individual as trying to employ any capital they might command for their own advantage, not that of the society,[112]
and for the sake of prot, which is necessary at some level
for employing capital in domestic industry, and positively
related to the value of produce.[113] In this:
He generally, indeed, neither intends to promote the public interest, nor knows how much
he is promoting it. By preferring the support
of domestic to that of foreign industry, he intends only his own security; and by directing
that industry in such a manner as its produce
may be of the greatest value, he intends only
his own gain, and he is in this, as in many other
cases, led by an invisible hand to promote an
end which was no part of his intention. Nor is
it always the worse for the society that it was
no part of it. By pursuing his own interest he
frequently promotes that of the society more
eectually than when he really intends to promote it.[114]
Economists have linked Smiths invisible-hand concept
to his concern for the common man and woman through
economic growth and development,[115] enabling higher
levels of consumption, which Smith describes as the sole
end and purpose of all production.[116][117] He embeds

While Adam Smith emphasized the production of income, David Ricardo (1817) focused on the distribution
of income among landowners, workers, and capitalists.
Ricardo saw an inherent conict between landowners on
the one hand and labour and capital on the other. He
posited that the growth of population and capital, pressing
against a xed supply of land, pushes up rents and holds
down wages and prots. Ricardo was the rst to state and
prove the principle of comparative advantage, according
to which each country should specialize in producing and
exporting goods in that it has a lower relative cost of production, rather relying only on its own production.[126] It
has been termed a fundamental analytical explanation
for gains from trade.[127]
Coming at the end of the Classical tradition, John Stuart Mill (1848) parted company with the earlier classical
economists on the inevitability of the distribution of income produced by the market system. Mill pointed to a
distinct dierence between the markets two roles: allocation of resources and distribution of income. The market might be ecient in allocating resources but not in
distributing income, he wrote, making it necessary for
society to intervene.[128]
Value theory was important in classical theory. Smith
wrote that the real price of every thing ... is the toil
and trouble of acquiring it as inuenced by its scarcity.
Smith maintained that, with rent and prot, other costs
besides wages also enter the price of a commodity.[129]
Other classical economists presented variations on Smith,
termed the 'labour theory of value'. Classical economics
focused on the tendency of markets to move to long-run

1.7. HISTORY

15

equilibrium.

bution, and consumption of wealth by Jean-Baptiste Say

in his Treatise on Political Economy or, The Production, Distribution, and Consumption of Wealth (1803).
1.7.2 Marxism
These three items are considered by the science only in
relation to the increase or diminution of wealth, and not in
Main article: Marxian economics
reference to their processes of execution.[133] Says deMarxist (later, Marxian) economics descends from clas- nition has prevailed up to our time, saved by substituting
the word wealth for goods and services meaning that
wealth may include non material objects as well. One
hundred and thirty years later, Lionel Robbins noticed
that this denition no longer suced,[134] because many
economists were making theoretical and philosophical inroads in other areas of human activity. In his Essay on
the Nature and Signicance of Economic Science, he proposed a denition of economics as a study of a particular aspect of human behavior, the one that falls under the
inuence of scarcity,[135] which forces people to choose,
allocate scarce resources to competing ends, and economize (seeking the greatest welfare while avoiding the wasting of scarce resources). For Robbins, the insuciency
was solved, and his denition allows us to proclaim, with
an easy conscience, education economics, safety and security economics, health economics, war economics, and
of course, production, distribution and consumption economics as valid subjects of the economic science.
Citing Robbins: Economics is the science which studies human behavior as a relationship between ends and
scarce means which have alternative uses.[136] After discussing it for decades, Robbins denition became widely
accepted by mainstream economists, and it has opened
way into current textbooks.[137] Although far from unanimous, most mainstream economists would accept some
version of Robbins denition, even though many have
The Marxist school of economic thought comes from the work of raised serious objections to the scope and method of economics, emanating from that denition.[138] Due to the
German economist Karl Marx.
lack of strong consensus, and that production, distribusical economics. It derives from the work of Karl Marx. tion and consumption of goods and services is the prime
The rst volume of Marxs major work, Das Kapital, area of study of economics, the old denition still stands
was published in German in 1867. In it, Marx focused in many quarters.
on the labour theory of value and the theory of surplus
A body of theory later termed neoclassical economics
value which, he believed, explained the exploitation of
or "marginalism" formed from about 1870 to 1910. The
labour by capital.[130] The labour theory of value held
term economics was popularized by such neoclassithat the value of an exchanged commodity was detercal economists as Alfred Marshall as a concise synonym
mined by the labour that went into its production and
for 'economic science' and a substitute for the earlier
the theory of surplus value demonstrated how the work"political economy".[2] This corresponded to the inuers only got paid a proportion of the value their work
ence on the subject of mathematical methods used in the
had created.[131] The U.S. Export-Import Bank denes
natural sciences.[139]
a Marxist-Lenninist state as having a centrally planned
economy.[131] They are now rare, examples can still be Neoclassical economics systematized supply and demand
as joint determinants of price and quantity in market
seen in Cuba, North Korea and Laos.[132]
equilibrium, aecting both the allocation of output and
the distribution of income. It dispensed with the labour
1.7.3 Neoclassical economics
theory of value inherited from classical economics in
favor of a marginal utility theory of value on the deMain article: Neoclassical economics
mand side and a more general theory of costs on the supply side.[140] In the 20th century, neoclassical theorists
At the dawn as a social science, economics was dened moved away from an earlier notion suggesting that total
and discussed at length as the study of production, distri- utility for a society could be measured in favor of ordinal

16

CHAPTER 1. ECONOMICS

utility, which hypothesizes merely behavior-based rela- equilibrium point. Because of the autonomous actions
tions across persons.[38][141]
of rational interacting agents, the economy is a complex
[146][147]
In microeconomics, neoclassical economics represents adaptive system.
incentives and costs as playing a pervasive role in shaping decision making. An immediate example of this is 1.7.4 Keynesian economics
the consumer theory of individual demand, which isolates how prices (as costs) and income aect quantity Main articles: Keynesian economics and Post-Keynesian
demanded.[38] In macroeconomics it is reected in an economics
early and lasting neoclassical synthesis with Keynesian
Keynesian economics derives from John Maynard
macroeconomics.[67][142]
Neoclassical economics is occasionally referred as orthodox economics whether by its critics or sympathizers.
Modern mainstream economics builds on neoclassical
economics but with many renements that either supplement or generalize earlier analysis, such as econometrics,
game theory, analysis of market failure and imperfect
competition, and the neoclassical model of economic
growth for analyzing long-run variables aecting national
income.
Neoclassical economics studies the behavior of
individuals, households, and organizations (called
economic actors, players, or agents), when they manage
or use scarce resources, which have alternative uses,
to achieve desired ends. Agents are assumed to act
rationally, have multiple desirable ends in sight, limited
resources to obtain these ends, a set of stable preferences,
a denite overall guiding objective, and the capability
of making a choice. There exists an economic problem,
subject to study by economic science, when a decision
(choice) is made by one or more resource-controlling
players to attain the best possible outcome under bounded
rational conditions. In other words, resource-controlling
agents maximize value subject to the constraints imposed by the information the agents have, their cognitive
limitations, and the nite amount of time they have to
make and execute a decision. Economic science centers
on the activities of the economic agents that comprise
society.[143] They are the focus of economic analysis.[144]
An approach to understanding these processes, through
the study of agent behavior under scarcity, may go as follows:
The continuous interplay (exchange or trade) done by
economic actors in all markets sets the prices for all goods
and services which, in turn, make the rational managing
of scarce resources possible. At the same time, the decisions (choices) made by the same actors, while they are
pursuing their own interest, determine the level of output (production), consumption, savings, and investment,
in an economy, as well as the remuneration (distribution)
paid to the owners of labor (in the form of wages), capital
(in the form of prots) and land (in the form of rent).[145]
Each period, as if they were in a giant feedback system,
economic players inuence the pricing processes and the
economy, and are in turn inuenced by them until a steady
state (equilibrium) of all variables involved is reached or
until an external shock throws the system toward a new

John Maynard Keynes (right), was a key theorist in economics.

Keynes, in particular his book The General Theory of

Employment, Interest and Money (1936), which ushered
in contemporary macroeconomics as a distinct eld.[148]
The book focused on determinants of national income
in the short run when prices are relatively inexible.
Keynes attempted to explain in broad theoretical detail
why high labour-market unemployment might not be selfcorrecting due to low "eective demand" and why even
price exibility and monetary policy might be unavailing.
The term revolutionary has been applied to the book in
its impact on economic analysis.[149]
Keynesian economics has two successors.
PostKeynesian economics also concentrates on macroeconomic rigidities and adjustment processes. Research
on micro foundations for their models is represented as
based on real-life practices rather than simple optimizing
models. It is generally associated with the University of
Cambridge and the work of Joan Robinson.[150]
New-Keynesian economics is also associated with developments in the Keynesian fashion. Within this group researchers tend to share with other economists the emphasis on models employing micro foundations and optimiz-

1.8. AGREEMENTS

17

ing behavior but with a narrower focus on standard Key- 1.8 Agreements
nesian themes such as price and wage rigidity. These are
usually made to be endogenous features of the models, According to various polls cited in Principles of Ecorather than simply assumed as in older Keynesian-style nomics by Harvard Chairman and Economics Professor
ones.
Gregory Mankiw, economists have the following agreements by percentage.[154][155]

1.7.5

Chicago school of economics

Main article: Chicago school (economics)

The Chicago School of economics is best known for its
free market advocacy and monetarist ideas. According
to Milton Friedman and monetarists, market economies
are inherently stable if the money supply does not greatly
expand or contract. Ben Bernanke, former Chairman of
the Federal Reserve, is among the economists today generally accepting Friedmans analysis of the causes of the
Great Depression.[151]
Milton Friedman eectively took many of the basic
principles set forth by Adam Smith and the classical
economists and modernized them. One example of this
is his article in the September 1970 issue of The New
York Times Magazine, where he claims that the social
responsibility of business should be to use its resources
and engage in activities designed to increase its prots ...
(through) open and free competition without deception or
fraud.[152]

1.7.6

Other schools and approaches

Main article: Schools of economics

Other well-known schools or trends of thought referring to a particular style of economics practiced at and
disseminated from well-dened groups of academicians
that have become known worldwide, include the Austrian
School, the Freiburg School, the School of Lausanne,
post-Keynesian economics and the Stockholm school.
Contemporary mainstream economics is sometimes separated into the Saltwater approach of those universities
along the Eastern and Western coasts of the US, and the
Freshwater, or Chicago-school approach.
Within macroeconomics there is, in general order of
their appearance in the literature; classical economics,
Keynesian economics, the neoclassical synthesis, postKeynesian economics, monetarism, new classical economics, and supply-side economics. Alternative developments include ecological economics, constitutional economics, institutional economics, evolutionary economics,
dependency theory, structuralist economics, world systems theory, econophysics, feminist economics and
biophysical economics.[153]

1. A ceiling on rents reduces the quantity and quality

of housing available. (93% agree)
2. Taris and import quotas usually reduce general
economic welfare. (93% agree)
3. Flexible and oating exchange rates oer an effective international monetary arrangement. (90%
agree)
4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a signicant stimulative impact
on a less than fully employed economy. (90% agree)
5. The United States should not restrict employers from
outsourcing work to foreign countries. (90% agree)
6. The United States should eliminate agricultural subsidies. (85% agree)
7. Local and state governments should eliminate subsidies to professional sports franchises. (85% agree)
8. If the federal budget is to be balanced, it should
be done over the business cycle rather than yearly.
(85% agree)
9. The gap between Social Security funds and expenditures will become unsustainably large within the
next fty years if current policies remain unchanged.
(85% agree)
10. Cash payments increase the welfare of recipients to
a greater degree than do transfers-in-kind of equal
cash value. (84% agree)
11. A large federal budget decit has an adverse eect
on the economy. (83% agree)
12. A minimum wage increases unemployment among
young and unskilled workers. (79% agree)
13. The government should restructure the welfare system along the lines of a negative income tax. (79%
agree)
14. Euent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78% agree)

18

CHAPTER 1. ECONOMICS

1.9 Criticisms

tions, taxing internet sales, Wal-Mart, casinos, ethanol

subsidies, and ination targeting.[161]

In Steady State Economics 1977, Herman Daly argues that

there exist logical inconsistencies between the emphasis
placed on economic growth and the limited availability
"The dismal science" is a derogatory alternative name
of natural resources.[162]
for economics devised by the Victorian historian Thomas
Carlyle in the 19th century. It is often stated that Carlyle Issues like central bank independence, central bank poligave economics the nickname the dismal science as a cies and rhetoric in central bank governors discourse or
response to the late 18th century writings of The Rev- the premises of macroeconomic policies[163] (monetary
erend Thomas Robert Malthus, who grimly predicted that and scal policy) of the state, are focus of contention and
starvation would result, as projected population growth criticism.[164]
exceeded the rate of increase in the food supply. How- Deirdre McCloskey has argued that many empirical ecoever, the actual phrase was coined by Carlyle in the con- nomic studies are poorly reported, and she and Stephen
text of a debate with John Stuart Mill on slavery, in which Ziliak argue that although her critique has been wellCarlyle argued for slavery, while Mill opposed it.[16]
received, practice has not improved.[165] This latter con-

1.9.1

General criticisms

Some economists, like John Stuart Mill or Lon Walras, tention is controversial.[166]
have maintained that the production of wealth should not A 2002 International Monetary Fund study looked at
be tied to its distribution.[156]
consensus forecasts (the forecasts of large groups of
In The Wealth of Nations, Adam Smith addressed many economists) that were made in advance of 60 dierent
issues that are currently also the subject of debate and national recessions in the 1990s: in 97% of the cases the
dispute. Smith repeatedly attacks groups of politically economists did not predict the contraction a year in adaligned individuals who attempt to use their collective in- vance. On those rare occasions when economists did sucuence to manipulate a government into doing their bid- cessfully predict recessions, they signicantly underestiding. In Smiths day, these were referred to as factions, mated their severity.[167]
but are now more commonly called special interests, a
term which can comprise international bankers, corporate conglomerations, outright oligopolies, monopolies, 1.9.2 Criticisms of assumptions
trade unions and other groups.[157]
Economics per se, as a social science, is independent of Economics has been subject to criticism that it relies
the political acts of any government or other decision- on unrealistic, unveriable, or highly simplied assumpmaking organization, however, many policymakers or in- tions, in some cases because these assumptions simplify
dividuals holding highly ranked positions that can inu- the proofs of desired conclusions. Examples of such asinformation, prot maximizaence other peoples lives are known for arbitrarily us- sumptions include perfect
[168][169]
tion
and
rational
choices.
The eld of information
ing a plethora of economic concepts and rhetoric as
economics
includes
both
mathematical-economical
revehicles to legitimize agendas and value systems, and
search and also behavioral economics, akin to studies in
do not limit their remarks to matters relevant to their
[170]
responsibilities.[158] The close relation of economic the- behavioral psychology.
ory and practice with politics[159] is a focus of contention
that may shade or distort the most unpretentious original
tenets of economics, and is often confused with specic
social agendas and value systems.[160]
Notwithstanding, economics legitimately has a role in informing government policy. It is, indeed, in some ways an
outgrowth of the older eld of political economy. Some
academic economic journals are currently focusing increased eorts on gauging the consensus of economists
regarding certain policy issues in hopes of eecting a
more informed political environment. Currently, there
exists a low approval rate from professional economists
regarding many public policies. Policy issues featured in
a recent survey of AEA economists include trade restrictions, social insurance for those put out of work by international competition, genetically modied foods, curbside recycling, health insurance (several questions), medical malpractice, barriers to entering the medical profession, organ donations, unhealthy foods, mortgage deduc-

Nevertheless, prominent mainstream economists such as

Keynes[171] and Joskow have observed that much of economics is conceptual rather than quantitative, and dicult to model and formalize quantitatively. In a discussion
on oligopoly research, Paul Joskow pointed out in 1975
that in practice, serious students of actual economies
tended to use informal models based upon qualitative
factors specic to particular industries. Joskow had a
strong feeling that the important work in oligopoly was
done through informal observations while formal models
were trotted out ex post". He argued that formal models
were largely not important in the empirical work, either,
and that the fundamental factor behind the theory of the
rm, behavior, was neglected.[172]
In recent years, feminist critiques of neoclassical economic models gained prominence, leading to the formation of feminist economics.[173] Contrary to common
conceptions of economics as a positive and objective
science, feminist economists call attention to the social

1.10. SEE ALSO

construction of economics[174] and highlight the ways in
which its models and methods reect masculine preferences. Primary criticisms focus on failures to account
for: the selsh nature of actors (homo economicus); exogenous tastes; the impossibility of utility comparisons;
the exclusion of unpaid work; and the exclusion of class
and gender considerations. Feminist economics developed to address these concerns, and the eld now includes critical examinations of many areas of economics
including paid and unpaid work, economic epistemology
and history, globalization, household economics and the
care economy. In 1988, Marilyn Waring published the
book If Women Counted, in which she argues that the
discipline of economics ignores womens unpaid work
and the value of nature;[175] according to Julie A. Nelson, If Women Counted showed exactly how the unpaid
work traditionally done by women has been made invisible within national accounting systems" and issued a
wake-up call to issues of ecological sustainability.[176]
Bjrnholt and McKay argue that the nancial crisis of
200708 and the response to it revealed a crisis of ideas in
mainstream economics and within the economics profession, and call for a reshaping of both the economy, economic theory and the economics profession. They argue
that such a reshaping should include new advances within
feminist economics that take as their starting point the
socially responsible, sensible and accountable subject in
creating an economy and economic theories that fully acknowledge care for each other as well as the planet.[177]
Philip Mirowski observes that
The imperatives of the orthodox research
programme [of economic science] leave little
room for maneuver and less room for originality. ... These mandates ... Appropriate as many mathematical techniques and
metaphorical expressions from contemporary
respectable science, primarily physics as possible. ... Preserve to the maximum extent possible the attendant nineteenth-century overtones
of natural order ... Deny strenuously that
neoclassical theory slavishly imitates physics.
... Above all, prevent all rival research programmes from encroaching ... by ridiculing
all external attempts to appropriate twentieth
century physics models. ... All theorizing is
[in this way] held hostage to nineteenth-century
concepts of energy.[178]
In a series of peer-reviewed journal and conference
papers and books published over a period of several
decades, John McMurtry[179] has provided extensive criticism of what he terms the unexamined assumptions and
implications [of economics], and their consequent cost to
peoples lives.[180]
Nassim Nicholas Taleb and Michael Perelman are two
additional scholars who criticized conventional or main-

19
stream economics. Taleb opposes most economic theorizing, which in his view suers acutely from the problem of overuse of Platos Theory of Forms, and calls for
cancellation of the Nobel Memorial Prize in Economics,
saying that the damage from economic theories can be
devastating.[181][182] Michael Perelman provides extensive criticism of economics and its assumptions in all his
books (and especially his books published from 2000 to
date), papers and interviews.
Despite these concerns, mainstream graduate programs have become increasingly technical and
mathematical.[183][184]

1.10 See also

Budget
Business ethics
Economics terminology that diers from common
usage
Constitutional economics
Economic ideology
Economic policy
Economic union
Free trade
List of economic communities
List of economics lms
List of free trade agreements
Socioeconomics
General:
Index of economics articles
Outline of economics

1.11 References
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20

CHAPTER 1. ECONOMICS

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CHAPTER 1. ECONOMICS

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merchant must also understand the processes of his art.
He must be acquainted with the commodities in which he
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deals, their qualities and defects, the countries from which
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to the practical man of business; to acquire a thorough
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nomic Order (and following, pp. 2629; The Invisible
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Hand (including discussion of market failure and public
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Robbins ibid, p. 17.
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Population.
[137] Dening Economics: the Long Road to Acceptance of the
Robbins Denition, Roger E. Backhouse and Steven G.
[125] Simon J.L. 1981. The ultimate resource; and 1992 The
Medema, Lionel Robbinss essay on the Nature and Sigultimate resource II.
nicance of Economic Science, 75th anniversary confer[126] David Ricardo, 1817. On the Principles of Political Econence proceedings, p. 215; http://darp.lse.ac.uk/papersdb/
omy and Taxation.
LionelRobbinsConferenceProveedingsVolume.pdf

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[138] There remained division over whether economics was de- [156] The Origin of Economic Ideas, Guy Routh (1989)
ned by a method or a subject matter but both sides in
that debate could increasingly accept some version of the [157] See Noam Chomsky (Understanding Power), on Smiths
emphasis on class conict in the Wealth of Nations
Robbins denition. Roger E. Backhouse and Steven G.
Medema, ibid, p. 223
[158] Sara Ledwith and Antonella Ciancio, Special Report: Crisis forces dismal science to get real, Reuters (July 3,
[139] Clark, Barry (1998). Political Economy: A Comparative
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Approach, Praeger.
[140] Campos, Antonietta (1987). marginalist economics, [159] Research Paper No. 2006/148 Ethics, Rhetoric and Politics of Post-conict Reconstruction How Can the Concept
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[141] R.D. Collison Black (1987 [2008])). utility, The New
[160] Dan F. Hahn New York University (2001-09-11).
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Political Communication: Rhetoric, Government, and
[142] Hicks, J.R. (1937). Mr. Keynes and the 'Classics: A
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[161] Whaples, Robert. The Policy Views of American Eco[143] See LEIGH TESFATSION: Agent-Based Computational
nomic Association Members: The Results of a New SurEconomics: Growing Economies from the Bottom Up,
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ISU Economics Working Paper No. 1, 15 March 2002
[162] Steady-State Economics, by Herman Daly
http://www2.econ.iastate.edu/tesfatsi/acealife.pdf
[163] Johan Scholvinck, Director of the UN Division for Social
Policy and Development in New York, Making the Case
[145] Interest payments are considered a form of rent on credit
for the Integration of Social and Economic Policy, The
money
Social Development Review
[144] Agent-based computational economics

[146] Complex adaptive system

[147] Dynamic network analysis
[148] Keynes, John Maynard (1936). The General Theory of
Employment, Interest and Money. London: Macmillan.
ISBN 1-57392-139-4.
Blaug, Mark (2007). The Social Sciences: Economics, The New Encyclopdia Britannica, v. 27, p.
347. Chicago.
[149] Tarshis, L. (1987). Keynesian Revolution, The New
Palgrave: A Dictionary of Economics, v. 3, pp. 4750.
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Blaug, Mark (2007). The Social Sciences: Economics, The New Encyclopdia Britannica, v. 27, p.
346. Chicago.

[164] Bernd Hayo (Georgetown University & University of

Bonn), Do We Really Need Central Bank Independence?
A Critical Re- examination, IDEAS at the Department of
Economics, College of Liberal Arts and Sciences, University of Connecticut
Gabriel Mangano (Centre Walras-Pareto, University of
Lausanne BFSH 1, 1015 Lausanne, Switzerland, and London School of Economics), Measuring Central Bank Independence: A Tale of Subjectivity and of Its Consequences, Oxford Economic Papers. 1998; 50: 468492.
Friedrich Heinemann, Does it Pay to Watch Central
Bankers Lips? The Information Content of ECB Wording, IDEAS at the Department of Economics, College of
Liberal Arts and Sciences, University of Connecticut
Stephen G. Cecchetti, Central Bank Policy Rules: Conceptual Issues and Practical Considerations, IDEAS at the
Department of Economics, College of Liberal Arts and
Sciences, University of Connecticut

[150] Harcourt, G.C.(1987). Post-Keynesian Economics, The

New Palgrave: A Dictionary of Economics, v. 3, pp. 47 [165] Ziliak, S.T.; McCloskey, D.N. (2004). Size Matters:
50.
The Standard Error of Regressions in the American Economic Review (PDF). Econ Journal Watch 1 (2): 331
[151] Ben Bernanke (2002-11-08). Remarks by Governor Ben
358. Archived from the original on 2008-06-25. ReS. Bernanke. The Federal Reserve Board. Retrieved
trieved 2008-06-10.
2008-02-26.
[152] Friedman, Milton. The Social Responsibility of Business [166] Sound and Fury: McCloskey and Signicance Testing in
Economics. Retrieved 2008-06-10.
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13 Sep. 1970.
[167] How Accurate Are Private Sector Forecasts? CrossCountry Evidence from Consensus Forecasts of Output
[153] New School of Thought Brings Energy to 'the Dismal SciGrowth, by Prakash Loungani, International Monetary
ence' New York Times Retrieved Oct-26-09
Fund (IMF), December 2002
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[168] Rappaport, Steven (1996). Abstraction and Unrealisnews-flash-economists-agree.html
tic Assumptions in Economics, Journal of Economic
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Methodology, 3(2), pp. 215236. Abstract, (1998). Modpg=PA36&lpg=PA36#v=onepage&q&f=false
els and Reality in Economics. Edward Elgar, p. 6, ch. 68.

26

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[169] Friedman, Milton (1953), The Methodology of Positive [182] Taleb, Nassim Nicholas (October 23, 2007). The
Economics, Essays in Positive Economics, University of
pseudo-science hurting markets.
Chicago Press, pp. 1415, 22, 31.
Boland, Lawrence A. (2008). assumptions contro- [183] Johansson D. (2004). Economics without Entrepreneurship or Institutions: A Vocabulary Analysis of Graduate
versy, The New Palgrave Dictionary of Economics, 2nd
Textbooks (PDF). Econ Journal Watch 1 (3): 515538.
Edition Online abstract. Accessed May 30, 2008.
Archived from the original on 2008-06-25. Retrieved
2008-06-07.
[170] Hodgson, G.M (2007).
Evolutionary and Institutional Economics as the New Mainstream. Evolutionary and Institutional Economics Review 4 (1): 725. [184] Sutter, Daniel, and Rex Pjesky (2007). Where Would
Adam Smith Publish Today? The Near Absence of Mathdoi:10.14441/eier.4.7. Retrieved 2010-10-02.
free Research in Top Journals, Econ Journal Watch, 4(2),
pp. 230-240. Abstract. Retrieved 2013-04-04.
[171] Keynes, J. M. (September 1924). Alfred Marshall
18421924. The Economic Journal 34 (135): 311372.
doi:10.2307/2222645. JSTOR 2222645.
[172] Joskow, Paul (May 1975). Firm Decision-making Policy and Oligopoly Theory. The American Economic Review 65 (2, Papers and Proceedings of the Eightyseventh
Annual Meeting of the American Economic Association):
270279, Particularly 271. JSTOR 1818864.
[173] England, Paula (1993). The Separative Self: Androcentric Bias in Neoclassical Assumptions, Beyond Economic
Man: Feminist Theory and Economics, University of
Chicago Press, pp. 3753.

1.12 Further reading

McCann, Charles Robert, Jr., 2003. The Elgar
Dictionary of Economic Quotations, Edward Elgar.
Preview.

1.13 External links

General information

[174] Ferber, M.A. and Julie A. Nelson, "Beyond Economic

Man: Ten Years Later, in Marianne A. Ferber and Julie
A. Nelson, eds., Feminist Economics Today: Beyond Economic Man. Chicago: University of Chicago Press, 2003.
[175] Marilyn Waring (1988.) If Women Counted. San Francisco: Harper & Row. ISBN 0-06-250933-0
[176] Nelson, Julie A. (2014). Foreword. In Bjrnholt, Margunn; McKay, Ailsa. Counting on Marilyn Waring: New
Advances in Feminist Economics. Demeter Press. ISBN
9781927335277.
[177] Bjrnholt, Margunn; McKay, Ailsa (2014). Advances
in Feminist Economics in Times of Economic Crisis
(PDF). In Bjrnholt, Margunn; McKay, Ailsa. Counting
on Marilyn Waring: New Advances in Feminist Economics.
Demeter Press. pp. 720. ISBN 9781927335277.
[178] Philip Mirowski, More Heat Than Light: Economics as
Social Physics. New York: Cambridge University Press,
1989, pp. 3778.
[179] Please see partial list of publications, including peerreviewed papers and books, on John McMurtry's
wikipedia page, as well as links to the text of several of his
peer-reviewed papers and peer-reviewed secondary references analyzing and discussing his work.
[180] John McMurtry, The Cancer Stage of Capitalism. London, Pluto Books, 1999. The book is a scholarly examination and criticism of economics. The book is available
for free download from several sites online, for example
here . (In April 2012, the author stated he is working on
an updated edition.)
[181] Cox, Adam. Blame Nobel for crisis, says author of 'Black
Swan'", Reuters (2010-09-28).

Economics at DMOZ
Economic journals on the web
Economics at Encyclopdia Britannica
Intute: Economics: Internet directory of UK universities
Research Papers in Economics (RePEc)
Resources For Economists: American Economic
Association-sponsored guide to 2,000+ Internet resources from Data to Neat Stu, updated quarterly.
Institutions and organizations
Economics Departments, Institutes and Research
Centers in the World
Organization For Co-operation and Economic Development (OECD) Statistics
United Nations Statistics Division
World Bank Data
Study resources
A guide to several online economics textbooks
Economics at About.com
Economics textbooks on Wikibooks

1.13. EXTERNAL LINKS

Introduction to Economics: Short Creative commons-licensed introduction to basic economics
MERLOT Learning Materials: Economics: USbased database of learning materials
MIT OpenCourseWare: Economics: Archive of
study materials from MIT courses
Online Learning and Teaching Materials UK Economics Networks database of text, slides, glossaries
and other resources
Schools of Thought: Compare various economic
schools of thought on particular issues
The Library of Economics and Liberty (Econlib):
Economics Books, Articles, Blog (EconLog), Podcasts (EconTalk)

27

Chapter 2

Price
For other uses, see Price (disambiguation).

2.1 Price theory

In ordinary usage, price is the quantity of payment or Economic theory asserts that in a free market economy
compensation given by one party to another in return for the market price reects interaction between supply and
demand: the price is set so as to equate the quantity being
goods or services.
supplied and that being demanded. In turn these quantiIn modern economies, prices are generally expressed in
ties are determined by the marginal utility of the asset to
units of some form of currency. (For commodities, they
dierent buyers and to dierent sellers. In reality, the
are expressed as currency per unit weight of the commodprice may be distorted by other factors, such as tax and
ity, e.g. euros per kilogram.) Although prices could be
other government regulations.
quoted as quantities of other goods or services this sort
of barter exchange is rarely seen. Prices are sometimes When a commodity is for sale at multiple locations, the
quoted in terms of vouchers such as trading stamps and law of one price is generally believed to hold. This essenair miles. In some circumstances, cigarettes have been tially states that the cost dierence between the locations
used as currency, for example in prisons, in times of cannot be greater than that representing shipping, taxes,
hyperination, and in some places during World War 2. other distribution costs and more. In the case of the maIn a black market economy, barter is also relatively com- jority of consumer goods and services, distribution costs
are quite a high proportion of the overall price, so the law
mon.
may not be very useful.
In many nancial transactions, it is customary to quote
prices in other ways. The most obvious example is in
pricing a loan, when the cost will be expressed as the
percentage rate of interest. The total amount of interest 2.2 Price and value
payable depends upon credit risk, the loan amount and the
period of the loan. Other examples can be found in pric- The paradox of value was observed and debated by
ing nancial derivatives and other nancial assets. For in- classical economists. Adam Smith described what is now
stance the price of ination-linked government securities called the diamond water paradox: diamonds command
in several countries is quoted as the actual price divided a higher price than water, yet water is essential for life and
by a factor representing ination since the security was diamonds are merely ornamentation. Use value was supissued.
posed to give some measure of usefulness, later rened
Price sometimes refers to the quantity of payment re- as marginal benet (which is marginal utility counted in
quested by a seller of goods or services, rather than the common units of value) while exchange value was the
eventual payment amount. This requested amount is of- measure of how much one good was in terms of another,
ten called the asking price or selling price, while the namely what is now called relative price.
actual payment may be called the transaction price or
traded price. Likewise, the bid price or buying price is
the quantity of payment oered by a buyer of goods or 2.3 Austrian School theory
services, although this meaning is more common in asset
or nancial markets than in consumer markets.
One solution oered to the paradox of value is through
Economists sometimes dene price more generally as the the theory of marginal utility proposed by Carl Menger,
ratio of the quantities of goods that are exchanged for one of the founders of the Austrian School of economics.
each other.
As William Barber put it, human volition, the human
subject, was brought to the centre of the stage by
marginalist economics, as a bargaining tool. Neoclassical economists sought to clarify choices open to producers
28

2.5. CONFUSION BETWEEN PRICES AND COSTS OF PRODUCTION

29

and consumers in market situations, and thus fears that

cleavages in the economic structure might be unbridgeable could be suppressed.

2.5 Confusion between prices and

costs of production

Without denying the applicability of the Austrian theory of value as subjective only, within certain contexts
of price behavior, the Polish economist Oskar Lange felt
it was necessary to attempt a serious integration of the
insights of classical political economy with neo-classical
economics. This would then result in a much more realistic theory of price and of real behavior in response
to prices. Marginalist theory lacked anything like a theory of the social framework of real market functioning,
and criticism sparked o by the capital controversy initiated by Piero Sraa revealed that most of the foundational tenets of the marginalist theory of value either reduced to tautologies, or that the theory was true only if
counter-factual conditions applied.

Price is commonly confused with the notion of cost of

production, as in I paid a high cost for buying my new
plasma television; but technically these are dierent
concepts. Price is what a buyer pays to acquire products
from a seller. Cost of production concerns the sellers
investment (e.g., manufacturing expense) in the product
being exchanged with a buyer. For marketing organizations seeking to make a prot, the hope is that price will
exceed cost of production so that the organization can see
nancial gain from the transaction.

One insight often ignored in the debates about price theory is something that businessmen are keenly aware of:
in dierent markets, prices may not function according
to the same principles except in some very abstract (and
therefore not very useful) sense. From the classical political economists to Michal Kalecki it was known that prices
for industrial goods behaved dierently from prices for
agricultural goods, but this idea could be extended further to other broad classes of goods and services.

Finally, while pricing is a topic central to a companys

protability, pricing decisions are not limited to for-prot
companies. The behavior of non-prot organizations,
such as charities, educational institutions and industry
trade groups, also involve setting prices.[1]:160165 For instance, charities seeking to raise money may set dierent
target levels for donations that reward donors with increases in status (e.g., name in newsletter), gifts or other
benets; likewise educational and cultural nonprots often price seats for events in theatres, auditoriums and
stadiums. Furthermore, while nonprot organizations
may not earn a prot, by denition, it is the case that
many nonprots may desire to maximize net revenue
total revenue less total costfor various programs and
activities, such as selling seats to theatrical and cultural
performances.[1]:183194

2.6 Price point

2.4 Price as productive human
labour time
Marxists assert that value derives from the volume of
socially necessary labour time exerted in the creation of
an object. This value does not relate to price in a simple manner, and the diculty of the conversion of the
mass of values into the actual prices is known as the
transformation problem. However, many recent Marxists
deny that any problem exists. Marx was not concerned
with proving that prices derive from values. In fact, he
admonished the other classical political economists (like
Ricardo and Smith) for trying to make this proof. Rather,
for Marx, price equals the cost of production (capitalcost and labor-costs) plus the average rate of prot. So
if the average rate of prot (return on capital investment)
is 22% then prices would reect cost-of-production plus
22%. The perception that there is a transformation problem in Marx stems from the injection of Walrasian equilibrium theory into Marxism where there is no such thing
as equilibrium.

The price of an item is also called the "price point", especially where it refers to stores that set a limited number
of price points. For example, Dollar General is a general
store or "ve and dime" store that sets price points only
at even amounts, such as exactly one, two, three, ve, or
ten dollars (among others). Other stores will have a policy of setting most of their prices ending in 99 cents or
pence. Other stores (such as dollar stores, pound stores,
euro stores, 100-yen stores, and so forth) only have a single price point ($1, 1, 1, 100), though in some cases
this price may purchase more than one of some very small
items.

2.7 Other price terms

Basic price is the price a seller gets after removing any
taxes paid by a buyer and adding any subsidy the seller
gets for selling.[2]
Producer price is the amount the producer gets from a
buyer for a unit of a good or service produced as output
minus any tax, it excludes any transport charges invoiced
separately by the producer.[3]

30

2.8 See also

Common law of business balance
Cost
Factor price

CHAPTER 2. PRICE
Simon Clarke, Marx, marginalism, and modern sociology: from Adam Smith to Max Weber (London:
The Macmillan Press, Ltd, 1982).
Makoto Itoh & Costas Lapavitsas, Political Economy
of Money and Finance.
Pierre Vilar, A history of gold and money.

Free price system

Geo (marketing)
Law of value
Market trend
Marketing
Marketing mix

2.10 Further reading

Vianello, F. [1989], Natural (or Normal) Prices.
Some Pointers, in: Political Economy. Studies in
the Surplus Approach, 2, pp. 89105.
Roberts, Russell (June 4, 2007). Where Do Prices
Come From?". Library of Economics and Liberty.

Microeconomics
Production, costs, and pricing
Price system
Price xing
Pricing in marketing
Real prices and ideal prices
Resale price maintenance
Reservation price
Suggested retail price
Time based pricing
Unit of account
Variable pricing
Value
Wholesale
Yield management

2.9 References
[1] Heyne, Paul; Boettke, Peter J.; Prychitko, David L.
(2014). The Economic Way of Thinking (13th ed.). Pearson. ISBN 978-0-13-299129-2.
[2] http://financial-dictionary.thefreedictionary.com/Basic+
Price
[3] http://stats.oecd.org/glossary/detail.asp?ID=2144

Milton Friedman, Price Theory.

George Stigler, Theory of Price.

2.11 External links

Prices and Wages library guide - Prices and Wages
research guide at the University of Missouri libraries

Chapter 3

Gross domestic product

GDP redirects here. For other uses, see GDP (disam- 3.1 History
biguation).
Gross domestic product (GDP) is dened by the The concept of GDP was rst developed by Simon
Kuznets for a US Congress report in 1934.[4] In this report, Kuznets warned against its use as a measure of
welfare (see below under limitations and criticisms). After
the Bretton Woods conference in 1944, GDP became the
main tool for measuring a countrys economy.[5] At that
time Gross National Product (GNP) was the preferred estimate, which diered from GDP in that it measured production by a countrys citizens at home and abroad rather
than its 'resident institutional units (see OECD denition
above). The switch to GDP came in the 1990s.
A map of world economies by size of GDP (nominal) in $US,
CIA World Factbook, 2012.[1]

Organisation for Economic Co-operation and Development (OECD) as an aggregate measure of production
equal to the sum of the gross values added of all resident
institutional units engaged in production (plus any taxes,
and minus any subsidies, on products not included in the
value of their outputs).[2]
GDP estimates are commonly used to measure the economic performance of a whole country or region, but can
also measure the relative contribution of an industry sector. This is possible because GDP is a measure of 'value
added' rather than sales; it adds each rms value added
(the value of its output minus the value of goods that are
used up in producing it). For example, a rm buys steel
and adds value to it by producing a car; double counting
would occur if GDP added together the value of the steel
and the value of the car.[3] Because it is based on value
added, GDP also increases when an enterprise reduces
its use of materials or other resources ('intermediate consumption') to produce the same output.
The more familiar use of GDP estimates is to calculate
the growth of the economy from year to year (and recently
from quarter to quarter). The pattern of GDP growth is
held to indicate the success or failure of economic policy
and to determine whether an economy is 'in recession'.

The history of the concept of GDP should be distinguished from the history of changes in ways of estimating
it. The value added by rms is relatively easy to calculate from their accounts, but the value added by the public sector, by nancial industries, and by intangible asset
creation is more complex. These activities are increasingly important in developed economies, and the international conventions governing their estimation and their
inclusion or exclusion in GDP regularly change in an attempt to keep up with industrial advances. In the words
of one academic economist The actual number for GDP
is therefore the product of a vast patchwork of statistics
and a complicated set of processes carried out on the raw
data to t them to the conceptual framework.[6]
Angus Maddison calculated historical GDP gures going
back to 1830 and before.

3.2 Determining GDP

GDP can be determined in three ways, all of which
should, in principle, give the same result. They are
the production (or output or value added) approach, the
income approach, or the expenditure approach.
The most direct of the three is the production approach,
which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the
principle that all of the product must be bought by somebody, therefore the value of the total product must be
equal to peoples total expenditures in buying things. The

31

32

CHAPTER 3. GROSS DOMESTIC PRODUCT

income approach works on the principle that the incomes

of the productive factors (producers, colloquially) must
be equal to the value of their product, and determines
GDP by nding the sum of all producers incomes.[7]

3.2.1

Production approach

This approach mirrors the OECD denition given above.

Countries by 2012 GDP (nominal) per capita.[8]

1. Estimate the gross value of domestic output out of

the many various economic activities;
2. Determine the intermediate consumption, i.e., the
cost of material, supplies and services used to produce nal goods or services.
3. Deduct intermediate consumption from gross value
to obtain the gross value added.
Gross value added = gross value of output value of intermediate consumption.
Value of output = value of the total sales of goods and GDP (PPP) per capita (World bank, 2012).
services plus value of changes in the inventories.
The sum of the gross value added in the various economic measurement errors will make the two gures slightly o
when reported by national statistical agencies.)
activities is known as GDP at factor cost.
GDP at factor cost plus indirect taxes less subsidies on This method measures GDP by adding incomes that rms
pay households for factors of production they hire - wages
products = GDP at producer price.
for labour, interest for capital, rent for land and prots for
For measuring output of domestic product, economic acentrepreneurship.
tivities (i.e. industries) are classied into various sectors.
After classifying economic activities, the output of each The US National Income and Expenditure Accounts disector is calculated by any of the following two methods: vide incomes into ve categories:
1. By multiplying the output of each sector by their respective market price and adding them together
2. By collecting data on gross sales and inventories
from the records of companies and adding them together

1. Wages, salaries, and supplementary labour income

2. Corporate prots
3. Interest and miscellaneous investment income
4. Farmers incomes

The gross value of all sectors is then added to get the gross
5. Income from non-farm unincorporated businesses
value added (GVA) at factor cost. Subtracting each sectors intermediate consumption from gross output gives These ve income components sum to net domestic inthe GDP at factor cost. Adding indirect tax minus sub- come at factor cost.
sidies in GDP at factor cost gives the GDP at producer
Two adjustments must be made to get GDP:
prices.

3.2.2

Income approach

The second way of estimating GDP is to use the sum

of primary incomes distributed by resident producer
units.[2]

1. Indirect taxes minus subsidies are added to get from

factor cost to market prices.
2. Depreciation (or capital consumption allowance) is
added to get from net domestic product to gross domestic product.

If GDP is calculated this way it is sometimes called gross

domestic income (GDI), or GDP (I). GDI should provide Total income can be subdivided according to various
the same amount as the expenditure method described schemes, leading to various formulae for GDP measured
later. (By denition, GDI = GDP. In practice, however, by the income approach. A common one is:

3.2. DETERMINING GDP

GDP = compensation of employees + gross operating surplus + gross mixed income + taxes
less subsidies on production and imports
GDP = COE + GOS + GMI + TP & M SP
&M
Compensation of employees (COE) measures the
total remuneration to employees for work done. It
includes wages and salaries, as well as employer
contributions to social security and other such programs.
Gross operating surplus (GOS) is the surplus due
to owners of incorporated businesses. Often called
prots, although only a subset of total costs are subtracted from gross output to calculate GOS.

33
of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. Note that if you knit yourself a sweater,
it is production but does not get counted as GDP because it is never sold. Sweater-knitting is a small part
of the economy, but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from nonmarket provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market provision of services, then this trend toward increased market
provision of services may mask a dramatic decrease in
actual domestic production, resulting in overly optimistic
and inated reported GDP. This is particularly a problem for economies which have shifted from production
economies to service economies.

Gross mixed income (GMI) is the same measure as

GOS, but for unincorporated businesses. This often Components of GDP by expenditure
includes most small businesses.
The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of production
in society. It measures the value of GDP at factor (basic) prices. The dierence between basic prices and nal
prices (those used in the expenditure calculation) is the
total taxes and subsidies that the government has levied
or paid on that production. So adding taxes less subsidies
on production and imports converts GDP at factor cost to
GDP(I).
Total factor income is also sometimes expressed as:
Total factor income = employee compensation
+ corporate prots + proprietors income +
rental income + net interest [9]
Yet another formula for GDP by the income method is:

Components of U.S. GDP

GDP (Y) is the sum of consumption (C), investment

(I), government spending (G) and net exports (X M).
Y = C + I + G + (X M)

GDP = R + I + P + SA + W
where R : rents
I : interests
P : prots
SA : statistical adjustments (corporate income taxes, dividends, undistributed corporate prots)
W : wages.

3.2.3

Expenditure approach

The third way to estimate GDP is to calculate the sum of

the nal uses of goods and services (all uses except intermediate consumption) measured in purchasers prices.[2]
In economics, most things produced are produced for sale
and then sold. Therefore, measuring the total expenditure

Here is a description of each GDP component:

C (consumption) is normally the largest GDP
component in the economy, consisting of private
(household nal consumption expenditure) in the
economy. These personal expenditures fall under
one of the following categories: durable goods, nondurable goods, and services. Examples include food,
rent, jewelry, gasoline, and medical expenses but
does not include the purchase of new housing.
I (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or
purchase of machinery and equipment for a factory.

34

CHAPTER 3. GROSS DOMESTIC PRODUCT

Spending by households (not government) on new
houses is also included in investment. In contrast to
its colloquial meaning, investment in GDP does
not mean purchases of nancial products. Buying
nancial products is classed as 'saving', as opposed
to investment. This avoids double-counting: if one
buys shares in a company, and the company uses
the money received to buy plant, equipment, etc.,
the amount will be counted toward GDP when the
company spends the money on those things; to also
count it when one gives it to the company would be
to count two times an amount that only corresponds
to one group of products. Buying bonds or stocks is
a swapping of deeds, a transfer of claims on future
production, not directly an expenditure on products.

G (government spending) is the sum of

government expenditures on nal goods and
services. It includes salaries of public servants,
purchases of weapons for the military and any
investment expenditure by a government. It does
not include any transfer payments, such as social
security or unemployment benets.

in the United States, In general, the source data for

the expenditures components are considered more reliable than those for the income components [see income
method, below].[11]
Examples of GDP component variables
C, I, G, and NX(net exports): If a person spends money
to renovate a hotel to increase occupancy rates, the spending represents private investment, but if he buys shares in
a consortium to execute the renovation, it is saving. The
former is included when measuring GDP (in I), the latter is not. However, when the consortium conducted its
own expenditure on renovation, that expenditure would
be included in GDP.
If a hotel is a private home, spending for renovation would
be measured as consumption, but if a government agency
converts the hotel into an oce for civil servants, the
spending would be included in the public sector spending, or G.

If the renovation involves the purchase of a chandelier

from abroad, that spending would be counted as C, G,
X (exports) represents gross exports. GDP captures or I (depending on whether a private individual, the govthe amount a country produces, including goods and ernment, or a business is doing the renovation), but then
services produced for other nations consumption, counted again as an import and subtracted from the GDP
therefore exports are added.
so that GDP counts only goods produced within the country.
M (imports) represents gross imports. Imports are
subtracted since imported goods will be included in If a domestic producer is paid to make the chandelier for
the terms G, I, or C, and must be deducted to avoid a foreign hotel, the payment would not be counted as C,
G, or I, but would be counted as an export.
counting foreign supply as domestic.
A fully equivalent denition is that GDP (Y) is the sum of
nal consumption expenditure (FCE), gross capital
formation (GCF), and net exports (X M).
Y = FCE + GCF+ (X M)
FCE can then be further broken down by three sectors (households, governments and non-prot institutions serving households) and GCF by ve sectors (non- GDP real growth rates for 2010.
nancial corporations, nancial corporations, households, governments and non-prot institutions serving A production boundary delimits what will be counted
households). The advantage of this second denition is as GDP.
that expenditure is systematically broken down, rstly,
by type of nal use (nal consumption or capital formaOne of the fundamental questions that
tion) and, secondly, by sectors making the expenditure,
must be addressed in preparing the national
whereas the rst denition partly follows a mixed delimeconomic accounts is how to dene the producitation concept by type of nal use and sector.
tion boundarythat is, what parts of the myrNote that C, G, and I are expenditures on nal goods and
iad human activities are to be included in or
services; expenditures on intermediate goods and services
excluded from the measure of the economic
do not count. (Intermediate goods and services are those
production.[12]
used by businesses to produce other goods and services
within the accounting year.[10] )
All output for market is at least in theory included within
According to the U.S. Bureau of Economic Analysis, the boundary. Market output is dened as that which is
which is responsible for calculating the national accounts sold for economically signicant prices; economically

3.3. GDP VS GNI

signicant prices are prices which have a signicant inuence on the amounts producers are willing to supply
and purchasers wish to buy.[13] An exception is that illegal goods and services are often excluded even if they
are sold at economically signicant prices (Australia and
the United States exclude them).
This leaves non-market output. It is partly excluded and
partly included. First, natural processes without human
involvement or direction are excluded.[14] Also, there
must be a person or institution that owns or is entitled
to compensation for the product. An example of what
is included and excluded by these criteria is given by the
United States national accounts agency: the growth of
trees in an uncultivated forest is not included in production, but the harvesting of the trees from that forest is
included.[15]
Within the limits so far described, the boundary is further
constricted by functional considerations.[16] The Australian Bureau for Statistics explains this: The national
accounts are primarily constructed to assist governments
and others to make market-based macroeconomic policy
decisions, including analysis of markets and factors affecting market performance, such as ination and unemployment. Consequently, production that is, according
to them, relatively independent and isolated from markets, or dicult to value in an economically meaningful way [i.e., dicult to put a price on] is excluded.[17]
Thus excluded are services provided by people to members of their own families free of charge, such as child
rearing, meal preparation, cleaning, transportation, entertainment of family members, emotional support, care of
the elderly.[18] Most other production for own (or ones
familys) use is also excluded, with two notable exceptions which are given in the list later in this section.
Non-market outputs that are included within the boundary are listed below. Since, by denition, they do not
have a market price, the compilers of GDP must impute
a value to them, usually either the cost of the goods and
services used to produce them, or the value of a similar
item that is sold on the market.
Goods and services provided by governments and
non-prot organizations free of charge or for economically insignicant prices are included. The
value of these goods and services is estimated as
equal to their cost of production. This ignores
the consumer surplus generated by an ecient and
eective government supplied infrastructure. For
example, government-provided clean water confers
substantial benets above its cost. Ironically, lack
of such infrastructure which would result in higher
water prices (and probably higher hospital and medication expenditures) would be reected as a higher
GDP. This may also cause a bias that mistakenly favors inecient privatizations since some of the consumer surplus from privatized entities sale of goods
and services are indeed reected in GDP.[19]

35
Goods and services produced for own-use by businesses are attempted to be included. An example
of this kind of production would be a machine constructed by an engineering rm for use in its own
plant.
Renovations and upkeep by an individual to a home
that she owns and occupies are included. The value
of the upkeep is estimated as the rent that she could
charge for the home if she did not occupy it herself. This is the largest item of production for own
use by an individual (as opposed to a business) that
the compilers include in GDP.[19] If the measure
uses historical or book prices for real estate, this
will grossly underestimate the value of the rent in
real estate markets which have experienced signicant price increases (or economies with general ination). Furthermore, depreciation schedules for
houses often accelerate the accounted depreciation
relative to actual depreciation (a well-built house can
be lived in for several hundred years a very long
time after it has been fully depreciated). In summary, this is likely to grossly underestimate the value
of existing housing stock on consumers actual consumption or income.
Agricultural production for consumption by oneself
or ones household is included.
Services (such as chequeing-account maintenance
and services to borrowers) provided by banks and
other nancial institutions without charge or for a
fee that does not reect their full value have a value
imputed to them by the compilers and are included.
The nancial institutions provide these services by
giving the customer a less advantageous interest rate
than they would if the services were absent; the value
imputed to these services by the compilers is the difference between the interest rate of the account with
the services and the interest rate of a similar account
that does not have the services. According to the
United States Bureau for Economic Analysis, this is
one of the largest imputed items in the GDP.[20]

3.3 GDP vs GNI

GDP can be contrasted with gross national product
(GNP) or, as it is now known, gross national income
(GNI). The dierence is that GDP denes its scope according to location, while GNI denes its scope according
to ownership. In a global context, world GDP and world
GNI are, therefore, equivalent terms.
GDP is product produced within a countrys borders;
GNI is product produced by enterprises owned by a countrys citizens. The two would be the same if all of the productive enterprises in a country were owned by its own
citizens, and those citizens did not own productive enter-

36

CHAPTER 3. GROSS DOMESTIC PRODUCT

prises in any other countries. In practice, however, foreign ownership makes GDP and GNI non-identical. Production within a countrys borders, but by an enterprise
owned by somebody outside the country, counts as part
of its GDP but not its GNI; on the other hand, production
by an enterprise located outside the country, but owned
by one of its citizens, counts as part of its GNI but not its
GDP.
For example, the GNI of the USA is the value of output
produced by American-owned rms, regardless of where
the rms are located. Similarly, if a country becomes increasingly in debt, and spends large amounts of income
servicing this debt this will be reected in a decreased
GNI but not a decreased GDP. Similarly, if a country
sells o its resources to entities outside their country this
will also be reected over time in decreased GNI, but not
decreased GDP. This would make the use of GDP more
attractive for politicians in countries with increasing national debt and decreasing assets.

3.3.3 Interest rates

Net interest expense is a transfer payment in all sectors
except the nancial sector. Net interest expenses in the
nancial sector are seen as production and value added
and are added to GDP.

3.4 Nominal GDP and adjustments

to GDP

The raw GDP gure as given by the equations above is

called the nominal, historical, or current, GDP. When one
compares GDP gures from one year to another, it is desirable to compensate for changes in the value of money
i.e., for the eects of ination or deation. To make it
more meaningful for year-to-year comparisons, it may be
multiplied by the ratio between the value of money in the
year the GDP was measured and the value of money in a
Gross national income (GNI) equals GDP plus income re- base year.
ceipts from the rest of the world minus income payments
For example, suppose a countrys GDP in 1990 was $100
to the rest of the world.[21]
million and its GDP in 2000 was $300 million. Suppose
In 1991, the United States switched from using GNP also that ination had halved the value of its currency over
to using GDP as its primary measure of production.[22] that period. To meaningfully compare its GDP in 2000 to
The relationship between United States GDP and GNP is its GDP in 1990, we could multiply the GDP in 2000 by
shown in table 1.7.5 of the National Income and Product one-half, to make it relative to 1990 as a base year. The
Accounts.[23]
result would be that the GDP in 2000 equals $300 million one-half = $150 million, in 1990 monetary terms.
We would see that the countrys GDP had realistically increased 50 percent over that period, not 200 percent, as it
3.3.1 International standards
might appear from the raw GDP data. The GDP adjusted
The international standard for measuring GDP is for changes in money value in this way is called the real,
contained in the book System of National Accounts or constant, GDP.
(1993), which was prepared by representatives of The factor used to convert GDP from current to conthe International Monetary Fund, European Union, stant values in this way is called the GDP deator. Unlike
Organization for Economic Co-operation and Develop- consumer price index, which measures ination or deament, United Nations and World Bank. The publication tion in the price of household consumer goods, the GDP
is normally referred to as SNA93 to distinguish it from deator measures changes in the prices of all domestithe previous edition published in 1968 (called SNA68) cally produced goods and services in an economy includ[24]

SNA93 provides a set of rules and procedures for the

measurement of national accounts. The standards are designed to be exible, to allow for dierences in local statistical needs and conditions.

3.3.2

National measurement

ing investment goods and government services, as well as

household consumption goods.[25]
Constant-GDP gures allow us to calculate a GDP growth
rate, which indicates how much a countrys production
has increased (or decreased, if the growth rate is negative)
compared to the previous year.
Real GDP growth rate for year n = [(Real GDP
in year n) (Real GDP in year n 1)] / (Real
GDP in year n 1)

Within each country GDP is normally measured by a national government statistical agency, as private sector organizations normally do not have access to the informa- Another thing that it may be desirable to account for
tion required (especially information on expenditure and is population growth. If a countrys GDP doubled over
production by governments).
a certain period, but its population tripled, the increase
Main article: National agencies responsible for GDP in GDP may not mean that the standard of living inmeasurement
creased for the countrys residents; the average person
in the country is producing less than they were before.

3.6. PER UNIT GDP

37

Per-capita GDP is a measure to account for population There is a clear pattern of the purchasing power parity
growth.
method decreasing the disparity in GDP between high
and low income (GDP) countries, as compared to the current exchange rate method. This nding is called the Penn
3.5 Cross-border comparison and eect.

PPP
The level of GDP in dierent countries may be compared
by converting their value in national currency according
to either the current currency exchange rate, or the purchasing power parity exchange rate.

For more information, see Measures of national income

and output.

3.6 Per unit GDP

Current currency exchange rate is the exchange

GDP is an aggregate gure which does not consider difrate in the international foreign exchange market.
fering sizes of nations. Therefore, GDP can be stated as
Purchasing power parity exchange rate is the ex- GDP per capita (per person) in which total GDP is dichange rate based on the purchasing power parity vided by the resident population on a given date, GDP
(PPP) of a currency relative to a selected standard per citizen where total GDP is divided by the numbers
(usually the United States dollar). This is a compar- of citizens residing in the country on a given date, and
ative (and theoretical) exchange rate, the only way to less commonly GDP per unit of a resource input, such
directly realize this rate is to sell an entire CPI basket as GDP per GJ of energy or Gross domestic product per
in one country, convert the cash at the currency mar- barrel. GDP per citizen in the above case is pretty similar
ket rate & then rebuy that same basket of goods in to GDP per capita in most nations, however, in nations
the other country (with the converted cash). Going with very high proportions of temporary foreign workers
from country to country, the distribution of prices like in Persian Gulf nations, the two gures can be vastly
within the basket will vary; typically, non-tradable dierent.
purchases will consume a greater proportion of the
Source:Helgi Library,[26] World Bank
baskets total cost in the higher GDP country, per
the Balassa-Samuelson eect.
The ranking of countries may dier signicantly based on
which method is used.
The current exchange rate method converts the
value of goods and services using global currency
exchange rates. The method can oer better indications of a countrys international purchasing power.
For instance, if 10% of GDP is being spent on buying hi-tech foreign arms, the number of weapons
purchased is entirely governed by current exchange
rates, since arms are a traded product bought on the
international market. There is no meaningful 'local'
price distinct from the international price for high
technology goods.
The purchasing power parity method accounts for
the relative eective domestic purchasing power of
the average producer or consumer within an economy. The method can provide a better indicator
of the living standards especially of less developed
countries, because it compensates for the weakness
of local currencies in the international markets. It
also oers better indication of total national wealth.
For example, India ranks 10th by nominal GDP, but
3rd by PPP. The PPP method of GDP conversion is
more relevant to non-traded goods and services. In
the above example if hi-tech weapons are to be produced internally their amount will be governed by
GDP(PPP) rather than nominal GDP.

3.7 Standard of living and GDP

GDP per capita is not a measurement of the standard
of living in an economy; however, it is often used as
such an indicator, on the rationale that all citizens would
benet from their countrys increased economic production. Similarly, GDP per capita is not a measure of personal income. GDP may increase while real incomes for
the majority decline. The major advantage of GDP per
capita as an indicator of standard of living is that it is
measured frequently, widely, and consistently. It is measured frequently in that most countries provide information on GDP on a quarterly basis, allowing trends to be
seen quickly. It is measured widely in that some measure
of GDP is available for almost every country in the world,
allowing inter-country comparisons. It is measured consistently in that the technical denition of GDP is relatively consistent among countries.
The major disadvantage is that it is not a measure of standard of living. GDP is intended to be a measure of total
national economic activitya separate concept.
The argument for using GDP as a standard-of-living
proxy is not that it is a good indicator of the absolute
level of standard of living, but that living standards tend
to move with per-capita GDP, so that changes in living
standards are readily detected through changes in GDP.

38

3.8 Externalities
GDP is widely used by economists to gauge economic recession and recovery and an economys general monetary
ability to address externalities. It is not meant to measure
externalities. It serves as a general metric for a nominal
monetary standard of living and is not adjusted for costs
of living within a region. GDP is a neutral measure which
merely shows an economys general ability to pay for externalities such as social and environmental concerns.[27]
Examples of externalities include:
Wealth distribution GDP does not account
for variances in incomes of various demographic
groups. See income inequality metrics for discussion of a variety of inequality-based economic measures.
Non-market transactionsGDP excludes activities that are not provided through the market, such as
household production and volunteer or unpaid services. As a result, GDP is understated. The work of
New Zealand economist Marilyn Waring has highlighted that if a concerted attempt to factor in unpaid
work were made, then it would in part undo the injustices of unpaid (and in some cases, slave) labour,
and also provide the political transparency and accountability necessary for democracy.
Underground economy ocial GDP estimates
may not take into account the underground economy, in which transactions contributing to production, such as illegal trade and tax-avoiding activities,
are unreported, causing GDP to be underestimated.
Asset valueGDP does not take into account the
value of all assets in an economy. This is akin to
ignoring a companys balance sheet, and judging it
solely on the basis of its income statement.
Non-monetary economyGDP omits economies
where no money comes into play at all, resulting in
inaccurate or abnormally low GDP gures. For example, in countries with major business transactions
occurring informally, portions of local economy are
not easily registered. Bartering may be more prominent than the use of money, even extending to services.
GDP also ignores subsistence production.
Quality improvements and inclusion of new
products by not adjusting for quality improvements and new products, GDP understates true
economic growth. For instance, although computers today are less expensive and more powerful than
computers from the past, GDP treats them as the
same products by only accounting for the monetary
value. The introduction of new products is also difcult to measure accurately and is not reected in

CHAPTER 3. GROSS DOMESTIC PRODUCT

GDP despite the fact that it may increase the standard of living. For example, even the richest person in 1900 could not purchase standard products,
such as antibiotics and cell phones, that an average
consumer can buy today, since such modern conveniences did not exist then.
What is being producedGDP counts work that
produces no net change or that results from repairing harm. For example, rebuilding after a natural disaster or war may produce a considerable
amount of economic activity and thus boost GDP.
The economic value of health care is another classic
exampleit may raise GDP if many people are sick
and they are receiving expensive treatment, but it is
not a desirable situation. Alternative economic estimates, such as the standard of living or discretionary
income per capita try to measure the human utility
of economic activity. See uneconomic growth.
Sustainability of growth GDP is a measurement
of economic historic activity and is not necessarily
a projection. A country may achieve a temporarily
high GDP from use of natural resources or by misallocating investment.
Nominal GDP does not measure variations in purchasing power or costs of living by area, so when
the GDP gure is deated over time, GDP growth
can vary greatly depending on the basket of goods
used and the relative proportions used to deate the
GDP gure.
Cross-border comparisons of GDP can be inaccurate as they do not take into account local dierences in the quality of goods, even when adjusted for
purchasing power parity. This type of adjustment to
an exchange rate is controversial because of the difculties of nding comparable baskets of goods to
compare purchasing power across countries. For instance, people in country A may consume the same
number of locally produced apples as in country B,
but apples in country A are of a more tasty variety. This dierence in material well being will not
show up in GDP statistics. This is especially true for
goods that are not traded globally, such as houses.

3.9 Limitations and criticisms

Simon Kuznets, the economist who developed the rst
comprehensive set of measures of national income, stated
in his rst report to the US Congress in 1934, in a
section titled Uses and Abuses of National Income
Measurements":[4]
The valuable capacity of the human mind
to simplify a complex situation in a compact
characterization becomes dangerous when not

3.10. LISTS OF COUNTRIES BY THEIR GDP

controlled in terms of denitely stated criteria.
With quantitative measurements especially, the
deniteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of
national income are subject to this type of illusion and resulting abuse, especially since they
deal with matters that are the center of conict
of opposing social groups where the eectiveness of an argument is often contingent upon
oversimplication. [...]
All these qualications upon estimates of
national income as an index of productivity are
just as important when income measurements
are interpreted from the point of view of economic welfare. But in the latter case additional
diculties will be suggested to anyone who
wants to penetrate below the surface of total
gures and market values. Economic welfare
cannot be adequately measured unless the personal distribution of income is known. And no
income measurement undertakes to estimate
the reverse side of income, that is, the intensity and unpleasantness of eort going into the
earning of income. The welfare of a nation can,
therefore, scarcely be inferred from a measurement of national income as dened above.
In 1962, Kuznets stated:[28]

39
picted by real GDP, grew by a particular percentage? All we can say is that this percentage
has nothing to do with real economic growth
and that it most likely mirrors the pace of monetary pumping. We can thus conclude that the
GDP framework is an empty abstraction devoid of any link to the real world.
The UKs Natural Capital Committee highlighted the
shortcomings of GDP in its advice to the UK Government in 2013, pointing out that GDP focusses on ows,
not stocks. As a result an economy can run down its assets
yet, at the same time, record high levels of GDP growth,
until a point is reached where the depleted assets act as a
check on future growth. They then went on to say that
it is apparent that the recorded GDP growth rate overstates the sustainable growth rate. Broader measures of
wellbeing and wealth are needed for this and there is a
danger that short-term decisions based solely on what is
currently measured by national accounts may prove to be
costly in the long-term.
Many environmentalists argue that GDP is a poor measure of social progress because it does not take into account harm to the environment.[30][31]
In 1989 Herman Daly and John B. Cobb developed the
Index of Sustainable Economic Welfare (ISEW), which
they proposed as a more valid measure of socio-economic
progress, by taking into account various other factors such
as consumption of non-renewable resources and degradation of the environment.

Distinctions must be kept in mind between

quantity and quality of growth, between costs
and returns, and between the short and long
run. Goals for more growth should specify
more growth of what and for what.

India and China have the largest population in the world

and hence has the greatest potential in productivity due
to the fact that the value of a product is measured as the
value of service that can be obtained by the holder in exchange for that product. ( Units per man hour)

Austrian School economist Frank Shostak has argued that

GDP is an empty abstraction devoid of any link to the real
world, and, therefore, has little or no value in economic
analysis. Says Shostak:[29]

3.10 Lists of countries by their

GDP

The GDP framework cannot tell us

whether nal goods and services that were
produced during a particular period of time
are a reection of real wealth expansion,
or a reection of capital consumption. For
instance, if a government embarks on the
building of a pyramid, which adds absolutely
nothing to the well-being of individuals, the
GDP framework will regard this as economic
growth. In reality, however, the building of
the pyramid will divert real funding from
wealth-generating activities, thereby stiing
the production of wealth.
So what are we to make out of the periodical pronouncements that the economy, as de-

Lists of countries by GDP

List of countries by GDP (nominal), (per capita)
List of continents by GDP (nominal)
List of countries by GDP (PPP), (per capita), (per
hour)
List of countries by GDP (real) growth rate, (per
capita)
List of countries by GDP sector composition
List of countries by future GDP estimates (PPP),
(per capita), (nominal)

40

3.11 List of other approaches to the

measurement of (economic)
progress
Human development index (HDI) up until 2009
report HDI used GDP as a part of its calculation and
then factors in indicators of life expectancy and education levels. In 2010 the GDP component has been
replaced with GNI.
Genuine progress indicator (GPI) or Index of Sustainable Economic Welfare (ISEW) The GPI and
the ISEW attempt to address many of the above criticisms by taking the same raw information supplied
for GDP and then adjust for income distribution,
add for the value of household and volunteer work,
and subtract for crime and pollution.
European Quality of Life Survey The survey, rst
published in 2005, assessed quality of life across
European countries through a series of questions
on overall subjective life satisfaction, satisfaction
with dierent aspects of life, and sets of questions
used to calculate decits of time, loving, being and
having.[32]
Gross national happiness The Centre for
Bhutanese Studies in Bhutan is working on a
complex set of subjective and objective indicators
to measure 'national happiness in various domains
(living standards, health, education, eco-system diversity and resilience, cultural vitality and diversity,
time use and balance, good governance, community
vitality and psychological well-being). This set of
indicators would be used to assess progress towards
gross national happiness, which they have already
identied as being the nations priority, above GDP.
Happy Planet Index The happy planet index (HPI)
is an index of human well-being and environmental
impact, introduced by the New Economics Foundation (NEF) in 2006. It measures the environmental
eciency with which human well-being is achieved
within a given country or group. Human well-being
is dened in terms of subjective life satisfaction and
life expectancy while environmental impact is dened by the Ecological Footprint.
OECD Better Life Index - The better lives compendium of indicators produced in 2011 reects
some 10 years by the organisation to develop a wider
of set of indicators more closely attuned to the measurement of wellbeing or welfare outcomes. There
is felt to be considerable convergence (in 2011) in
high income countries about the kinds of dimensions
that should be included in such multi-dimensional
approaches to welfare measurement - see for instance the capabilities measurement research project
capabilities approach.

CHAPTER 3. GROSS DOMESTIC PRODUCT

Composite Wealth Indicators Namely yearly material wealth (an amended version of GNI to include depletion of natural resources and the costs
of pollution), biological wealth (measured through
life expectancy) and thus expected material wealth
(or physical wealth), a linear combination of biological and yearly material wealth (the amount of material wealth expected to be produced by an individual
during his/her lifetime).[33]

Future Orientation Index - Tobias Preis et al. used

Google Trends data to demonstrate that Internet
users from countries with a higher per capita gross
domestic product (GDP) are more likely to search
for information about the future than information
about the past. The ndings, published in the journal Scientic Reports, suggest there may be a link
between online behaviour and real-world economic
indicators.[34][35][36] The authors of the study examined Google search queries made by Internet users
in 45 dierent countries in 2010 and calculated the
ratio of the volume of searches for the coming year
('2011') to the volume of searches for the previous
year ('2009'), which they call the 'future orientation index'.[37] They compared the future orientation index to the per capita GDP of each country
and found a strong tendency for countries in which
Google users enquire more about the future to exhibit a higher GDP. The results hint that there may
potentially be a relationship between the economic
success of a country and the information-seeking behaviour of its citizens online.

World Governance Index - Basing their work on the

United Nations Millennium Declaration, which was
the subject of unprecedented U.N. consensus among
the heads of state and government who adopted it
in 2000, a team of researchers of the Forum for
a new World Governance (FnWG) focused its research on the ve main concepts dening the application framework of world governance and constituting key goals to be reached by 2015: Peace
and Security; Democracy and Rule of Law; Human
Rights and Participation; Sustainable Development
and Human Development

Social Progress Index - measures the extent to which

countries provide for the social and environmental
needs of their citizens. Fifty-two indicators in the
areas of basic human needs, foundations of wellbeing, and opportunity show the relative performance
of nations. The index uses outcome measures when
there is sucient data available or the closest possible proxies.

3.13. NOTES AND REFERENCES

41

3.12 See also

[13] Australian National Accounts: Concepts, Sources and

Methods, 2000, sections 3.5 and 4.15.

3.13 Notes and references

[14] This and the following statement on entitlement to compensation are from Australian National Accounts: Concepts, Sources and Methods, 2000, section 4.6.

[1] GDP (Ocial Exchange Rate)". CIA World Factbook.

Retrieved June 2, 2012.
[2] OECD. Retrieved 14 August 2014.
[3] Dawson, Graham (2006). Economics and Economic
Chenge.
FT / Prentice Hall.
p.
205.
ISBN
9780273693512.
[4] Congress commissioned Kuznets to create a system that
would measure the nations productivity in order to better
understand how to tackle the Great Depression.Simon
Kuznets, 1934. National Income, 19291932. 73rd US
Congress, 2d session, Senate document no. 124, page 5-7
Simon Kuznets, 1934. National Income, 19291932.
73rd US Congress, 2d session, Senate document no.
124, page 5-7 Simon Kuznets, 1934. National Income,
19291932. 73rd US Congress, 2d session, Senate
document no. 124, page 5-7. https://fraser.stlouisfed.
org/scribd/?title_id=971&filepath=/docs/publications/
natincome_1934/19340104_nationalinc.pdf
[5] Dickinson, Elizabeth. GDP: a brief history. ForeignPolicy.com. Retrieved 25 April 2012.
[6] Coyle, Diane (2014). GDP: A Brief but Aectionate
History. Princeton University Press. p. 6. ISBN
9780691156798.
[7] World Bank, Statistical Manual >> National Accounts >>
GDPnal output, retrieved October 2009.
Users guide: Background information on GDP and GDP
deator. HM Treasury.
Measuring the Economy: A Primer on GDP and the National Income and Product Accounts (PDF). Bureau of
Economic Analysis.
[8] Based on the IMF gures. If no number was available for
a country from IMF, CIA gures were used.
[9] United States Bureau of Economic Analysis, A guide to
the National Income and Product Accounts of the United
States PDF, page 5; retrieved November 2009. Another
term, business current transfer payments, may be added.
Also, the document indicates that the capital consumption adjustment (CCAdj) and the inventory valuation adjustment (IVA) are applied to the proprietors income and
corporate prots terms; and CCAdj is applied to rental
income.
[10] Thayer Watkins, San Jos State University Department of
Economics, Gross Domestic Product from the Transactions Table for an Economy, commentary to rst table,
" Transactions Table for an Economy. (Page retrieved
November 2009.)
[11] Concepts and Methods of the United States National Income and Product Accounts, chap. 2.
[12] BEA, Concepts and Methods of the United States National
Income and Product Accounts, p 12.

[15] Concepts and Methods of the United States National Income and Product Accounts, page 2-2.
[16] Concepts and Methods of the United States National Income and Product Accounts, page 2-2.
[17] Australian National Accounts: Concepts, Sources and
Methods, 2000, section 4.4.
[18] Concepts and Methods of the United States National Income and Product Accounts, page 2-2; and Australian National Accounts: Concepts, Sources and Methods, 2000,
section 4.4.
[19] Concepts and Methods of the United States National Income and Product Accounts, page 2-4.
[20] Concepts and Methods of the United States National Income and Product Accounts, page 2-5.
[21] Lequiller, Franois; Derek Blades (2006). Understanding
National Accounts. OECD. p. 18. ISBN 978-92-6402566-0. To convert GDP into GNI, it is necessary to
add the income received by resident units from abroad and
deduct the income created by production in the country
but transferred to units residing abroad.
[22] United States, Bureau of Economic Analysis, Glossary,
GDP. Retrieved November 2009.
[23] U.S. Department of Commerce. Bureau of Economic
Analysis. Bea.gov. 2009-10-21. Retrieved 2010-07-31.
[24] National Accounts. Central Bureau of Statistics. Retrieved 2011-06-29.
[25] HM Treasury, Background information on GDP and GDP
deator
Some of the complications involved in comparing national
accounts from dierent years are explained in this World
Bank document.
[26] |
http://helgilibrary.com/indicators/index/
gdp-per-capita-current-usd GDP Per Capita (Current USD) | 2014-02-10
[27] Eric Zencey-G.D.P. R.I.P..
2009. Retrieved 2011-01-31.

Nytimes.com.

August

[28] Simon Kuznets. How To Judge Quality. The New Republic, October 20, 1962
[29] Frank Shostak. What is up with the GDP?".
[30] The Virtues of Ignoring GDP http://www.thebrokeronline.
eu/Articles/The-virtues-of-ignoring-GDP
[31] The Rise and Fall of G.D.P. http://www.nytimes.com/
2010/05/16/magazine/16GDP-t.html?pagewanted=all
[32] First European Quality of Life Survey.

42

CHAPTER 3. GROSS DOMESTIC PRODUCT

[33] See Emanuele Felice, Neither dashboard nor 'mashup'

indices: an empirical wealth approach as a pathway to
a comprehensive measure of development, http://www.
h-economica.uab.es/wps/2012_01.pdf
[34] Tobias Preis, Helen Susannah Moat, H. Eugene Stanley and Steven R. Bishop (2012). Quantifying the
Advantage of Looking Forward. Scientic Reports 2:
350. doi:10.1038/srep00350. PMC 3320057. PMID
22482034.
[35] Paul Marks (April 5, 2012). Online searches for future
linked to economic success. New Scientist. Retrieved
April 9, 2012.
[36] Casey Johnston (April 6, 2012). Google Trends reveals
clues about the mentality of richer nations. Ars Technica.
Retrieved April 9, 2012.
[37] Tobias Preis (2012-05-24). Supplementary Information:
The Future Orientation Index is available for download.
Retrieved 2012-05-24.

3.15.2 Data
Bureau of Economic Analysis:
States GDP data

Ocial United

Historicalstatistics.org: Links to historical statistics

on GDP for dierent countries and regions, maintained by the Department of Economic History at
Stockholm University.
Quandl - GDP by county - downloadable in CSV,
Excel, JSON or XML
Historical US GDP (yearly data), 1790present,
maintained by Samuel H. Williamson and Lawrence
H. Ocer, both professors of economics at the
University of Illinois at Chicago.
Historical US GDP (quarterly data), 1947present
OECD Statistics
Google public data: GDP and Personal Income of
the U.S. (annual): Nominal Gross Domestic Product

3.14 Further reading

Coyle, Diane (2014). GDP: A Brief but Aectionate
History. Princeton, NJ: Princeton University Press.
ISBN 978-0-691-15679-8.

The Maddison Project of the Groningen Growth and

Development Centre at the University of Groningen, the Netherlands. This project continues and
extends the work of Angus Maddison in collating
all the available, credible data estimating GDP for
dierent countries around the world. This includes
data for some countries for over 2,000 years back to
1 CE and for essentially all countries since 1950.

Australian Bureau for Statistics, Australian National

Accounts: Concepts, Sources and Methods, 2000.
Retrieved November 2009. In depth explanations
of how GDP and other national accounts items are
3.15.3
determined.
United States Department of Commerce, Bureau of
Economic Analysis, Concepts and Methods of the
United States National Income and Product Accounts
PDF. Retrieved November 2009. In depth explanations of how GDP and other national accounts items
are determined.

Articles and books

Gross Domestic Product: An Economys All,

International Monetary Fund.
Stiglitz JE, Sen A, Fitoussi J-P. Mismeasuring our
Lives: Why GDP Doesn't Add Up, New Press, New
York, 2010
Whats wrong with the GDP?

3.15 External links

Limitations of GDP Statistics by Robert Schenk.

3.15.1

Whether output and CPI ination are mismeasured,

by Nouriel Roubini and David Backus, in Lectures
in Macroeconomics

Global

World GDP Chart (since 1960)

Australian Bureau of Statistics Manual on GDP
measurement

Rodney Edvinsson, Growth, Accumulation, Crisis:

With New Macroeconomic Data for Sweden 1800
2000 PDF

World Development Indicators (WDI)

Cliord Cobb, Ted Halstead and Jonathan Rowe.

If the GDP is up, why is America down?" The
Atlantic Monthly, vol. 276, no. 4, October 1995,
pages 5978

UN Statistical Databases

Jerorn C.J.M. van den Bergh, "Abolishing GDP"

GDP-indexed bonds

3.15. EXTERNAL LINKS

GDP and GNI in OECD Observer No246-247, Dec
2004-Jan 2005
Progress, what progress? in OECD Observer No272
March 2009

43

Chapter 4

BSE SENSEX
The S&P BSE SENSEX (S&P Bombay Stock Exchange
Sensitive Index), also-called the BSE 30 or simply the
SENSEX, is a free-oat market-weighted stock market
index of 30 well-established and nancially sound companies listed on Bombay Stock Exchange. The 30 component companies which are some of the largest and
most actively traded stocks, are representative of various
industrial sectors of the Indian economy. Published since
1 January 1986, the S&P BSE SENSEX is regarded as
the pulse of the domestic stock markets in India. The
base value of the S&P BSE SENSEX is taken as 100 on
1 April 1979, and its base year as 197879. On 25 July
2001 BSE launched DOLLEX-30, a dollar-linked version of S&P BSE SENSEX. As of 21 April 2011, the
market capitalisation of S&P BSE SENSEX was about
29733 billion (US$467 billion) (47.68% of market capitalisation of BSE), while its free-oat market capitalisation was 15690 billion (US$246 billion). During 200812, Sensex 30 Index share of BSE market capitalisation
fell from 49% to 25%[1] due to the rise of sectoral indices
like BSE PSU, Bankex, BSE-Teck, etc.

rate of return on the S&P BSE SENSEX works out to be

18.6% per annum, which translates to roughly 19% per
annum.

4.3 Milestones

Graph of S&P BSE SENSEX monthly data

Here is a timeline on the rise of the SENSEX through Indian

stock market history
1000, 25 July 1990 On 25 July 1990, the SENSEX touched the four-digit gure for the rst time
and closed at 1,001 in the wake of a good monsoon
and excellent corporate results.

4.1 Components
Template:BSE SConstituents

4.2 Calculation
The BSE has some reviews and modies its composition
to be sure it reects current market conditions. The index
is calculated based on a free oat capitalisation method, a
variation of the market capitalisation method. Instead of
using a companys outstanding shares it uses its oat, or
shares that are readily available for trading. As per free
oat capitalisation methodology, the level of index at any
point of time reects the free oat market value of 30
component stocks relative to a base period. The market
capitalisation of a company is determined by multiplying
the price of its stock by the number of shares issued by
of corporate actions, replacement of scrips, The index has
increased by over ten times from June 1990 to the present.
Using information from April 1979 onwards, the long-run
44

2000, 15 January 1992 On 15 January 1992,

the SENSEX crossed the 2,000 mark and closed
at 2,020 followed by the liberal economic policy
initiatives undertaken by the then nance minister
and Former Prime Minister of India Dr Manmohan
Singh.
3000, 29 February 1992 On 29 February 1992,
the SENSEX surged past the 3,000 mark in the wake
of the market-friendly Budget announced by Manmohan Singh.
4000, 30 March 1992 On 30 March 1992, the
SENSEX crossed the 4,000 mark and closed at
4,091 on the expectations of a liberal export-import
policy. It was then that the Harshad Mehta scam hit
the markets and SENSEX witnessed unabated selling.

4.3. MILESTONES
5000, 11 October 1999 On 11 October 1999, the
SENSEX crossed the 5,000 mark, as the Bharatiya
Janata Party-led coalition won the majority in the
13th Lok Sabha election.[2]
6000, 11 February 2000 On 11 February 2000,
the information technology boom helped the SENSEX to cross the 6,000 mark and hit an all-time high
of 6,006 points. This record would stand for nearly
four years, until 2 January 2004, when the SENSEX
closed at 6,026.59 points.[3]
7000, 21 June 2005 On 20 June 2005, the news
of the settlement between the Ambani brothers
boosted investor sentiments and the scrips of RIL,
Reliance Energy, Reliance Capital and IPCL made
huge gains. This helped the SENSEX crossed 7,000
points for the rst time.
8000, 8 September 2005 On 8 September 2005,
the Bombay Stock Exchanges benchmark 30-share
index the SENSEX crossed the 8,000 level following brisk buying by foreign and domestic funds
in early trading.
9000, 9 December 2005 The SENSEX on 28
November 2005 crossed 9,000 and touched a peak
of 9,000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic buying
spree by foreign institutional investors and well supported by local operators as well as retail investors.
However, it was on 9 December 2005 that the SENSEX rst closed at over 9,000 points.[4]
10,000, 7 February 2006 The SENSEX on 6
February 2006 touched 10,003 points during midsession. The SENSEX nally closed above the
10,000 mark on 7 February 2006.
11,000, 27 March 2006 The SENSEX on 21
March 2006 crossed 11,000 and touched a peak
of 11,001 points during mid-session at the Bombay
Stock Exchange for the rst time. However, it was
on 27 March 2006 that the SENSEX rst closed at
over 11,000 points.
12,000, 20 April 2006 The SENSEX on 20 April
2006 crossed 12,000 and touched a peak of 12,004
points during mid-session at the Bombay Stock Exchange for the rst time.
13,000, 30 October 2006 The SENSEX on 30
October 2006 crossed 13,000 for the rst time. It
touched a peak of 13,039.36, before nally closing
at 13,024.26 points.
14,000, 5 December 2006 The SENSEX on 5 December 2006 crossed the 14,000 mark for the rst
time.

45
15,000, 6 July 2007 The SENSEX on 6 July 2007
crossed the 15,000 mark for the rst time.
16,000, 19 September 2007 The SENSEX on 19
September 2007 crossed the 16,000 mark for the
rst time.
17,000, 26 September 2007 The SENSEX on 26
September 2007 crossed the 17,000 mark for the
rst time.
18,000, 9 October 2007 The SENSEX on 9 October 2007 crossed the 18,000 mark for the rst time.
19,000, 15 October 2007 The SENSEX on 15
October 2007 crossed the 19,000 mark for the rst
time.
20,000, 11 December 2007 The SENSEX on
29 October 2007 crossed the 20,000 mark for the
rst time during intra-day trading, but closed at
19,977.67 points. However, it was on 11 December
2007 that it nally closed at a gure above 20,000
points on the back of aggressive buying by funds.[2]
21,000, 5 November 2010 The SENSEX on 8
January 2008 crossed the 21,000 mark for the rst
time, reaching an intra-day peak of 21,078 points,
before closing at 20,873.[5] However, it was not until 5 November 2010 that the SENSEX closed at
21,004.96, for its rst close above 21,000 points.[6]
This record would stand for nearly three years, until 30 October 2013, when the SENSEX closed at
21,033.97 points.[7]
19 February 2013 SENSEX becomes S&P SENSEX as BSE ties up with Standard and Poors to use
the S&P brand for Sensex and other indices.[8]
13 March 2014 - The SENSEX closes higher than
the Hang Seng Index, to become the major Asian
stock market index with the highest value, for the
rst time ever.
22,000, 24 March 2014 The SENSEX on 10
March 2014 crossed the 22,000 mark for the rst
time during intra-day trading. However, it was on
24 March 2014 that the index nally closed above
the milestone[9] at 22,095.30.[10]
23,000, 9 May 2014 - The SENSEX crossed record
23,000 level for the rst time, but close just short
of the milestone level, on 9 May 2014. The index
would close well above the 23,000 mark during the
following session.

46

CHAPTER 4. BSE SENSEX

12 May 2014 - The SENSEX closed at its record all

time high of 23,551,a rise of 2.42%(+556.77 points)
intraday due to continued fund inows on hopes of
a stable government.[11]
24,000, 13 May 2014 - The SENSEX crossed
record 24,000 level for the rst time, on 13 May
2014 and reached its peak of 24,067.11 due to sustained capital inows by foreign funds at the domestic bourses and widespread buying by retail investors after exit polls showing the BJP-led NDA
forming the government lifted the key indices to
new highs.However it closed at a little low at 23,905
points[12]
25,000, 16 May 2014 - The SENSEX crossed
record 25,000 level for the rst time, on 16 May
2014 and reached its peak of 25,364.71 due to winning of the BJP led NDA government by a staggering record marginal dierence of all times. However, it closed well below the 25,000 mark. Still,
the index closed at its all time high of 24,121.74,
for its rst close above 24,000 points.[13] The SENSEX closed at 25,019.51, for its rst close above the
25,000 milestone on 5 June 2014[14]

Finance Minister of India, P. Chidambaram, made an unscheduled press statement when trading was suspended to
assure investors that nothing was wrong with the fundamentals of the economy, and advised retail investors to
stay invested. When trading resumed after the reassurances of the Reserve Bank of India and the Securities and
Exchange Board of India (SEBI), the SENSEX managed
to move up 700 points, but still nished the session 457
points in the red.[19]
The SENSEX eventually recovered from the volatility,
and on 16 October 2006, the SENSEX closed at an
all-time high of 12,928.18 with an intra-day high of
12,953.76. This was a result of increased condence in
the economy and reports that Indias manufacturing sector grew by 11.1% in August 2006.
13,000, 30 October 2006 The SENSEX on 30
October 2006 crossed 13,000 mark for the rst
time, touching a peak of 13,039.36, before closing at 13,024.26 points. It took 135 days to reach
13,000 from 12,000, and 124 days to reach 13,000
from 12,500.
14,000, 5 December 2006 The SENSEX on 5 December 2006 crossed 14,000 mark for the rst time,
after opening the day with a peak of 14,028 at 9.58
am(IST).

26,000, 7 July 2014- The SENSEX crossed record

26,000 level for the rst time on 7 July 2014
and reached its peak of 26,123.55, before closing
slightly lower at 26,100.08, in anticipation of strong 4.4.2
reformatory budget by the new government.[15]
27,000, 2 September 2014 - The SENSEX closed
at 27,019.39, for its rst close above the 27,000
level, on 2 September 2014.[16] This is the sixth
1000-point milestone the index has crossed in 2014,
tying a record set in 2007.
28,000, 5 November 2014 - The SENSEX crossed
28,000 mark, on 5 November 2014.[17] One week
later, on 12 November 2014, the index would close
above the milestone for the rst time.[18] This is the
seventh 1000-point milestone the index has crossed
in 2014, breaking the six 1000-point record set in
2007.

4.4 The SENSEX since 2006

4.4.1

MayDecember 2006

On 22 May 2006, the SENSEX plunged by 1,100 points

during intra-day trading, leading to the suspension of
trading for the rst time since 17 May 2004. The volatility of the SENSEX had caused investors to lose Rs 6 trillion (US$131 billion) within seven trading sessions. The

JulySeptember 2007: Eects of the

subprime crisis in the U.S.

15,000, 6 July 2007- The SENSEX on 6 July 2007

crossed another milestone and reached a magic gure of 15,000. It took 7 months and one day after
rst reaching the 14,000 milestone to touch this historic milestone.
On 23 July 2007, the SENSEX touched a new high of
15,733 points. On 27 July 2007 the SENSEX witnessed
a huge decline because of selling by Foreign Institutional
Investors and global cues to come back to 15,160 points
by noon. Following global cues and heavy selling in
the international markets, the BSE SENSEX fell by 615
points in a single day on 1 August 2007.[20]
16,000, 19 September 2007- The SENSEX on 19
September 2007 crossed the 16,000 mark, closing
at a historic peak of 16,322. The bull hits because
of the rate cut of 50 bit/s in the discount rate by the
Fed chief Ben Bernanke.
17,000, 26 September 2007- On 26 September
2007, the SENSEX crossed the 17,000 mark for the
rst time, creating a record for the second fastest
1000 point gain in just 5 trading sessions. It failed
however to sustain the momentum and closed below

4.4. THE SENSEX SINCE 2006

17,000. The SENSEX closed above 17,000 for the
rst time on the following day. Reliance group has
been the main contributor in this bull run, contributing 256 points. This also helped Mukesh Ambanis
net worth to grow to over $50 billion or Rs. 2 trillion.
It was also during this record bull run that the SENSEX for the rst time zoomed ahead of the Nikkei
of Japan.

4.4.3

OctoberDecember 2007: Participatory notes issue

18,000, 9 October 2007- The SENSEX crossed the

18,000 mark for the rst time on 9 October 2007,
gaining 788 points, to close at 18,280. The journey
from 17,000 to 18,000 took just 8 trading sessions,
which is the third fastest 1000-point rise in the history of the SENSEX.
19,000, 15 October 2007- The SENSEX crossed
the 19,000 mark for the rst time on 15 October
2007, gaining 640 points, to close at 19,059. It took
just 4 trading sessions for the SENSEX to move
from 18,000 to 19,000. This is the fastest 1000point rise ever for the index. In addition, the rise
from 16,000 to 19,000 in 17 trading sessions sets a
record for the fastest 3,000-point rally in the history
of the SENSEX.

47
After detailed clarications from the SEBI chief M.
Damodaran regarding the new rules, the market made an
879-point gain on 23 October, thus signalling the end of
the PN crisis.
20,000, 11 December 2007- On 29 October 2007,
the SENSEX crossed the 20,000 mark for the rst
time with a massive 734.5-point gain, but closed below the 20,000 mark. The SENSEX would close
above the 20,000 mark for the rst time on 11 December 2007. It took 42 days after reaching the
19,000 milestone to close above 20,000 points for
the rst time. The journey of the last 10,000 points
was covered in just 483[21] sessions, compared to
7,297 sessions taken to touch the 10,000 mark from
its base value of 100 points. In the second half of
2007 alone, the SENSEX reached six 1,000-point
milestones.

4.4.4 May 2009-present

On 18 May 2009, the SENSEX surged up 2,110.79
points to close at 14,285.21, from its previous closing
of 12,174.42, for its largest single day rally. Less than
a month later, on 4 June 2009, the SENSEX would cross
the 15,000 mark.

However, the SENSEX remained volatile during the summer of 2009. The SENSEX plunged by 869.65 points on
6 July 2009, the day of Union Budget presentation in ParThis was the
On 16 October 2007, SEBI (Securities & Exchange liament on concerns over high scal decit.
[2]
biggest
Budget-day
loss
for
the
index.
On
17 August
Board of India) proposed curbs on participatory notes
2009,
the
SENSEX
lost
626.71
points.
which accounted for roughly 50% of FII investment in
2007. SEBI was not happy with P-notes because it was Once again, the SENSEX would recover from the volatilnot possible to know who owned the underlying securi- ity. On 7 September 2009, the SENSEX crossed the
ties, and hedge funds acting through P-notes might there- 16,000 mark, closing at 16,016.32 points. The index
fore cause volatility in the Indian markets.
would gain 3,000 points over the next 12 months, as
However the proposals of SEBI were not clear and this the SENSEX crossed the 19,000 mark on 13 September
led to a knee-jerk crash when the markets opened on the 2010, closing at 19,208.33 points.
following day (17 October 2007). Within a minute of
opening trade, the SENSEX crashed by 1,744 points or
about 9% of its value the biggest intra-day fall in Indian stock markets in absolute terms till then. This led
to the automatic suspension of trade for one hour. Finance Minister P. Chidambaram issued clarications, in
the meantime, that the government was not against FIIs
and was not immediately banning PNs. After the market
opened at 10:55 am, the index staged a comeback and
ended the day at 18715.82, down 336.04 from the last
days close.
However, this would not be the end of the volatility. The
next day (18 October 2007), the SENSEX tumbled by
717.43 points 3.83 per cent to close at 17,998.39
points. The slide continued the next day (19 October
2007), when the SENSEX fell 438.41 points to settle at
17,559.98 to the end of the week, after touching the lowest level of that week at 17,226.18 during the day.

21,000, 5 November 2010 - The SENSEX closed at

21,004.96, for its rst close above the 21,000 mark.
It would take nearly three years for the index to make
its next close above this level.
22,000, 24 March 2014 - The SENSEX closed at
22,055.48, for its rst close above the 22,000 mark.
For the rst time, the SENSEX zoomed ahead of the
Hang Seng Index.
23,000, 12 May 2014 - The SENSEX closed at
23,551.00, for its rst close above the 23,000 mark,
24,000, 16 May 2014 - The SENSEX closed at
24,121.74, for its rst close above the 24,000 mark,
Breaking all previous records and above all other indexes in the world.

48

CHAPTER 4. BSE SENSEX

25,000, 5 June 2014 - The SENSEX closed at

25,019.51, for its rst close above the 25,000 mark,

14,810, 17 March 2008 - The SENSEX dropped by

951.03 points on the global credit crisis and distress,
to fall below the 15,000 mark, closing at 14,810.[2]

26,000, 7 July 2014 - The SENSEX closed at

26,123.55, for its rst close above the 26,000 mark, The month ended with the SENSEX shedding 726.85
points on 31 March 2008, after heavy selling in blue-chip
27,000, 2 September 2014 - The SENSEX closed stocks on global economic fears.
at 27019.39, for its rst close above the 27,000
13,802, 27 June 2008 - The SENSEX dropped by
mark,
600 points, to fall below the 14,000 mark, closing at
28,000, 5 November 2014 - The SENSEX crossed
13,802.
28,000 mark, on 5 November 2014.[22] This is the
seventh 1000-point milestone the index has crossed
12,962, 1 July 2008 - The SENSEX falls below the
in 2014, breaking the six 1000-point record set in
13,000 mark, closing at 12,962.[2]
2007.
11,802, 6 October 2008 - The SENSEX dropped
by 724.62 points amid fears of the US recession and
attempts by governments across the world to save
4.5 Major SENSEX stock market
their failing banks, to fall below the 12,000 mark,
plunges
closing at 11,802.[2]

4.5.1

January 2008

In the third week of January 2008, the SENSEX experienced huge falls along with other markets around the
world. On 21 January 2008, the SENSEX saw its highest
ever loss of 1,408 points at the end of the session. The
SENSEX recovered to close at 17,605.40 after it tumbled to the days low of 16,963.96, on high volatility as
investors panicked following weak global cues amid fears
of a recession in the US.
The next day, the BSE SENSEX index went into a free
fall. The index hit the lower circuit breaker in barely
a minute after the markets opened at 10 am. Trading
was suspended for an hour. On reopening at 10.55 am
IST, the market saw its biggest intra-day fall when it hit
a low of 15,332, down 2,273 points. However, after reassurance from the Finance Minister of India, the market bounced back to close at 16,730 with a loss of 875
points.[23]
Over the course of two days, the BSE SENSEX in India
dropped from 19,013 on Monday morning to 16,730 by
Tuesday evening or a two-day fall of 13.9%.[23] Less than
a month later, on 11 February 2008, the SENSEX lost
833.98 points, when Reliance Power fell below its IPO
price in its debut trade after a high-prole public oer.[2]

4.5.2

March 2008

10,527, 10 October 2008 - The SENSEX dropped

by 800.51 points amid weak industrial production
data and concerns over impact of global economic
crisis on IT and banking rms in India,[2] to fall below the 11,000 mark, closing at 10,527.
9,975, 17 October 2008 The SENSEX crashes
below the psychological 5-gure mark of 10,000
points, closing at 9,975.35, following extremely negative global nancial indications in US and other
countries. Just ten months earlier, in December
2007, SENSEX had closed above the 20,000 mark
for the rst time.
8,701.07, 24 October 2008 - The SENSEX lost
10.96% of its value (1070.63 points) on the intraday trade, closing at 8,701.07, for its rst close below the 9,000 mark since 14 June 2006, after RBI
lowered its GDP growth forecasts on global economic concerns.[2] The loss was the 2nd highest in
terms of total points, and the 3rd highest percentagewise, for a one day period in the indexs history.
8,509.56, 27 October 2008 - The SENSEX hit
an intra-day low of 7,697.39, before closing at
8,509.56,[2] for its lowest close since 14 November
2005.

4.5.3 Early 2009

The free fall of the SENSEX accelerated in March 2008.

The month started out with the Sensex losing 900.84 The SENSEX dropped by 749.05 points on 7 January
points on 3 March 2008, on concerns emanating from 2009, when the Satyam fraud came to light.[2]
growing credit losses in the US. This would be the rst
8,160.40, 9 March 2009 - The SENSEX closed
of four one-day falls of greater than 700 points during
at 8,160.40, for its lowest close since 2 November
the month. On 13 March 2008, the SENSEX plummeted
2005.
another 770.63 points on global economic jitters.[2]

4.7. REFERENCES

4.6 Major falls

On the following dates, the SENSEX index suered major single-day falls (of 430 or more points):[24]
1. 21 January 2008 --- 1,408.35 points
2. 24 October 2008 -- 1,070.63 points
3. 17 March 2008 --- 951.03 points
4. 3 March 2008 --- 900.84 points[2]
5. 22 January 2008 --- 875 points
6. 6 July 2009 --- 869.65 points
7. 06 january 2014 --- 855 points
8. 06 January 2015 --- 854.86 points
9. 11 February 2008 --- 833.98 points
10. 18 May 2006 --- 826 points
11. 10 October 2008 --- 800.51 points
12. 13 March 2008 --- 770.63 points
13. 17 December 2007 --- 769.48 points

49
33. 16 December 2014 --- 538.12 points[27]
34. 20 June 2013 --- 526.41 points[28]
35. 8 July 2014 --- 517.97 points[29]
36. 27 February 2012 --- 477.82 points
37. 15 May 2006 --- 463 points[19]
38. 22 May 2006 --- 457 points
39. 31 May 2013 --- 455.10 points
40. 18 Nov 2013 --- 451.32 points
41. 19 May 2006 --- 453 points[19]
42. 6 August 2013 --- 449.22 points[30]
43. 16 November 2010 --- 444.55 points
44. 4 February 2011 --- 441.92 points
45. 12 November 2010 --- 432 points
46. 13 May 2013 --- 430.65 points[31]

4.7 References

14. 16 August 2013 --- 769.41 points

[1] Sensex dominations nears end

15. 7 January 2009 --- 749.05 points

[2] Ups and Downs of Sensex. bemoneyaware.com. Retrieved 21 May 2013.

16. 31 March 2008[2] --- 726.85 points

17. 6 October 2008 --- 724.62 points
18. 17 October 2007 --- 717.43 points
19. 15 September 2008 --- 710.00 points
20. 22 September 2011 --- 704.00 points
21. 18 January 2008 --- 687.82 points
22. 21 November 2007 --- 678.18 points
23. 3 September 2013 --- 651.47 points[25]
24. 16 August 2007 --- 642.70 points
25. 17 August 2009 --- 626.71 points
26. 2 April 2007 --- 617 points[20]
27. 1 August 2007 --- 615 points
28. 27 June 2008 --- 600.00 points
29. 27 Aug 2013 --- 590.05 points[26]
30. 28 April 1992 --- 570 points[19]
31. 17 May 2004 --- 565 points[19]
32. 24 February 2011 --- 545.92 points

[3] Funds Hope to Ride on the Boom. ArabNews. Retrieved 14 June 2013.
[4] Sensex at 9k, bulls on Cloud 9 - Money - DNA. Dnaindia.com. Retrieved 14 June 2013.
[5] Sensex hits 21,000; ends up 61 points Redi.com Business. In.redi.com. 8 January 2008. Retrieved 19
September 2011.
[6] Sensex closes above 21,000 level in Diwali Muhurat trade
- Money - DNA. Dnaindia.com. Retrieved 14 June
2013.
[7] http://www.dnaindia.com/money/
market-report-sensex-trades-flat-during-pre-noon-trade-1911105
[8] Vyas Mohan (19 February 2013). Sensex to carry S&P
tag. Livemint. Retrieved 14 June 2013.
[9] http://www.thehindubusinessline.
com/markets/stock-markets/
sensex-rises-300-points-to-close-over-22000-level-for-first-time/
article5824888.ece
[10] http://www.business-standard.com/article/news-cm/
sensex-nifty-attain-record-closing-high-114032600805_
1.html
[11] http://www.thehindu.com/business/markets/
sensex-at-new-record-high-nifty-breaches-7000-mark/
article6001312.ece

50

[12] http://www.thehindu.com/business/markets/
sensex-hits-new-record-high-of-23922/article6003839.
ece?homepage=true

CHAPTER 4. BSE SENSEX

[31] Just 6 stocks caused half of Sensexs 430-point fall Money - DNA. Dnaindia.com. Retrieved 3 September
2013.

[13] http://indianexpress.com/article/business/market/
bse-sensex-soars-1000-pts-as-lok-sabha-election-results-pour-in/
[14] http://businesstoday.intoday.in/story/
bse-sensex-nse-nifty-tarding-on-june-5-2014/1/
206938.html
[15] http://www.thehindubusinessline.com/markets/
sensex-jumps-107-points-on-hopes-of-pragmatic-budget/
article6184757.ece

4.8 External links

Reuters page for .BSESN
DOLLEX-30
Bombay Stock Exchange
SENSEX Chart from 3 June 2008 to 3 August 2009:

[16] http://www.moneycontrol.com/news/local-markets/
sensex-ends-above-27000-heavyweights-lead-show-cements-up_Fourteen Months Below the 16,000 Level
1168737.html

SENSEX down marginally

[17] http://indianexpress.com/article/business/market/
bse-sensex-breaches-28000-mark-nifty-at-8363-65/

Bloomberg page for SENSEX:IND

[18] http://www.moneycontrol.com/news/local-markets/
sensex-ends-above-28000-for-1st-time-tata-steel-slips-2_
1226200.html
[19] The 10 Biggest Falls in Sensex History as of 2006. redi.com. Retrieved 21 May 2013.
[20] The 10 Biggest Falls in Sensex History as of October
2008. redi.com. Retrieved 21 May 2013.
[21] Article: MARKET WATCH: Sensex @ 10K: up in 483
days, down in 193. | AccessMyLibrary - Promoting library advocacy. AccessMyLibrary. Retrieved 14 June
2013.
[22] http://indianexpress.com/article/business/market/
bse-sensex-breaches-28000-mark-nifty-at-8363-65/
[23] redi Business Bureau (21 January 2008).
The
10 biggest falls in SENSEX history. MarketWatch.
Archived from the original on 27 January 2008. Retrieved
23 January 2008.
[24] The Hindu News Update Service. Chennai, India:
Hindu.com. 22 January 2008. Retrieved 19 September
2011.
[25] Sensex slumps 651 points on geopolitical worries.
Reuters. 3 September 2013.
[26] http://www.thehindubusinessline.com/markets/
sensex-crashes-590-points-on-heavy-fii-selling/
article5064005.ece
[27] http://www.livemint.com/Money/
DkEns2iQB2Nc658767s9HO/
Sensex-falls-240-points-as-economic-concerns-weigh-on-market.
html
[28] http://www.myiris.com/newsCentre/storyShow.php?
fileR=20130620155908043&dir=2013/06/20
[29] http://indianexpress.com/article/business/market/
bse-sensex-plummets-518-pts-marks-biggest-single-day-fall-in-over-10-months/
[30] Sensex plunges 450 points, Nifty slips way below 5,600.
The Times Of India. 6 August 2013.

Chapter 5

Consumer price index

CPI redirects here. For other uses, see CPI (disam- lected for a sample of goods and services from a sample
biguation).
of sales outlets in a sample of locations for a sample of
A consumer price index (CPI) measures changes in times. The weighting data are estimates of the shares of
the dierent types of expenditure in the total expenditure
covered by the index. These weights are usually based
upon expenditure data obtained from expenditure surveys
for a sample of households or upon estimates of the composition of consumption expenditure in the National Income and Product Accounts. Although some of the sampling of items for price collection is done using a sampling
frame and probabilistic sampling methods, many items
and outlets are chosen in a commonsense way (purposive
sampling) that does not permit estimation of condence
intervals. Therefore, the sampling variance cannot be calculated. In any case, a single estimate is required in most
of the purposes for which the index is used.
A graph of the US CPI from 1913 to 2013 (in blue), and its percentage annual change (in red)

the price level of a market basket of consumer goods and

services purchased by households.
The CPI is a statistical estimate constructed using the
prices of a sample of representative items whose prices
are collected periodically. Sub-indexes and sub-subindexes are computed for dierent categories and subcategories of goods and services, being combined to produce the overall index with weights reecting their shares
in the total of the consumer expenditures covered by the
index. It is one of several price indices calculated by
most national statistical agencies. The annual percentage change in a CPI is used as a measure of ination. A
CPI can be used to index (i.e., adjust for the eect of
ination) the real value of wages, salaries, pensions, for
regulating prices and for deating monetary magnitudes
to show changes in real values. In most countries, the
CPI is, along with the population census and the USA
National Income and Product Accounts, one of the most
closely watched national economic statistics.

5.1 Introduction

The index is usually computed monthly, or quarterly in

some countries, as a weighted average of sub-indices
for dierent components of consumer expenditure, such
as food, housing, clothing, each of which is in turn a
weighted average of sub-sub-indices. At the most detailed
level, the elementary aggregate level, (for example, mens
shirts sold in department stores in San Francisco), detailed weighting information is unavailable, so indices are
computed using an unweighted arithmetic or geometric
mean of the prices of the sampled product oers. (However, the growing use of scanner data is gradually making
weighting information available even at the most detailed
level.) These indices compare prices each month with
prices in the price-reference month. The weights used to
combine them into the higher-level aggregates, and then
into the overall index, relate to the estimated expenditures
during a preceding whole year of the consumers covered
by the index on the products within its scope in the area
covered. Thus the index is a xed-weight index, but rarely
a true Laspeyres index, since the weight-reference period
of a year and the price-reference period, usually a more
recent single month, do not coincide. It takes time to assemble and process the information used for weighting
which, in addition to household expenditure surveys, may
include trade and tax data.

Ideally, the weights would relate to the composition of

expenditure during the time between the price-reference
Two basic types of data are needed to construct the CPI:
month and the current month. There is a large technical
price data and weighting data. The price data are col51

52

CHAPTER 5. CONSUMER PRICE INDEX

economics literature on index formulae which would approximate this and which can be shown to approximate
what economic theorists call a true cost of living index.
Such an index would show how consumer expenditure
would have to move to compensate for price changes so
as to allow consumers to maintain a constant standard
of living. Approximations can only be computed retrospectively, whereas the index has to appear monthly and,
preferably, quite soon. Nevertheless, in some countries,
notably in the United States and Sweden, the philosophy
of the index is that it is inspired by and approximates
the notion of a true cost of living (constant utility) index,
whereas in most of Europe it is regarded more pragmatically.

Example: The prices of 85,000 items from 22,000 stores,

and 35,000 rental units are added together and averaged. They are weighted this way: Housing: 41.4%,
Food and Beverage: 17.4%, Transport: 17.0%, Medical Care: 6.9%, Other: 6.9%, Apparel: 6.0%, Entertainment: 4.4%. Taxes (43%) are not included in CPI
computation.[2]
n
CP I = i=1 CP Ii weighti

The coverage of the index may be limited. Consumers

expenditure abroad is usually excluded; visitors expenditure within the country may be excluded in principle
if not in practice; the rural population may or may not
be included; certain groups such as the very rich or the
very poor may be excluded. Saving and investment are
always excluded, though the prices paid for nancial services provided by nancial intermediaries may be included along with insurance.

5.2.1 Weights and sub-indices

The index reference period, usually called the base year,

often diers both from the weight-reference period and
the price reference period. This is just a matter of rescaling the whole time-series to make the value for the index
reference-period equal to 100. Annually revised weights
are a desirable but expensive feature of an index, for the
older the weights the greater is the divergence between
the current expenditure pattern and that of the weight
reference-period.

5.1.1

Calculating the CPI for a single item

Current item price ($) = (base year price) * (Current CPI)

/ (Base year CPI)
or
CP I2
CP I1

P rice2
P rice1

Where 1 is usually the comparison year and

CPI1 is usually an index of 100.

where the weighti s sum to 1 or 100.

5.2 Weighting

By convention weights are fractions or ratios summing to

one, as percentages summing to 100 or as per mille numbers summing to 1000.
On the European Unions Harmonised Index of Consumer Prices (HICP), for example, each country computes some 80 prescribed sub-indices, their weighted average constituting the national HICP. The weights for
these sub-indices will consist of the sum of the weights
of a number of component lower level indices. The classication is according to use, developed in a national accounting context. This is not necessarily the kind of classication that is most appropriate for a Consumer Price
Index. Grouping together of substitutes or of products
whose prices tend to move in parallel might be more suitable.
For some of these lower level indexes detailed reweighing
to make them be available, allowing computations where
the individual price observations can all be weighted.
This may be the case, for example, where all selling is in
the hands of a single national organisation which makes
its data available to the index compilers. For most lower
level indexes, however, the weight will consist of the sum
of the weights of a number of elementary aggregate indexes, each weight corresponding to its fraction of the
total annual expenditure covered by the index. An 'elementary aggregate' is a lowest-level component of expenditure, one which has a weight but within which, weights
of its sub-components are usually lacking. Thus, for example: Weighted averages of elementary aggregate indexes (e.g. for mens shirts, raincoats, womens dresses,
etc.) make up low level indexes (e.g. Outer garments).

Alternatively, the CPI can be performed as CP I =

cost updated
cost period base 100 . The updated cost (i.e. the price of
an item at a given year, e.g.: the price of bread in 2010)
is divided by the initial year (the price of bread in 1970), Weighted averages of these in turn provide sub-indices
at a higher, more aggregated level,(e.g. clothing) and
then multiplied by one hundred.[1]
weighted averages of the latter provide yet more aggregated sub-indices (e.g. Clothing and Footwear).

5.1.2

Calculating the CPI for multiple Some of the elementary aggregate indexes, and some of
items
the sub-indexes can be dened simply in terms of the

types of goods and/or services they cover, as in the case

Many but not all price indices are weighted averages using of such products as newspapers in some countries and
weights that sum to 1 or 100.
postal services, which have nationally uniform prices. But

5.2. WEIGHTING
where price movements do dier or might dier between
regions or between outlet types, separate regional and/or
outlet-type elementary aggregates are ideally required for
each detailed category of goods and services, each with its
own weight. An example might be an elementary aggregate for sliced bread sold in supermarkets in the Northern
region.
Most elementary aggregate indexes are necessarily 'unweighted' averages for the sample of products within the
sampled outlets. However, in cases where it is possible
to select the sample of outlets from which prices are collected so as to reect the shares of sales to consumers of
the dierent outlet types covered, self-weighted elementary aggregate indexes may be computed. Similarly, if
the market shares of the dierent types of product represented by product types are known, even only approximately, the number of observed products to be priced for
each of them can be made proportional to those shares.

53
in the Northern region) and only national estimates
for the shares of dierent outlet types for broad categories of consumption (e.g. 70% of food sold in
supermarkets) the weight for sliced bread sold in supermarkets in the Northern region has to be estimated as the share of sliced bread in total consumption 0.24 0.7.
The situation in most countries comes somewhere between these two extremes. The point is to make the best
use of whatever data are available.

5.2.3 The nature of the data used for

weighting

No rm rules can be suggested on this issue for the simple reason that the available statistical sources dier between countries. However, all countries conduct periodical Household Expenditure surveys and all produce
breakdowns of Consumption Expenditure in their Na5.2.2 Estimating weights
tional Accounts. The expenditure classications used
The outlet and regional dimensions noted above mean there may however be dierent. In particular:
that the estimation of weights involves a lot more than
Household Expenditure surveys do not cover the exjust the breakdown of expenditure by types of goods and
penditures of foreign visitors, though these may be
services, and the number of separately weighted indexes
within the scope of a Consumer Price Index.
composing the overall index depends upon two factors:
National Accounts include imputed rents for owner1. The degree of detail to which available data permit
occupied dwellings which may not be within the
breakdown of total consumption expenditure in the
scope of a Consumer Price Index.
weight reference-period by type of expenditure, region and outlet type.
Even with the necessary adjustments, the National Ac2. Whether there is reason to believe that price move- count estimates and Household Expenditure Surveys usuments vary between these most detailed categories. ally diverge.
How the weights are calculated, and in how much detail,
depends upon the availability of information and upon the
scope of the index. In the UK the Retail Price Index
(RPI) does not relate to the whole of consumption, for
the reference population is all private households with
the exception of a) pensioner households that derive at
least three-quarters of their total income from state pensions and benets and b) high income households whose
total household income lies within the top four per cent
of all households. The result is that it is dicult to use
data sources relating to total consumption by all population groups.
For products whose price movements can dier between
regions and between dierent types of outlet:
The ideal, rarely realisable in practice, would consist
of estimates of expenditure for each detailed consumption category, for each type of outlet, for each
region.
At the opposite extreme, with no regional data on
expenditure totals but only on population (e.g. 24%

The statistical sources required for regional and outlettype breakdowns are usually weaker. Only a large-sample
Household Expenditure survey can provide a regional
breakdown. Regional population data are sometimes
used for this purpose, but need adjustment to allow for
regional dierences in living standards and consumption
patterns. Statistics of retail sales and market research reports can provide information for estimating outlet-type
breakdowns, but the classications they use rarely correspond to COICOP categories.
The increasingly widespread use of bar codes, scanners
in shops has meant that detailed cash register printed receipts are provided by shops for an increasing share of
retail purchases. This development makes possible improved Household Expenditure surveys, as Statistics Iceland has demonstrated. Survey respondents keeping a diary of their purchases need to record only the total of
purchases when itemised receipts were given to them and
keep these receipts in a special pocket in the diary. These
receipts provide not only a detailed breakdown of purchases but also the name of the outlet. Thus response
burden is markedly reduced, accuracy is increased, product description is more specic and point of purchase

54

CHAPTER 5. CONSUMER PRICE INDEX

data are obtained, facilitating the estimation of outlet- of a Consumer Price Index.
type weights.
Opportunity cost can be looked at in two ways, since there
There are only two general principles for the estimation are two alternatives to continuing to live in an ownerof weights: use all the available information and accept occupied dwelling. One supposing that it is one years
that rough estimates are better than no estimates.
cost that is to be considered is to sell it, earn interest on the owners capital thus released, and buy it back a
year later, making an allowance for its physical depreciation. This can be called the alternative cost approach.
5.2.4 Reweighting
The other, the rental equivalent approach, is to let it to
Ideally, in computing an index, the weights would repre- someone else for the year, in which case the cost is the
sent current annual expenditure patterns. In practice they rent that could be obtained for it. Most people do not
necessarily reect past using the most recent data avail- think about their dwelling in either of these ways, but this
able or, if they are not of high quality, some average of does not bother the theoretical economist for whom conthe data for more than one previous year. Some coun- sistent logic is what matters.
tries have used a three-year average in recognition of the There are, of course, practical problems in implementing
fact that household survey estimates are of poor quality. either of these economists approaches. Thus, with the
In some cases some of the data sources used may not be alternative cost approach, if house prices are rising fast
available annually, in which case some of the weights for the cost can be negative and then become sharply positive
lower level aggregates within higher level aggregates are once house prices start to fall, so such an index would be
based on older data than the higher level weights.
very volatile. On the other hand, with the rental equivInfrequent reweighing saves costs for the national statistical oce but delays the introduction into the index of
new types of expenditure. For example, subscriptions for
Internet Service entered index compilation with a considerable time lag in some countries, and account could be
taken of digital camera prices between re-weightings only
by including some digital cameras in the same elementary
aggregate as lm cameras.

5.3 Owner-occupiers and the price

index
The way in which owner-occupied dwellings should be
dealt with in a Consumer Price Index has been, and remains, a subject of heated controversy in many countries.
Various approaches have been considered, each with their
advantages and disadvantages.

5.3.1

The economists approach

See also: Imputed rent

Leaving aside the quality of public services, the environment, crime and so forth, and regarding the standard of
living as a function of the level and composition of individuals consumption, this standard depends upon the
amount and range of goods and services they consume.
These include the service provided by rented accommodation, which can readily be priced, and the similar services yielded by a at or house owned by the consumer
who occupies it. Its cost to a consumer is, according to the
economic way of thinking, an opportunity cost, namely
what he or she sacrices by living in it. This cost, according to many economists, is what should form a component

alent approach, there may be diculty in estimating the

movement of rental values of types of property which are
not actually rented. If one or other of these measures
of the consumption of the services of owner-occupied
dwellings is included in consumption, then it must be
included in income too, for income equals consumption
plus saving. This means that if the movement of incomes
is to be compared with the movement of the Consumer
Price Index, incomes must be expressed as money income
plus this imaginary consumption value. That is logical,
but it may not be what users of the index want.
Although the argument has been expressed in connection
with owner-occupied dwellings, the logic applies equally
to all durable consumer goods and services. Furniture,
carpets and domestic appliances are not used up soon after purchase in the way that food is. Like dwellings, they
yield a consumption service that can continue for years.
Furthermore, since strict logic is to be adhered to, there
are durable services as well that ought to be treated in the
same way; the service consumers derive from appendectomies or crowned teeth continue for a long time. Since
estimating values for these components of consumption
has not been tackled, the economic theorists are torn between their desire for intellectual consistency and their
recognition that inclusion of the opportunity cost of the
use of durables is impracticable.

5.3.2 Spending
Another approach is to concentrate on spending.[3] Everyone agrees that repairs and maintenance expenditure
of owner-occupied dwellings should be covered in a Consumer Price Index, but the spending approach would include mortgage interest too. This turns out to be quite
complicated, conceptually as well as in practice.
To explain what is involved, consider a Consumer Price

5.3. OWNER-OCCUPIERS AND THE PRICE INDEX

55

Index computed with reference to 2009 for just one sole

consumer who bought her house in 2006, nancing half
of this sum by raising a mortgage. The problem is to compare how much interest such a consumer would now be
paying with the interest that was paid in 2009. Since the
aim is to compare like with like, that requires an estimate
of how much interest would be paid now in the year 2010
on a similar house bought and 50% mortgage-nanced
three years ago, in 2007. It does not require an estimate
of how much that identical person is paying now on the
actual house she bought in 2006, even though that is what
personally concerns her now.

other durable products are treated. This means: Taking

account of the transaction prices agreed;

The application of this principle in the owner-occupied

dwellings component of a Consumer Price Index is
known as the debt prole method. It means that the
current movement of the index will reect past changes
in dwelling prices and interest rates. Some people regard
this as odd. Quite a few countries use the debt prole
method, but in doing so most of them behave inconsistently. Consistency would require that the index should
also cover the interest on consumer credit instead of the
whole price paid for the products bought on credit if it
covers mortgage interest payments. Products bought on
credit would then be treated in the same way as owneroccupied dwellings.

equivalent rental approach would have to be applied in the

Consumer Price Index too. But the national accounts do
not apply it to other durables, so the argument demands
consistency in one respect but accepts its rejection in another.

Ignoring whether payments are delayed or are partly

nanced by borrowing;
Leaving out second-hand transactions. Second-hand
purchases correspond to sales by other consumers.
Thus only new dwellings would be included.

Furthermore, expenditure on enlarging or reconstructing

an owner-occupied dwelling would be covered, in addiA Consumer Price Index compares how much it would tion to regular maintenance and repair. Two arguments
cost now to do exactly what consumers did in the of an almost theological character are advanced in conreference-period with what it cost then. Application of nection with this transactions approach.
the principle thus requires that the index for our one house One argument is that purchases of new dwellings are
owner should reect the movement of the prices of houses treated as Investment in the System of National Accounts,
like hers from 2006 to 2007 and the change in interest so should not enter a consumption price index. It is said
rates. If she took out a xed-interest rate mortgage it is that this is more than just a matter of terminological unithe change in interest rates from 2006 to 2007 that counts; formity. For example it may be thought to help underif she took out a variable interest mortgage it is the change standing and facilitate economic analysis if what is infrom 2009 to 2010 that counts. Thus her current index cluded under the heading of Consumption is the same in
with 1999 as reference-period will stand at more than 100 the Consumer Price Index and in the national income and
if house prices or, in the case of a xed-interest mortgage, expenditure accounts. Since these accounts include the
interest rates rose between 2006 and 2007.
equivalent rental value of owner-occupied dwellings, the

The other argument is that the prices of new dwellings

should exclude that part reecting the value of the land,
since this is an irreproducible and permanent asset that
cannot be said to be consumed. This would presumably
mean deducting site value from the price of a dwelling,
site value presumably being dened as the price the site
would fetch at auction if the dwelling were not on it. How
this is to be understood in the case of multiple dwellings
Variants of the debt prole method are employed or have remains unclear.
been proposed. One example is to include down payments as well as interest. Another is to correct nominal mortgage rates for changes in dwelling prices or for 5.3.4 Confusion
changes in the rest of the Consumer Price Index to obtain a real rate of interest. Also, other methods may It is apparent that much of the muddle in discussing the
be used alongside the debt prole method. Thus several merits of the dierent approaches arises from the promiscountries include a purely notional cost of depreciation cuous mixing up of arguments about feasibility, about
as an additional index component, applying an arbitrar- dislike or approval of the way the index would move unily estimated, or rather guessed, depreciation rate to the der a particular approach and about principles of various,
value of the stock of owner-occupied dwellings. Finally, often incompatible, sorts. Feasibility is naturally imporone country includes both mortgage interest and purchase tant. The diculty of dealing with site values is obvious.
prices in its index.
Statisticians in a country lacking a good dwelling price
index (which is required for all except the rental equivalent method) will go along with a proposal to use such
5.3.3 Transaction prices
an index only if they can obtain the necessary additional
resources that will enable them to compile one. Even obThe third approach simply treats the acquisition of owner- taining mortgage interest rate data can be a major task
occupied dwellings in the same way as acquisitions of in a country with a multitude of mortgage lenders and

56
many types of mortgage. Dislike of the eect upon the
behaviour of the Consumer Price Index arising from the
adoption of some methods can be a powerful, if sometimes unprincipled, argument.
Dwelling prices are volatile and so, therefore, would be an
index incorporating the current value of a dwelling price
sub-index which, in some countries, would have a large
weight under the third approach. Furthermore, the weight
for owner-occupied dwellings could be altered considerably when reweighting was undertaken. (It could even
become negative under the alternative cost approach if
weights were estimated for a year during which house
prices had been rising steeply).

CHAPTER 5. CONSUMER PRICE INDEX

Which question is to be answered is, as just stated, a policy matter, depending upon the purposes the index is to
serve. It is not an issue for statisticians to decide. Their
job is the technical, professional one of compiling one or
more indexes that answer the selected question or questions as well as possible, given the resources at their disposal. In a perfect world this is how the owner-occupied
dwellings issue would be resolved. But the world is not
perfect.

5.4 Consumer Price Indices in the

United States

Then, there is the point that a rise in interest rates designed to halt ination could paradoxically make ination
Main article: United States Consumer Price Index
appear higher if current interest rates showed up in the
index. Economists principles are not acceptable to all;
nor is insistence upon consistency between the treatment In the United States, several dierent consumer price
indices are routinely computed by the Bureau of Labor
of owner-occupied dwellings and other durables.
Statistics (BLS). These include the CPI-U (for all urban consumers), CPI-W (for Urban Wage Earners and
5.3.5 Clarity
Clerical Workers), CPI-E (for the elderly), and C-CPIU (chained CPI for all urban consumers). These are all
Much would be gained if two sets of problems were dis- built in two stages. First, the BLS collects data to estimate
tinguished.*
8,018 separate item-area indices reecting the prices of
211 categories of consumption items in 38 geographical
areas. In the second stage, weighted averages are com What is the Consumer Price Index to measure?
puted of these 8,018 item-area indices. The dierent in How can that be achieved?
dices dier only in the weights applied to the dierent
8,018 item-area indices. The weights for CPI-U and CPIW are held constant for 24 months, changing in January
Another way of putting this is to distinguish:
of even-numbered years. The weights for C-CPI-U are
What is the question that should be answered? This updated each month to reecting changes in consumption
is a matter for policy makers and other users of the patterns in the last month. Thus, if people on average eat
more chicken and less beef or more apples and fewer orConsumer Price Index.
anges than the previous month, that change would be re How can it best be answered? This is a matter for ected in next months C-CPI-U. However, it would not
the statisticians.
be reected in CPI-U and CPI-W until January of the
next even-numbered year.[3]
The three approaches should not be regarded as rivals, This allows the BLS to compute consumer price indices
they are dierent answers to dierent questions. One, or for each of the designated 38 geographical areas and for
possibly more, should be chosen. The three questions can aggregates like the Midwest.[4]
be formulated as follows:
In January of each year, Social Security recipients receive
a cost of living adjustment (COLA) to ensure that the
1. Opportunity cost. What is the change through purchasing power of Social Security and Supplemental
time in what would be the opportunity cost of the Security Income (SSI) benets is not eroded by ination.
reference-period consumption of the services of It is based on the percentage increase in the Consumer
owner-occupied dwellings?
Price Index for Urban Wage Earners and Clerical Work[5]
2. Spending. What is the change through time in the ers (CPI-W)". The use of CPI-W conicts with this
cash outlays that would correspond to the reference- purpose, because the elderly consume substantially more
[6]
period cash outlays in respect of owner-occupied health care goods and services than younger people. In
recent years, ination in health care has substantially exdwellings?
ceeded ination in the rest of the economy. Since the
3. Transactions. What is the change through time in weight on health care in CPI-W is much less than the
what would be the purchase value of the reference- consumption patterns of the elderly, this COLA does not
period net acquisition of owner-occupied dwellings adequately compensate them for the real increases in the
by consumers?
costs of the items they buy.

5.6. REFERENCES
The BLS does track a consumer price index for the elderly
(CPI-E). It is not used, in part because the social security
trust fund is forecasted to run out of money in roughly
40 years, and using the CPI-E instead of CPI-W would
shorten that by roughly 5 years.[7]

57
Cost of living index
FRED (Federal Reserve Economic Data)
Harmonized Index of Consumer Prices (HICP)
Hedonic regression

5.4.1

History

Between 1971 and 1977, the United States CPI increased

47%.[8]

Higher Education Price Index

Household nal consumption expenditure (HFCE)
GDP deator

In 2009, the Consumer Price Index fell for the rst time
since 1955.[9]

Ination adjustment

5.4.2

Inationism

Chained CPI

Main article: United States Chained Consumer Price

Index
Former White House Chief of Sta Erskine Bowles and
former U.S. Senator Alan K. Simpson suggested a transition to using a chained CPI in 2010, when they headed
the White Houses decit-reduction commission.[10] They
stated that it was a more accurate measure of ination
than the current system and switching from the current system could save the government more than $290
billion over the decade following their report.[10] The
chained CPI is usually 0.25 to 0.30 percentage points
lower each year, on average, than the standard CPI
measurements.[10]
However, the National Active and Retired Federal Employees Associations said that the chained CPI does not
account for seniors citizens health care costs.[10] Robert
Reich, former United States Secretary of Labor under
President Clinton, noted that typical seniors spend between 20 and 40 percent of their income on health care,
far more than most Americans. Besides, Social Security
isn't in serious trouble. The Social Security trust fund is
ush for at least two decades. If we want to ensure its
there beyond that, theres an easy x just lift the ceiling
on income subject to Social Security taxes, which is now
$113,700.[6]
Replacing the current cost-of-living adjustment calculation with the chained CPI was considered, but not
adopted, as part of a decit-reduction proposal to avert
the sequestration cuts, or scal cli, in January 2013,[10]
but President Obama included it in his April 2013 budget
proposal.[11]

5.5 See also

Consumer price index by country
Core ination

Ination rate

List of economics topics

Market basket (basket of goods)
MIT Billion Prices project
Personal consumption expenditures price index
(PCEPI)
Producer Price Index (PPI)
Quality bias
RPIX
World ination crisis

5.6 References
[1] Education 2020 Homeschool Console, subject Economics, lecture Ination. Formula described within.
[2] Bloomberg Business News, Social Security Administration
[3] Frequently Asked Questions about the Chained Consumer Price Index for All Urban Consumers (C-CPI-U)".
Consumer Price Index (Bureau of Labor Statistics). Retrieved April 11, 2013. For example, the CPI-U for the
years 2004 and 2005 uses expenditure weights drawn from
the 20012002 Consumer Expenditure Surveys.
[4] Consumer Price Index, Portland Second Half 2012.
Consumer Price Index (Bureau of Labor Statistics). Retrieved April 11, 2013Midwest Region Consumer Price
Index February 2013. Consumer Price Index (Bureau
of Labor Statistics). Retrieved April 11, 2013
[5] Cost-Of-Living Adjustment (COLA) Information For
2013. Cost-Of-Living Adjustment (Social Security Administration). Retrieved April 11, 2013
[6] Robert, Reich (April 4, 2013). Whats the 'Chained
CPI,' Why Its Bad for Social Security and Why the White
House Shouldn't Be Touting It (VIDEO)". Hungton
Post. Retrieved April 11, 2013.

58

[7] Hobijn, Bart; Lagakos, David (May 2003). Social Security and the Consumer Price Index for the Elderly. Current Issues in Economics and Finance (Federal Reserve
Bank of New York) 9 (5): 16. Retrieved April 11, 2013.
[8] Frum, David (2000). How We Got Here: The '70s. New
York, New York: Basic Books. p. 324. ISBN 0-46504195-7.
[9] Harpers Magazine http://harpers.org/archive/2009/04/
WeeklyReview2009-04-21
[10] Losey, Stephen (31 December 2012). Chained CPI proposal o table for now, lawmakers say. Federal Times.
Retrieved 3 January 2013.
[11] Gibson, Ginger (April 9, 2013). Republicans applaud
chained CPI in Obama budget. Politico. Retrieved April
11, 2013.

5.7 Further reading

CHAPTER 5. CONSUMER PRICE INDEX

5.8.1 Specic countries

International
Worldwide Consumer Price Index Per City UserUpdated
User contributed cost of living database
Australia
Australian CPI
Measures of Consumer Price Ination
France
Consumer Price Index, INSEE
A description of the French consumer price index
(in French)

W.E. Diewert, 1993. The early history of price index research. Chapter 2 of Essays in Index Number
French CPI composition and evolution
Theory, Volume I, W.E. Diewert and A.O. Nakamura, editors. Elsevier Science Publishers, B.V.
Canada
Boskin, Michael J. (2008). Consumer Price In Statistics Canada
dexes. In David R. Henderson (ed.). Concise
Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978- Hong Kong
0865976658. OCLC 237794267.

5.8 External links

Issues of the Consumer Price Index report from the
BLS for 19531974 and 1974present

Hong Kong Consumer Price Index (CPI), Census

and Statistics Department
India

CPI and its composition in India

ILO CPI manual This large manual produced cooperatively by a number of international organiza- Italy
tions is the standard work on the methods of compiling consumer price indexes and on the underlying
Indici dei prezzi al consumo, ISTAT
economic and statistical theory.
Rivalutazione monetaria con gli Indici dei prezzi al
myCPI.info Project for establishing alternative
consumo per le famiglie di operai ed impiegati
CPI data based on users inputting and tracking their
personal CPI.
Spain
The Consumer Price Index and index number purpose A technical article by economist W.E.
CPI information, Instituto Nacional de Estadstica
Diewert
SGS Alternate Ination Charts
SGS CPI calculation criticisms

New Zealand
CPI information, Statistics New Zealand

BLS rebuttal to SGS CPI calculation criticisms

SGS rebuttal to BLS rebuttal regarding CPI
CPI Ination Calculator

Sweden
A Consumer Price Index for Sweden 12902006

5.8. EXTERNAL LINKS

A detailed account in English of the Swedish consumer price index
Denmark
Oldmoney.dk A Consumer Price Index-calculator
for Denmark 19002010
United Kingdom
National Statistics Online: Consumer Prices, UK
Oce for National Statistics
A detailed account of the UK index
United States
Consumer Price Index Home Page, U.S. Department of Labor, Bureau of Labor Statistics
A detailed account of the US index
Ination Calculator
Historical US CPI chart Monthly data since 1947
CPI categories 19932010
Alternate non ocial CPI measures
An ination research site and personal ination rate
calculator
Consumer Price Index 1953-1974 and CPI Detailed
Report 1974-present - historical Bureau of Labor
Statistics publications digitized for Federal Reserve
Archival System for Economic Research

59

Chapter 6

Good (economics)
Responsiveness to
price changes

Responsiveness to
income changes

6.2 Types of goods

Ordinary good

Giffen good

Normal good

Inferior good

(elasticity > 0)

(elasticity < 0)

Goods diversity allows of their classication into dierent categories based on distinctive characteristics, such
as tangibility and (ordinal) relative elasticity. A tangible
Luxury / Superior
Necessary good
good
(elasticity < 1)
good like an apple diers from an intangible good like
(elasticity > 1)
information due to the impossibility of a person to physically hold the latter, whereas the former occupies physical
Types of goods in economics.
space. Intangible goods dier from services in that nal (intangible) goods are transferable and can be traded,
In economics, a good is a material that satises hu- whereas a service cannot.
man wants[1] and provides utility, for example, to a
Price elasticity also dierentiates types of goods. An
consumer making a purchase. A common distinction
elastic good is one for which there is a relatively large
is made between 'goods that are tangible property (also
[2] change in quantity due to a relatively small change in
called goods) and services, which are non-physical.
price, and therefore is likely to be part of a family of
Commodities may be used as a synonym for economic
substitute goods; for example, as pen prices rise, congoods but often refer to marketable raw materials and
sumers might buy more pencils instead. An inelastic good
[3]
primary products.
is one for which there are few or no substitutes, such as
Although in economic theory all goods are considered tickets to major sporting events, original works by fatangible, in reality certain classes of goods, such as mous artists, and prescription medicine such as insulin.
information, only take intangible forms. For example, Complementary goods are generally more inelastic than
among other goods an apple is a tangible object, while goods in a family of substitutes. For example, if a rise
news belongs to an intangible class of goods and can be in the price of beef results in a decrease in the quantity
perceived only by means of an instrument such as print, of beef demanded, it is likely that the quantity of hambroadcast or computer.
burger buns demanded will also drop, despite no change
in buns prices. This is because hamburger buns and beef
(in Western culture) are complementary goods. It is im6.1 Utility characteristics of goods portant to note that goods considered complements or
substitutes are relative associations and should not be unGoods may increase or decrease their utility directly or derstood in a vacuum. The degree to which a good is
indirectly and may be described as having marginal util- a substitute or a complement depends on its relationship
ity. Some things are useful, but not scarce enough to have to other goods, rather than an intrinsic characteristic, and
monetary value, such as the Earths atmosphere, these are can be measured as cross elasticity of demand by employing statistical techniques such as covariance and correlareferred to as 'free goods'.
tion.
In economics, a bad is the opposite of a good. Ultimately,
whether an object is a good or a bad depends on each in- The following chart illustrates the classication of goods
dividual consumer and therefore, it is important to realize according to their exclusivity and competitiveness.
that not all goods are good all the time and not all goods Main article: Rivalry (economics)
are goods to all people.
60

6.4. SEE ALSO

61

6.3 Trading of goods

knowledge are substantive goods where sociability, aesthetic experience, practical reasonableness and religion
are reexive. He continues by stating that reexive goods
Main article: Trade
are dened in conditions of human choice where substantive goods provide reasons for making choices. Although
Goods are capable of being physically delivered to a Finnis provides that the basic goods are not to be conconsumer. Goods that are economic intangibles can sidered as moral values. Finnis concludes that the baonly be stored, delivered, and consumed by means of sic goods should be considered as fundamentally good,
where these ideals are good for their individual purpose
media.
and not an instrumental purpose.
Goods, both tangibles and intangibles, may involve the
transfer of product ownership to the consumer. Services After discussing the basic goods it is argued that within
do not normally involve transfer of ownership of the ser- the list there is no hierarchal order, as the basic goods are
vice itself, but may involve transfer of ownership of goods considered impossible to compare or measure. Finnis bedeveloped by a service provider in the course of the ser- lieves the goods are equally self-evident. Each of the bavice. For example, distributing electricity among con- sic goods can be considered the most important, as none
sumers is a service provided by an electric utility com- of them can be reduced to simply a mechanism of achievpany. This service can only be experienced through the ing another. While technically the goods can be treated
consumption of electrical energy, which is available in a as superior to one another Finnis provides that each good
variety of voltages and, in this case, is the economic goods is still fundamental where no priority value exists. Finproduced by the electric utility company . While the ser- nis asserts that, These choices constitute a life plan that
vice (namely, distribution of electrical energy) is a pro- subjectively orders the basic goods for the individual but
cess that remains in its entirety in the ownership of the the fundamental nature and intrinsic value of the goods
electric service provider, the goods (namely, electric en- themselves is not changed by this
ergy) is the object of ownership transfer. The consumer
becomes electric energy owner by purchase and may use
6.4 See also
it for any lawful purposes just like any other goods.
For Finnis there are seven basic goods; life, knowledge,
play, aesthetic experience, sociability of friendship, practical reasonableness and religion. Life for Finnis involves
all aspects of vitality that enable a person to gain strong
willpower. The second aspect of well-being is knowledge
and is described as the pure desire to know, simply out of
curiosity, as well as a concerning interest and desire for
truth. The third aspect, play, is regarded as self-evident
as there is no real point of performing such activities, only
for pure enjoyment. Aesthetic experience is the fourth aspect and is considered similarly to play however; it does
not essentially need an action to occur. The fth aspect
for Finnis is sociability where it is realised through the
creation of friendships, that these relationships are fundamental goods. Practical reasonableness is the sixth basic
good where it is ones ability to use their intellect in deciding choices that ultimately shape ones nature. The nal
basic good is religion; it encompasses the acknowledgment of a concern for a simplied distinct form of order,
where an individuals sense of responsibility is addressed.
As the basic goods, and practical reasoning principles,
are features of ones well being the question is asked as
to what are the basic aspects of well being. The basic
goods are ideals to be achieved and perused whereby this
view enables one to see the good and bad actions available. This knowledge eects a persons practical reasoning regarding the dierent accessible forms of good that
they can decide. The real question for Finnis is, Whether
something is a good in and of itself. Legal theorist Russel
Hittinger provides that the goods are then broken down
into being either substantive or reexive. Life, play and

Fast moving consumer goods

Final goods
Intangible asset
List of economics topics
Service (economics)
Tangible property

6.5 Notes
[1] Quotation from Murray Milgate, [1987] 2008, goods
and commodities, " The New Palgrave Dictionary of Economics, 2nd ed., preview link, in referencing an inuential parallel denition of 'goods by Alfred Marshall, 1891.
Principles of Economics, 2nd ed., Macmillan.
[2] Alan V. Deardor, 2006. Terms Of Trade: Glossary of
International Economics, World Scientic. Online version: Deardors Glossary of International Economics,
good and service.
[3] Alan V. Deardor, 2006, Deardors Glossary of International Economics commodity.

6.6 References
Bannock, Graham et al. (1997). Dictionary of Economics, Penguin Books.

62
Milgate, Murray (1987), goods and commodities,
The New Palgrave: A Dictionary of Economics, v. 2,
pp. 54648. Includes historical and contemporary
uses of the terms in economics.

CHAPTER 6. GOOD (ECONOMICS)

Chapter 7

Service (economics)
For other uses, see Service.
evident in the buyers willingness to pay for it. Public
In economics, a service is an intangible commodity. services are those, that society (nation state, scal union,
regional) as a whole pays for, through taxes and other
means.
By composing and orchestrating the appropriate level of
resources, skill, ingenuity, and experience for eecting
specic benets for service consumers, service providers
participate in an economy without the restrictions of carrying inventory (stock) or the need to concern themselves with bulky raw materials. On the other hand, their
investment in expertise does require consistent service
marketing and upgrading in the face of competition.

7.1 Characteristics
Services can be paraphrased in terms of their key characteristics, sometimes called the Five Is of Services.
1. Intangibility
Services are intangible and insubstantial: they cannot be
touched, gripped, handled, looked at, smelled, tasted.
Thus, there is neither potential nor need for transport,
storage or stocking of services. Furthermore, a service
can be (re)sold or owned by somebody, but it cannot be
turned over from the service provider to the service consumer. Solely, the service delivery can be commissioned
to a service provider who must generate and render the
service at the distinct request of an authorized service
consumer.
2. Inventory (Perishability)
Services have little or no tangible components and therefore cannot be stored for a future use. Services are produced and consumed during the same period of time.
Services are perishable in two regards
A bellhop is an example of a service occupation.

That is, services are an example of intangible economic

goods.
Service provision is often an economic activity where the
buyer does not generally, except by exclusive contract,
obtain exclusive ownership of the thing purchased. The
benets of such a service, if priced, are held to be self63

The service relevant resources, processes and systems are assigned for service delivery during a definite period in time. If the designated or scheduled service consumer does not request and consume the service during this period, the service cannot be performed for him. From the perspective of
the service provider, this is a lost business opportu-

64

CHAPTER 7. SERVICE (ECONOMICS)

nity as he cannot charge any service delivery; potentially, he can assign the resources, processes and
systems to another service consumer who requests a
service. Examples: The hairdresser serves another
client when the scheduled starting time or time slot
is over. An empty seat on a plane never can be utilized and charged after departure.

When the service has been completely rendered to

the requesting service consumer, this particular service irreversibly vanishes as it has been consumed
by the service consumer. Example: the passenger
has been transported to the destination and cannot
be transported again to this location at this point in
time.
3. Inseparability
The service provider is indispensable for service delivery as he must promptly generate and render the service
to the requesting service consumer. In many cases the
service delivery is executed automatically but the service provider must preparatorily assign resources and systems and actively keep up appropriate service delivery
readiness and capabilities. Additionally, the service consumer is inseparable from service delivery because he is
involved in it from requesting it up to consuming the rendered benets. Examples: The service consumer must sit
in the hairdressers shop & chair or in the plane & seat;
correspondingly, the hairdresser or the pilot must be in
the same shop or plane, respectively, for delivering the
service.
4. Inconsistency (Variability)

age in the service consumer's mind. From the service

consumers point of view, these characteristics make it
dicult, or even impossible, to evaluate or compare services prior to experiencing the service delivery.
Mass generation and delivery of services is very dicult. This can be seen as a problem of inconsistent service
quality. Both inputs and outputs to the processes involved
providing services are highly variable, as are the relationships between these processes, making it dicult to
maintain consistent service quality. For many services
there is labor intensity as services usually involve considerable human activity, rather than a precisely determined process; exceptions include utilities. Human resource management is important. The human factor is
often the key success factor in service economies. It is
dicult to achieve economies of scale or gain dominant
market share. There are demand uctuations and it can be
dicult to forecast demand. Demand can vary by season,
time of day, business cycle, etc. There is consumer involvement as most service provision requires a high degree of interaction between service consumer and service
provider. There is a customer-based relationship based
on creating long-term business relationships. Accountants, attorneys, and nancial advisers maintain long-term
relationships with their clients for decades. These repeat
consumers refer friends and family, helping to create a
client-based relationship.

7.2 Service denition

The generic clear-cut, complete, concise and consistent

Each service is unique. It is one-time generated, rendered denition of the service term reads as follows:
and consumed and can never be exactly repeated as the
point in time, location, circumstances, conditions, current A service is a set of one time consumable and perishable
congurations and/or assigned resources are dierent for benets
the next delivery, even if the same service consumer requests the same service. Many services are regarded as
delivered from the accountable service provider,
heterogeneous or lacking homogeneity and are typically
mostly in close coaction with his internal and extermodied for each service consumer or each new situation
nal service suppliers,
(consumerised). Example: The taxi service which transports the service consumer from his home to the opera is
eectuated by distinct functions of technical systems
dierent from the taxi service which transports the same
and by distinct activities of individuals, respectively,
service consumer from the opera to his home another
point in time, the other direction, maybe another route,
commissioned according to the needs of his serprobably another taxi driver and cab.
vice consumers by the service customer from the ac5. Involvement
countable service provider,
One of the most important characteristics of services is
the participation of the customer in the service delivery
rendered individually to an authorized service conprocess. A customer has the opportunity to get the sersumer at his/her dedicated trigger,
vices modied according to specic requirement.
and, nally, consumed and utilized by the triggerEach of these characteristics is retractable per se and
ing service consumer for executing his/her upcomtheir inevitable coincidence complicates the consistent
ing business activity or private activity.
service conception and make service delivery a challenge
in each and every case. Proper service marketing requires
creative visualization to eectively evoke a concrete im intangible source

7.3. SERVICE SPECIFICATION

7.3 Service specication

Any service can be clearly and completely, consistently
and concisely specied by means of the following 12 standard attributes which conform to the MECE principle
(Mutually Exclusive, Collectively Exhaustive)
1. Service consumer benets describe the (set of)
benets which are triggerable, consumable and effectively utilizable for any authorized service consumer and which are rendered to him as soon as he
triggers one service. The description of these benets must be phrased in the terms and wording of the
intended service consumers.
2. Service-specic functional parameters specify
the functional parameters which are essential and
unique to the respective service and which describe the most important dimension(s) of the
servicescape, the service output or the service outcome, e.g. maximum e-mailbox capacity per registered and authorized e-mailing service consumer.
3. Service delivery point describes the physical location and/or logical interface where the benets of the
service are triggered from and rendered to the authorized service consumer. At this point and/or interface, the preparedness for service delivery readiness
can be assessed as well as the eective delivery of
each triggered service can be monitored and controlled.
4. Service consumer count species the number of
intended, clearly identied, explicitly named, denitely registered and authorized service consumers
which shall be and/or are allowed and enabled to
trigger and consume the commissioned service for
executing and/or supporting their business tasks or
private activities.
5. Service delivering readiness times specify the distinct agreed times of every day of the week when
the described service consumer benets are
triggerable for the authorized service consumers at the dened service delivery
point
consumable and utilizable for the authorized service consumers at the respective
agreed service level
all the required service contributions are aggregated to the triggered service
the specied service benets are competely
and terminally rendered to any authorized triggering service consumer without any delay or
friction. The time data are specied in 24 h
format per local working day and local time
UTC, referring to the location of the intended
and/or triggering service consumers.

65
6. Service consumer support times specify the determined and agreed times of every day of the week
when the triggering and consumption of commissioned services is supported by the service desk team
for all identied, registered and authorized service
consumers within the service customers organizational unit or area. The service desk is/shall be the
so-called the Single Point of Contact (SPoC) for any
authorized service consumer inquiry regarding the
commissioned, triggered and/or rendered services,
particularly in the event of service denial, i.e. an incident. During the dened service consumer support
times, the service desk can be reached by phone, email, web-based entries, and fax, respectively. The
time data are specied in 24 h format per local working day and local time UTC, referring to the location
of the intended service consumers.
7. Service consumer support language species the
national languages which are spoken by the service
desk team(s) to the service consumers calling them.
8. Service fulllment target species the service
providers promise of eectively and seamlessly deliver the specied benets to any authorized service
consumer triggering a service within the specied
service delivery readiness times. It is expressed as
the promised minimum ratio of the count of successful individual service deliveries related to the
count of triggered service deliveries. The eective
service fulllment ratio can be measured and calculated per single service consumer or per service consumer group and may be referred to dierent time
periods (workhour, workday, calendarweek, workmonth, etc.)
9. Service impairment duration per incident species the maximum allowable elapsing time [hh:mm]
between
the rst occurrence of a service impairment,
i.e. service quality degradation, service delivery disruption or service denial, whilst the service consumer consumes and utilizes the requested service,
the full resumption and complete execution of
the service delivery to the content of the affected service consumer.
10. Service delivering duration species the promised
and agreed maximum allowable period of time for
eectively rendering all specied service consumer
benets to the triggering service consumer at his currently chosen service delivery point.
11. Service delivery unit species the basic portion
for rendering the dened service consumer benets
to the triggering service consumer. The service delivery unit is the reference and mapping object for
the Service Delivering Price, for all service costs as

66

CHAPTER 7. SERVICE (ECONOMICS)

well as for charging and billing the consumed service dramas are tightly scripted, others are more ad lib. Role
amounts to the service customer who has commis- congruence occurs when each actor follows a script that
sioned the service delivery.
harmonizes with the roles played by the other actors.
In some service industries, especially health care, dispute
resolution, and social services, a popular concept is the
idea of the caseload, which refers to the total number of
patients, clients, litigants, or claimants that a given employee is presently responsible for. On a daily basis, in
all those elds, employees must balance the needs of any
a xed basic price portion for basic eorts and individual case against the needs of all other current cases
resources which provide accessibility and us- as well as their own personal needs.
ability of the service delivery functions, i.e.
Under English law, if a service provider is induced to deservice access price
liver services to a dishonest client by a deception, this is
a price portion covering the service consump- an oence under the Theft Act 1978.
tion based on
Lovelock has used two issues of number of delivery sites
xed at rate price per authorized service (whether single or multiple) and the method of delivery
consumer and reference period for an un- to classify services in a 2 x 3 matrix. Then implications
limited amount of consumed services,
here are that the convenience of receiving the service is
staged prices per authorized service con- the lowest when the customer has to come to the service
sumer and reference period for staged and must use a single or specic outlets. As his options
multiply, the degree of convenience can go on rising, from
amounts of consumed services,
xed price per single consumed service being able to choose desirable sites, .to getting access at
convenient locations. (Table 1.6.
delivering unit.

12. Service delivering price species the amount of

money the commissioning service customer has to
pay for a distinct service delivery unit or for a distinct amount of service delivery units. Normally, the
service delivering price comprises two portions

7.4 Service delivery

The delivery of a service typically involves six factors:

7.5 Service-commodity goods continuum

There has been a long academic debate on what makes

The accountable service provider and his service services dierent from goods. The historical perspecsuppliers (e.g. the people)
tive in the late-eighteen and early-nineteenth centuries
Equipment used to provide the service (e.g. vehi- focused on creation and possession of wealth. Classical
cles, cash registers, technical systems, computer sys- economists contended that goods were objects of value
over which ownership rights could be established and extems)
changed. Ownership implied tangible possession of an
The physical facilities (e.g. buildings, parking, wait- object that had been acquired through purchase, barter or
gift from the producer or previous owner and was legally
ing rooms)
identiable as the property of the current owner.
The requesting service consumer
Adam Smiths famous book, The Wealth of Nations, published in Great Britain in 1776, distinguished between
Other customers at the service delivery location
the outputs of what he termed productive and unpro Customer contact
ductive labor. The former, he stated, produced goods
that could be stored after production and subsequently
The service encounter is dened as all activities involved exchanged for money or other items of value. The latin the service delivery process. Some service managers ter, however useful or necessary, created services that
use the term moment of truth to indicate that dening perished at the time of production and therefore did not
point in a specic service encounter where interactions contribute to wealth. Building on this theme, French
are most intense.
economist Jean-Baptiste Say argued that production and
Many business theorists view service provision as a per- consumption were inseparable in services, coining the
formance or act (sometimes humorously referred to as term immaterial products to describe them.
dramalurgy, perhaps in reference to dramaturgy). The location of the service delivery is referred to as the stage and
the objects that facilitate the service process are called
props. A script is a sequence of behaviors followed by
all those involved, including the client(s). Some service

Most modern business theorists see a continuum with

pure service on one terminal point and pure commodity
good on the other terminal point.[1] Most products fall
between these two extremes. For example, a restaurant
provides a physical good (the food), but also provides ser-

7.6. LIST OF ECONOMIC SERVICES

67
Customer service
Human resources administrators (providing
services like ensuring that employees are paid
accurately)
Childcare
Cleaning, repair and maintenance services
Gardeners
Janitors (who provide cleaning services)
Mechanics
Construction
Carpentry
Electricians (oering the service of making
wiring work properly)
Plumbing
Death care
Coroners (who provide the service of identifying cadavers and determining time and cause
of death)
Funeral homes (who prepare corpses for public display, cremation or burial)
Dispute resolution and prevention services
Arbitration

Service-Commodity Goods continuum

Courts of law (who perform the service of dispute resolution backed by the power of the
state)
Diplomacy

vices in the form of ambience, the setting and clearing of

the table, etc. And although some utilities actually deliver physical goods like water utilities which actually
deliver water utilities are usually treated as services.
In a narrower sense, service refers to quality of customer
service: the measured appropriateness of assistance and
support provided to a customer. This particular usage occurs frequently in retailing.

7.6 List of economic services

The following is a complete list of service industries,
grouped into sectors. Parenthetical notations indicate
how specic occupations and organizations can be regarded as service industries to the extent they provide an
intangible service, as opposed to a tangible good.

Incarceration (provides the service of keeping

criminals out of society)
Law enforcement (provides the service of
identifying and apprehending criminals)
Lawyers (who perform the services of
advocacy and decisionmaking in many
dispute resolution and prevention processes)
Mediation
Military (performs the service of protecting
states in disputes with other states)
Negotiation (not really a service unless someone is negotiating on behalf of another)
Education (institutions oering the services of
teaching and access to information)
Library
Museum

business functions (that apply to all organizations in

general)
Consulting

School
Entertainment (when provided live or within a
highly specialized facility)

68

CHAPTER 7. SERVICE (ECONOMICS)

Gambling
7.7 List of countries by tertiary
Movie theatres (providing the service of showoutput
ing a movie on a big screen)
Performing arts productions
Main article: List of countries by GDP sector composi Sexual services
tion
Sport
Below is a list of countries by service output at market
Television

Fabric care
Dry cleaning
Self-service laundry (oering the service of
automated fabric cleaning)
Financial services
Accountancy
Banks and building societies (oering lending Service output as a percentage of the top producer (USA) as of
services and safekeeping of money and valu- 2005
ables)
exchange rates in 2014.
Real estate
Stock brokerages
Tax preparation
7.8 See also
Foodservice industry
Health care (all health care professions provide services)

Application service provider

Borderless selling

Hospitality industry

Customer service

Information services

Ecosystem services

Data processing
Database services
Interpreting
Translation

Personal grooming

Body hair removal

Dental hygienist
Hairdressing
Manicurist / pedicurist

Public utility

Electric power
Natural gas
Telecommunications
Waste management
Water industry

Risk management
Insurance
Security
Social services
Social work
Transport

IT service management
Marketing
Outline of business

Outline of business management

Outline of nance
Outline of marketing
Outline of production

Outline of economics
Product
Public services
Service design
Service economy
Service system
Services marketing
Software as a service
Strategic Service Management
Tertiary sector of the economy
The Experience Economy
Utility computing

7.10. REFERENCES

69

7.9 Finding related topics

Pascal Petit (1987). services, The New Palgrave:

A Dictionary of Economics, v. 4, pp. 31415.

Social services

Alan Pilkington, Kah Hin Chai, Research Themes,

Concepts and Relationships: A study of International Journal of Service Industry Management
(1990 to 2005), International Journal of Service Industry Management, (2008) Vol. 19, No. 1, pp.
83110.

7.10 References
[1] Anders Gustofsson and Michael D. Johnson, Competing
in a Service Economy (SanFrancisco: Josey-Bass, 2003),
p.7.

7.10.1

Regarding service characteristics

Athens University of Economics and Business: An

Introduction to Services Marketing - s. http://www.
aueb.gr/users/esaopa/courses/part2.pdf
Valerie Zeithaml, A. Parasumaran, Leonhard Berry
(1990): Delivering Service Quality, ISBN 0-02935701-2, The Free Press

Steve Downton,
Hilbrand Rustema,
Jan
van Veen,
Service Economics - Profitable Growth with a Brand Driven Service Strategy- s.
http://www.amazon.com/
Service-Economics-Profitable-service-strategy/
dp/9963983804/ref=sr_1_1?ie=UTF8&qid=
1310661349&sr=8-1
5 Major Characteristics of Services

Valerie Zeithaml, A. Parasumaran, Leonhard Berry

(1990): SERVQUAL - s. http://www.12manage.
com/methods_zeithaml_servqual.html
Sharon Dobson: Product and Services Strategy s. http://busfac32.cob.calpoly.edu/presentations/
Sharon_Dobson/Ch08.ppt
John Swearingen: Operations Management - Characteristics of services - s. http://online.uis.edu/
spring2002/bus322/lectures/chap01/sld040.htm
James A. Fitzsimmons, Mona J. Fitzsimmons: Service Management - Operations, Strategy, Information
Technology - s.
http://www.belkcollege.uncc.edu/mjkhouja/
02%20Nature.ppt
http://www.amazon.com/
Service-Management-Operations-Information-Technology/
dp/0073122580
Russell Wolak, Stavros Kalafatis, Patricia Harris: An Investigation Into Four Characteristics
of Services - s. http://members.byronsharp.com/
empgens/emp1.pdf
Sheelagh Matear, Brendan Gray, Tony Garrett, Ken Deans: Moderating Eects of Service
Characteristics on the Sources of Competitive Advantage - Positional Advantage Relationship - s.
http://smib.vuw.ac.nz:8081/www/ANZMAC2000/
CDsite/papers/m/Matear1.PDF
Robert Johnston, Graham Clark: Service Operations Management Improving Service Delivery,
ISBN 1-4058-4732-8 - s. http://www.amazon.com/
Service-Operations-Management-Financial-Times/
dp/1405847328/ref=pd_bbs_sr_1?ie=UTF8&s=
books&qid=1223813905&sr=1-1

Chapter 8

Supply and demand

For other uses, see Supply and demand (disambiguation).
In microeconomics, supply and demand is an economic

D1 D2

4. If demand remains unchanged and supply decreases

(supply curve shifts to the left), a shortage occurs,
leading to a higher equilibrium price.

8.1 Graphical representation of

supply and demand
Although it is normal to regard the quantity demanded
and the quantity supplied as functions of the price of the
goods, the standard graphical representation, usually attributed to Alfred Marshall, has price on the vertical axis
and quantity on the horizontal axis, the opposite of the
standard convention for the representation of a mathematical function.

P2

P1

Q1 Q2

Since determinants of supply and demand other than the

price of the goods in question are not explicitly represented in the supply-demand diagram, changes in the values of these variables are represented by moving the supply and demand curves (often described as shifts in the
curves). By contrast, responses to changes in the price of
the good are represented as movements along unchanged
supply and demand curves.

The price P of a product is determined by a balance between

production at each price (supply S) and the desires of those with
purchasing power at each price (demand D). The diagram shows
a positive shift in demand from D1 to D2 , resulting in an increase
in price (P) and quantity sold (Q) of the product.

model of price determination in a market. It concludes

that in a competitive market, the unit price for a particular
good will vary until it settles at a point where the quantity
demanded by consumers (at current price) will equal the
quantity supplied by producers (at current price), resulting in an economic equilibrium for price and quantity.
The four basic laws of supply and demand are:[1]:37

8.1.1 Supply schedule

A supply schedule is a table that shows the relationship
between the price of a good and the quantity supplied.
Under the assumption of perfect competition, supply is
determined by marginal cost. That is, rms will produce
additional output while the cost of producing an extra unit
of output is less than the price they would receive.

1. If demand increases (demand curve shifts to the A hike in the cost of raw goods would decrease supply,
right) and supply remains unchanged, a shortage oc- shifting costs up, while a discount would increase supply,
shifting costs down and hurting producers as producer
curs, leading to a higher equilibrium price.
surplus decreases.
2. If demand decreases (demand curve shifts to the
By its very nature, conceptualizing a supply curve releft) and supply remains unchanged, a surplus ocquires the rm to be a perfect competitor (i.e. to have
curs, leading to a lower equilibrium price.
no inuence over the market price). This is true because
3. If demand remains unchanged and supply increases each point on the supply curve is the answer to the ques(supply curve shifts to the right), a surplus occurs, tion If this rm is faced with this potential price, how
leading to a lower equilibrium price.
much output will it be able to and willing to sell?" If a
70

8.2. MICROECONOMICS

71

rm has market power, its decision of how much output to

provide to the market inuences the market price, therefor the rm is not faced with any price, and the question
becomes less relevant.

It is aforementioned, that the demand curve is generally

downward-sloping, there may be rare examples of goods
that have upward-sloping demand curves. Two dierent
hypothetical types of goods with upward-sloping demand
Economists distinguish between the supply curve of an in- curves are Gien goods (an inferior but staple good) and
dividual rm and between the market supply curve. The Veblen goods (goods made more fashionable by a higher
market supply curve is obtained by summing the quanti- price).
ties supplied by all suppliers at each potential price. Thus, By its very nature, conceptualizing a demand curve rein the graph of the supply curve, individual rms supply quires that the purchaser be a perfect competitorthat is,
curves are added horizontally to obtain the market supply that the purchaser has no inuence over the market price.
curve.
This is true because each point on the demand curve is the
Economists also distinguish the short-run market supply answer to the question If this buyer is faced with this pocurve from the long-run market supply curve. In this con- tential price, how much of the product will it purchase?"
text, two things are assumed constant by denition of the If a buyer has market power, so its decision of how much
short run: the availability of one or more xed inputs (typ- to buy inuences the market price, then the buyer is not
ically physical capital), and the number of rms in the faced with any price, and the question is meaningless.
industry. In the long run, rms have a chance to adjust
their holdings of physical capital, enabling them to better
adjust their quantity supplied at any given price. Furthermore, in the long run potential competitors can enter or
exit the industry in response to market conditions. For
both of these reasons, long-run market supply curves are
generally atter than their short-run counterparts.

Like with supply curves, economists distinguish between

the demand curve of an individual and the market demand curve. The market demand curve is obtained by
summing the quantities demanded by all consumers at
each potential price. Thus, in the graph of the demand
curve, individuals demand curves are added horizontally
to obtain the market demand curve.

The determinants of supply are:

The determinants of demand are:

1. Production costs: how much a goods costs to be produced. Production costs are the cost of the inputs;
primarily labor, capital, energy and materials. They
depend on the technology used in production, and/or
technological advances. See: Productivity
2. Firms expectations about future prices
3. Number of suppliers

8.1.2

Demand schedule

A demand schedule, depicted graphically as the demand

curve, represents the amount of some goods that buyers
are willing and able to purchase at various prices, assuming all determinants of demand other than the price of
the good in question, such as income, tastes and preferences, the price of substitute goods, and the price of
complementary goods, remain the same. Following the
law of demand, the demand curve is almost always represented as downward-sloping, meaning that as price decreases, consumers will buy more of the good.[2]
Just like the supply curves reect marginal cost curves,
demand curves are determined by marginal utility
curves.[3] Consumers will be willing to buy a given quantity of a good, at a given price, if the marginal utility of
additional consumption is equal to the opportunity cost
determined by the price, that is, the marginal utility of
alternative consumption choices. The demand schedule
is dened as the willingness and ability of a consumer to
purchase a given product in a given frame of time.

1. Income.
2. Tastes & preferences.
3. Prices of related goods and services.
4. Consumers expectations about future prices and incomes that can be checked.
5. Number of potential consumers

8.2 Microeconomics

72

8.2.1

CHAPTER 8. SUPPLY AND DEMAND

Equilibrium

Generally speaking, an equilibrium is dened to be the

price-quantity pair where the quantity demanded is equal
to the quantity supplied. It is represented by the intersection of the demand and supply curves.[4] The analysis of various equilibria is a fundamental aspect of
microeconomics:
Market Equilibrium: A situation in a market when the
price is such that the quantity demanded by consumers
is correctly balanced by the quantity that rms wish to
supply. In this situation, the market clears.[5]
Changes in market equilibrium: Practical uses of supply and demand analysis often center on the dierent
variables that change equilibrium price and quantity, represented as shifts in the respective curves. Comparative
statics of such a shift traces the eects from the initial
equilibrium to the new equilibrium.
Demand curve shifts:
Main article: Demand curve
When consumers increase the quantity demanded at a
given price, it is referred to as an increase in demand. Increased demand can be represented on the graph as the
curve being shifted to the right. At each price point, a
greater quantity is demanded, as from the initial curve
D1 to the new curve D2. In the diagram, this raises the
equilibrium price from P1 to the higher P2. This raises
the equilibrium quantity from Q1 to the higher Q2. A
movement along the curve is described as a change in
the quantity demanded to distinguish it from a change
in demand, that is, a shift of the curve. there has been an
increase in demand which has caused an increase in (equilibrium) quantity. The increase in demand could also
come from changing tastes and fashions, incomes, price
changes in complementary and substitute goods, market
expectations, and number of buyers. This would cause
the entire demand curve to shift changing the equilibrium
price and quantity. Note in the diagram that the shift of
the demand curve, by causing a new equilibrium price
to emerge, resulted in movement along the supply curve
from the point (Q1 , P1 ) to the point (Q2 , P2 ).

shifts. For example, assume that someone invents a better way of growing wheat so that the cost of growing
a given quantity of wheat decreases. Otherwise stated,
producers will be willing to supply more wheat at every
price and this shifts the supply curve S1 outward, to S2
an increase in supply. This increase in supply causes the
equilibrium price to decrease from P1 to P2. The equilibrium quantity increases from Q1 to Q2 as consumers
move along the demand curve to the new lower price. As
a result of a supply curve shift, the price and the quantity
move in opposite directions. If the quantity supplied decreases, the opposite happens. If the supply curve starts at
S2, and shifts leftward to S1, the equilibrium price will increase and the equilibrium quantity will decrease as consumers move along the demand curve to the new higher
price and associated lower quantity demanded. The quantity demanded at each price is the same as before the supply shift, reecting the fact that the demand curve has not
shifted. But due to the change (shift) in supply, the equilibrium quantity and price have changed.
The movement of the supply curve in response to a change
in a non-price determinant of supply is caused by a change
in the y-intercept, the constant term of the supply equation. The supply curve shifts up and down the y axis as
non-price determinants of demand change.

8.2.2 Partial equilibrium

Main article: Partial equilibrium
Partial equilibrium, as the name suggests, takes into consideration only a part of the market to attain equilibrium.
Jain proposes (attributed to George Stigler): A partial
equilibrium is one which is based on only a restricted
range of data, a standard example is price of a single
product, the prices of all other products being held xed
during the analysis.[6]

The supply-and-demand model is a partial equilibrium

model of economic equilibrium, where the clearance
on the market of some specic goods is obtained independently from prices and quantities in other markets. In other words, the prices of all substitutes and
complements, as well as income levels of consumers are
If the demand decreases, then the opposite happens: a constant. This makes analysis much simpler than in a
shift of the curve to the left. If the demand starts at
general equilibrium model which includes an entire econD2, and decreases to D1, the equilibrium price will de- omy.
crease, and the equilibrium quantity will also decrease.
The quantity supplied at each price is the same as before Here the dynamic process is that prices adjust until supthe demand shift, reecting the fact that the supply curve ply equals demand. It is a powerfully simple techhas not shifted; but the equilibrium quantity and price are nique that allows one to study equilibrium, eciency and
comparative statics. The stringency of the simplifying asdierent as a result of the change (shift) in demand.
sumptions inherent in this approach make the model conSupply curve shifts:
siderably more tractable, but may produce results which,
Main article: Supply (economics)
while seemingly precise, do not eectively model real
world economic phenomena.

When technological progress occurs, the supply curve Partial equilibrium analysis examines the eects of pol-

8.5. MACROECONOMIC USES OF DEMAND AND SUPPLY

icy action in creating equilibrium only in that particular
sector or market which is directly aected, ignoring its
eect in any other market or industry assuming that they
being small will have little impact if any.
Hence this analysis is considered to be useful in constricted markets.
Lon Walras rst formalized the idea of a one-period economic equilibrium of the general economic system, but
it was French economist Antoine Augustin Cournot and
English political economist Alfred Marshall who developed tractable models to analyze an economic system.

8.3 Other markets

The model of supply and demand also applies to various
specialty markets.
The model is commonly applied to wages, in the market
for labor. The typical roles of supplier and demander are
reversed. The suppliers are individuals, who try to sell
their labor for the highest price. The demanders of labor
are businesses, which try to buy the type of labor they
need at the lowest price. The equilibrium price for a certain type of labor is the wage rate.[7]
A number of economists (for example Pierangelo
Garegnani,[8] Robert L. Vienneau,[9] and Arrigo Opocher
& Ian Steedman[10] ), building on the work of Piero
Sraa, argue that this model of the labor market, even
given all its assumptions, is logically incoherent. Michael
Anyadike-Danes and Wyne Godley[11] argue, based on
simulation results, that little of the empirical work done
with the textbook model constitutes a potentially falsifying test, and, consequently, empirical evidence hardly exists for that model.

73

with sucient information in the model. This can be

done with simultaneous-equation methods of estimation
in econometrics. Such methods allow solving for the
model-relevant structural coecients, the estimated algebraic counterparts of the theory. The Parameter identication problem is a common issue in structural estimation. Typically, data on exogenous variables (that is,
variables other than price and quantity, both of which
are endogenous variables) are needed to perform such an
estimation. An alternative to structural estimation is
reduced-form estimation, which regresses each of the endogenous variables on the respective exogenous variables.

8.5 Macroeconomic uses of demand and supply

Demand and supply have also been generalized to explain macroeconomic variables in a market economy,
including the quantity of total output and the general
price level. The Aggregate Demand-Aggregate Supply model may be the most direct application of supply
and demand to macroeconomics, but other macroeconomic models also use supply and demand. Compared
to microeconomic uses of demand and supply, dierent
(and more controversial) theoretical considerations apply to such macroeconomic counterparts as aggregate demand and aggregate supply. Demand and supply are also
used in macroeconomic theory to relate money supply
and money demand to interest rates, and to relate labor
supply and labor demand to wage rates.

8.6 History

This criticism of the application of the model of supply According to Hamid S. Hosseini, the power of supply and
and demand generalizes, particularly to all markets for demand was understood to some extent by several early
factors of production.
Muslim scholars, such as fourteenth-century Mamluk
In both classical and Keynesian economics, the money scholar Ibn Taymiyyah, who wrote: If desire for goods
market is analyzed as a supply-and-demand system with increases while its availability decreases, its price rises.
interest rates being the price. The money supply may be On the other hand, if availability of the good increases
[14]
a vertical supply curve, if the central bank of a country and the desire for it decreases, the price comes down.
chooses to use monetary policy to x its value regardless
of the interest rate; in this case the money supply is totally
inelastic. On the other hand,[12] the money supply curve
is a horizontal line if the central bank is targeting a xed
interest rate and ignoring the value of the money supply;
in this case the money supply curve is perfectly elastic.
The demand for money intersects with the money supply
to determine the interest rate.[13]

John Locke's 1691 work Some Considerations on the Consequences of the Lowering of Interest and the Raising of
the Value of Money.[15] includes an early and clear description of supply and demand and their relationship. In
this description demand is rent: The price of any commodity rises or falls by the proportion of the number of
buyer and sellers and that which regulates the price...
[of goods] is nothing else but their quantity in proportion
to their rent.

The phrase supply and demand was rst used by James

Denham-Steuart in his Inquiry into the Principles of Political Economy, published in 1767. Adam Smith used
Demand and supply relations in a market can be sta- the phrase in his 1776 book The Wealth of Nations,
tistically estimated from price, quantity, and other data and David Ricardo titled one chapter of his 1817 work

8.4 Empirical estimation

74

CHAPTER 8. SUPPLY AND DEMAND

Principles of Economics.[16]

8.7 Criticisms
At least two assumptions are necessary for the validity
of the standard model: rst, that supply and demand
are independent; second, that supply is constrained by a
xed resource. If these conditions do not hold, then the
Marshallian model cannot be sustained. Sraas critique
focused on the inconsistency (except in implausible circumstances) of partial equilibrium analysis and the rationale for the upward slope of the supply curve in a market
for a produced consumption good.[19] The notability of
Sraas critique is also demonstrated by Paul A. Samuelsons comments and engagements with it over many years,
for example:
What a cleaned-up version of Sraa (1926)
establishes is how nearly empty are all of Marshalls partial equilibrium boxes. To a logical purist of Wittgenstein and Sraa class, the
Marshallian partial equilibrium box of constant cost is even more empty than the box of
increasing cost..[20]
Adam Smith

Principles of Political Economy and Taxation On the Inuence of Demand and Supply on Price.[16]

Aggregate excess demand in a market is the dierence

between the quantity demanded and the quantity supplied as a function of price. In the model with an
upward-sloping supply curve and downward-sloping demand curve, the aggregate excess demand function only
intersects the axis at one point, namely, at the point
where the supply and demand curves intersect. The
SonnenscheinMantelDebreu theorem shows that the
standard model cannot be rigorously derived in general
from general equilibrium theory.[21]

In The Wealth of Nations, Smith generally assumed that

the supply price was xed but that its merit (value)
would decrease as its scarcity increased, in eect what
was later called the law of demand also. Ricardo, in Principles of Political Economy and Taxation, more rigorously
The model of prices being determined by supply and delaid down the idea of the assumptions that were used to
mand assumes perfect competition. But:
build his ideas of supply and demand. Antoine Augustin
Cournot rst developed a mathematical model of supply
economists have no adequate model of how
and demand in his 1838 Researches into the Mathematical
individuals and rms adjust prices in a comPrinciples of Wealth, including diagrams.
petitive model. If all participants are priceDuring the late 19th century the marginalist school of
takers by denition, then the actor who adthought emerged. This eld mainly was started by Stanley
justs prices to eliminate excess demand is not
Jevons, Carl Menger, and Lon Walras. The key idea was
specied.[22]
that the price was set by the most expensive price, that is,
the price at the margin. This was a substantial change Goodwin, Nelson, Ackerman, and Weisskopf write:
from Adam Smiths thoughts on determining the supply
price.
If we mistakenly confuse precision with acIn his 1870 essay On the Graphical Representation of
Supply and Demand, Fleeming Jenkin in the course of
introduc[ing] the diagrammatic method into the English
economic literature published the rst drawing of supply and demand curves therein,[17] including comparative
statics from a shift of supply or demand and application
to the labor market.[18] The model was further developed
and popularized by Alfred Marshall in the 1890 textbook

curacy, then we might be misled into thinking that an explanation expressed in precise
mathematical or graphical terms is somehow
more rigorous or useful than one that takes into
account particulars of history, institutions or
business strategy. This is not the case. Therefore, it is important not to put too much condence in the apparent precision of supply and

8.9. REFERENCES
demand graphs. Supply and demand analysis is a useful precisely formulated conceptual
tool that clever people have devised to help us
gain an abstract understanding of a complex
world. It does notnor should it be expected
togive us in addition an accurate and complete description of any particular real world
market.[23]

8.8 See also

Alpha consumer
Barriers to entry
Cambridge capital controversy
Consumer theory
Deadweight loss
Demand chain
Demand forecasting
Demand shortfall
Demand vacuum
Economic surplus
Eective demand
Eect of taxes and subsidies on price
Elasticity
Excess demand function
Externality
History of economic thought
Induced demand
Inverse demand function
Labor shortage
Law of supply
Neoclassical economics
Producers surplus
Protectionism
Prot
Rationing
Real prices and ideal prices
Says Law
"Supply creates its own demand"
Supply shock

75

8.9 References
[1] Braeutigam, Ronald (2010). Microeconomics (4th ed.).
Wiley.
[2] Note that unlike most graphs, supply & demand curves
are plotted with the independent variable (price) on the
vertical axis and the dependent variable (quantity supplied
or demanded) on the horizontal axis.
[3] Marginal Utility and Demand. Retrieved 2007-02-09.
[4] Microeconomics - Supply and Demand.
2014-12-31.

Retrieved

[5] Mankiw, N.G.; Taylor, M.P. (2011). Economics (2nd ed.,

revised ed.). Andover: Cengage Learning.
[6] Jain, T.R. (200607). Microeconomics and Basic Mathematics. New Delhi: VK Publications. p. 28. ISBN 8187140-89-5. Check date values in: |date= (help)
[7] Kibbe, Matthew B. The Minimum Wage: Washingtons
Perennial Myth. Cato Institute. Retrieved 2007-02-09.
[8] P. Garegnani, Heterogeneous Capital, the Production
Function and the Theory of Distribution, Review of Economic Studies, V. 37, N. 3 (Jul. 1970): 407436
[9] Robert L. Vienneau, On Labour Demand and Equilibria
of the Firm, Manchester School, V. 73, N. 5 (Sep. 2005):
612619
[10] Arrigo Opocher and Ian Steedman, Input Price-Input
Quantity Relations and the Numeraire, Cambridge Journal of Economics, V. 3 (2009): 937948
[11] Michael Anyadike-Danes and Wyne Godley, Real Wages
and Employment: A Sceptical View of Some Recent
Empirical Work, Manchester School, V. 62, N. 2 (Jun.
1989): 172187
[12] Basij J. Moore, Horizontalists and Verticalists: The
Macroeconomics of Credit Money, Cambridge University
Press, 1988
[13] Ritter, Lawrence S.; Silber, William L.; Udell, Gregory
F. (2000). Principles of Money, Banking, and Financial
Markets (10th ed.). Addison-Wesley, Menlo Park C. pp.
431438, 465476. ISBN 0-321-37557-2.
[14] Hosseini, Hamid S. (2003). Contributions of Medieval Muslim Scholars to the History of Economics
and their Impact: A Refutation of the Schumpeterian
Great Gap. In Biddle, Je E.; Davis, Jon B.; Samuels,
Warren J. A Companion to the History of Economic
Thought. Malden, MA: Blackwell. pp. 2845 [28 & 38].
doi:10.1002/9780470999059.ch3. ISBN 0-631-225730. (citing Hamid S. Hosseini, 1995. Understanding
the Market Mechanism Before Adam Smith: Economic
Thought in Medieval Islam, History of Political Economy,
Vol. 27, No. 3, 53961).
[15] John Locke (1691) Some Considerations on the consequences of the Lowering of Interest and the Raising of the
Value of Money

76

[16] Thomas M. Humphrey, 1992. Marshallian Cross Diagrams and Their Uses before Alfred Marshall, Economic
Review, Mar/Apr, Federal Reserve Bank of Richmond,
pp. 323.
[17] A.D. Brownlie and M. F. Lloyd Prichard, 1963. Professor Fleeming Jenkin, 18331885 Pioneer in Engineering and Political Economy, Oxford Economic Papers, NS,
15(3), p. 211.
[18] Fleeming Jenkin, 1870. The Graphical Representation
of the Laws of Supply and Demand, and their Application to Labour, in Alexander Grant, ed., Recess Studies,
Edinburgh. ch. VI, pp. 15185. Edinburgh. Scroll to
chapter link.
[19] Avi J. Cohen, "'The Laws of Returns Under Competitive
Conditions: Progress in Microeconomics Since Sraa
(1926)?", Eastern Economic Journal, V. 9, N. 3 (Jul.Sep.): 1983)
[20] Paul A. Samuelson, Reply in Critical Essays on Piero
Sraas Legacy in Economics (edited by H. D. Kurz) Cambridge University Press, 2000
[21] Alan Kirman, The Intrinsic Limits of Modern Economic
Theory: The Emperor has No Clothes, The Economic
Journal, V. 99, N. 395, Supplement: Conference Papers
(1989): pp. 126139
[22] Alan P. Kirman, Whom or What Does the Representative Individual Represent?" Journal of Economic Perspectives, V. 6, N. 2 (Spring 1992): pp. 117136
[23] Goodwin, N, Nelson, J; Ackerman, F & Weissskopf, T:
Microeconomics in Context 2d ed. Sharpe 2009 ISBN
978-0-7656-2301-0

8.10 Further reading

Ehrbar, Al (2008). Supply. In David R. Henderson. Concise Encyclopedia of Economics (2nd
ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267.
Henderson, David R. (2008). Demand. Concise
Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 9780865976658. OCLC 237794267.
Foundations of Economic Analysis by Paul A.
Samuelson
Price Theory and Applications by Steven E. Landsburg ISBN 0-538-88206-9
An Inquiry into the Nature and Causes of the Wealth
of Nations, Adam Smith, 1776
Supply and Demand book by Hubert D. Henderson
at Project Gutenberg.

CHAPTER 8. SUPPLY AND DEMAND

8.11 External links

Nobel Prize Winner Prof. William Vickrey: 15 fatal
fallacies of nancial fundamentalism A Disquisition on Demand Side Economics
Marshallian Cross Diagrams and Their Uses before Alfred Marshall: The Origins of Supply and
Demand Geometry by Thomas Humphrey (via the
Richmond Fed)
By what is the price of a commodity determined?, a
brief statement of Karl Marxs rival account
Supply and Demand by Fiona Maclachlan and
Basic Supply and Demand by Mark Gillis, Wolfram
Demonstrations Project.

8.12. TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

77

8.12 Text and image sources, contributors, and licenses

8.12.1

Text

Economics Source: http://en.wikipedia.org/wiki/Economics?oldid=640515389 Contributors: Paul Drye, The Epopt, The Cunctator, WojPob, Brion VIBBER, Eloquence, Vicki Rosenzweig, Mav, Koyaanis Qatsi, Slrubenstein, Gareth Owen, Mirwin, Youssefsan, Jrincayc,
XJaM, Arvindn, Christian List, Enchanter, Tim Shell, Miguel, SimonP, DavidLevinson, Hefaistos, Jennifer, Anne, Gretchen, Abraham,
Tool, LK, Galizia, Netesq, Tzartzam, Tedernst, Olivier, Lisiate, Stevertigo, Rbrwr, Boud, PhilipMW, Michael Hardy, Pit, Owl, Isomorphic,
Norm, Liftarn, Gabbe, Sam Francis, Mic, Ixfd64, Chmouel, Chinju, Cyde, 172, TakuyaMurata, Dori, Graith, Pde, Guerby, Ahoerstemeier, GGano, Snoyes, Angela, Jdforrester, Kingturtle, Mihai, Salsa Shark, Poor Yorick, Rossami, Nikai, Susurrus, Andres, Jiang, Evercat,
JamesReyes, Rl, Mxn, Icekiss, Arteitle, Mydogategodshat, Karlwick, Alex S, Vanished user 5zariu3jisj0j4irj, Dcoetzee, Pladask, Wikid,
Piolinfax, Graculus, Peregrine981, Tpbradbury, Taxman, VeryVerily, Bevo, Vinay Varma, Joy, Wetman, Secretlondon, Jusjih, Flockmeal,
Jni, Branddobbe, Frank A, Ke4roh, Jakohn, YahoKa, Fredrik, Chocolateboy, Jmabel, Muxxa, Mintchocicecream, Lowellian, Merovingian, Lsy098, Halthecomputer, SchmuckyTheCat, Meelar, Jondel, Rasmus Faber, Hadal, Wikibot, Borislav, Ungvichian, Lancemurdoch,
Ann Kyslowski, Asparagus, Terjepetersen, Alan Liefting, David Gerard, Snobot, Stirling Newberry, Ancheta Wis, Giftlite, DocWatson42,
Christopher Parham, Steve Casburn, Fennec, Nikodemos, ShaunMacPherson, Nat Krause, Geeoharee, Netoholic, Lee J Haywood, Meursault2004, Lupin, Fastssion, Marcika, Wwoods, Everyking, Jorend, Varlaam, Leonard G., Dick Bos, Frencheigh, Sundar, Joel Parker Henderson, Mboverload, Daniel Brockman, Taak, Bobblewik, Deus Ex, JRR Trollkien, Golbez, Pamri, Ruy Lopez, Jdevine, Pcarbonn, Quadell,
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Kenneth M Burke, Gwen Gale, Economistlai, Treisijs, Jrg Sutter, Ccc-media, Gemini1980, Sapaloe, Richardboswell, Scott Illini, The
Fat Guy, DASonnenfeld, Nwanda, Martial75, Idioma-bot, TNTfan101, Remi0o, Lights, UnicornTapestry, Xenophon101, VolkovBot,
TreasuryTag, Pasixxxx, Jamcib, Wikijectivist, Dlewis7444, Je G., Miguelzinho, Econos, Kks ceser, Childhoodsend, Ldonna, Knverma,
Tomsega, Joel Kincaid, Ann Stouter, DWP17, Someguy1221, Sephiroth m75, Ocolon, Edreamleo, Badly Bradley, Maharashtraexpress,
Tesfatsion, Big666, Larklight, Madandnaked, Sevenoaks, Streetstrategist, Vector Potential, Northern bear, Tc91102, Brianga, MaCRoEco,
Dassiebtekreuz, Logan, Wwwsamcom, NHRHS2010, PokeYourHeadO, Numanumaguy, The Random Editor, SieBot, Euryalus, Viskonsas, Ravensre, Acps110, Andersmusician, Aillema, Universalcosmos, JuanFox, Skipsievert, Fazyninja, EnOreg, Oxymoron83, Artoa-

78

CHAPTER 8. SUPPLY AND DEMAND

sis, Nuttycoconut, Jacko152, Xe7al, Lightmouse, RW Marloe, Cobrajs15, Iain99, Emesee, Johnkoirala, BillGosset, Sahilkk, StaticGull,
Emancipated, Msrasnw, Lordofolympia 14, Yhkhoo, Felizdenovo, Kortaggio, Rinconsoleao, Escape Orbit, Rlest, Simem007, Explicit,
Ossguy, Soporaeternus, EGeek, Liongold, ClueBot, Danielfarber, Lalitasuman, ImperfectlyInformed, Wwheaton, Bangalos, Razimantv,
Niemeyerstein en, J8079s, CounterVandalismBot, Ulmke, Sqeekywheeler, Marselan, Kashi0341, Jobermiester, Blazik, Lbertolotti, Masterpiece2000, Dwrcan, Walrasiad, Robbie098, NewBlueSoap, Flower5677, Hezarfenn, Fishiehelper2, Pinkpedaller, Washiwasha, NuclearWarfare, Arjayay, Snacks, Randomran, Kakofonous, Thechemist21, Pularoid, MelonBot, Tang23, Antonwg, DumZiBoT, Mtlhedd,
Pa68, Dawlco, Vegas949, JinJian, Dwilso, Eklipse, Addbot, DOI bot, Beamathan, Olikawala, PatrickFlaherty, Laurinavicius, Camarinha, Leszek Jaczuk, Cst17, CarsracBot, Joycloete, Z. Patterson, Buddha24, LinkFA-Bot, Mdnahas, 84user, Kivar2, , Blablablob,
J. Milch, Yobot, Firulaith, TaBOT-zerem, Mauler90, Fizyxnrd, Darx9url, Nirvana888, Erp204, ECEstats, QueenCake, Fiddler7, REDyellowGreenBLUE, South Bay, Azcolvin429, Lord Farquaad, MacTire02, Licor, Bility, AnomieBOT, Galoubet, Um, Jo3sampl, Citation bot,
ArthurBot, LilHelpa, Marshallsumter, Xqbot, Timir2, Porterfan1, GaryB84, Mgmwki, TechBot, ChildofMidnight, Locos epraix, Tyrol5,
Miguel in Portugal, Srich32977, GrouchoBot, Nayvik, Alumnum, , ProtectionTaggingBot, Omnipaedista, Oscarjquintana,
Mark Schierbecker, Basharh, Smallman12q, Shadowjams, Tugaworld, 13alexander, Velblod, Fruchogurt, FrescoBot, Fortdj33, Tobby72,
The Nerd from Earth, Bambuway, Ladril, CircleAdrian, Citation bot 1, Boxplot, Andrei Rublev, Chris814, Kiefer.Wolfowitz, DTMGO,
Achaemenes, RedBot, Solid State Survivor, Madliner, Jirka.h23, Gamewizard71, Jugni, FoxBot, Thrissel, Bbarkley2, Tj-tilli-wiki, Cassiopella, Lotje, Dasha14, Duoduoduo, Diannaa, Dun85, Tbhotch, Reach Out to the Truth, TjBot, Ripchip Bot, Macrocompassion, WildBot, Logwea299, Polylepsis, Shabidoo, KinkyLipids, EmausBot, Josephcunningham, Obamafan70, Anshuman.jrt, Dewritech, GoingBatty,
Sreekanthnair123, Mar4d, H3llBot, Dreispt, , Pochsad, Bellstarr, PraxisConsensus, Pierpietro, Terra Novus, Mjbmrbot, Faizanalivarya,
Virginiawhite09, Mod0001, Dalwalkat, Mouramoor, MerlIwBot, Helpful Pixie Bot, Lolm8, Revisor2011, Guest2625, BG19bot, Eb00kie,
Lawandeconomics1, Wingroras, Tb0412, Ajayupai95, LorLeod, Polmandc, Polytopic, Smsagro, Lieutenant of Melkor, Ejspeiro, BattyBot, Snowangel123, Prof. Squirrel, David B Stephens, ChrisGualtieri, IjonTichyIjonTichy, Editfromwithout, Dexbot, Evolife, Claireclear,
ComfyKem, Cupco, Johnjay1745, Keremcantekin, RotlinkBot, Paum89, CsDix, Camyoung54, Omkar Tivrekar, Neo Poz, The Wikimon,
CensoredScribe, Kuyi123w, WeakTrain, Mrm7171, Bronx Discount Liquor, WPGA2345, Csusarah, Mahusha, Monkbot, Itamarkalimi,
Sawdust Restaurant, Vincius94, Minimax Regret, Sy9045, HelloBestFriends, Loraof, Jodielavery and Anonymous: 830
Price Source: http://en.wikipedia.org/wiki/Price?oldid=641124616 Contributors: KF, Stephen pomes, Edward, Patrick, Willsmith, Earth,
LenBudney, Ixfd64, Haakon, Mac, Randywombat, Poor Yorick, Mydogategodshat, Novum, Juxo, Lou Sander, Radiojon, JorgeGG,
Fifelfoo, LiDaobing, Beland, Piotrus, Rdsmith4, Secfan, Pgreennch, Kaustuv, Marinheiro, Discospinster, Pak21, Luqui, Wk muriithi,
Cretog8, Reinyday, Maurreen, ParticleMan, Apatterno, Diego Moya, Mohammadgani, Simone, RJII, Metju, Dennis Bratland, Daranz,
JALockhart, Richard Arthur Norton (1958- ), Sburke, Brentdax, Je3000, Mangojuice, Bluemoose, Mbxp, Graham87, Protez, FlaBot,
Awotter, RexNL, Ewlyahoocom, Bgwhite, Dnadan, YurikBot, Huw Powell, Ihope127, Dureo, Jurriaan, Gtdp, Tevildo, Darbyw, El T,
GrinBot, Diligent, SmackBot, Eskimbot, Ohnoitsjamie, Timneu22, Chlewbot, Stevenmitchell, Mion, DDima, Byelf2007, Petr Kopa,
IronGargoyle, 16@r, Emx, Clarityend, Joseph Solis in Australia, Eastlaw, KnightLago, N2e, Gregbard, Norman314, Hebrides, Thijs!bot,
Epbr123, Barticus88, WillMak050389, Escarbot, AntiVandalBot, Wayiran, Khoj badami, JAnDbot, VoABot II, Nyttend, Enaidmawr,
Turtle Man, J.delanoy, STBotD, Squids and Chips, Idioma-bot, VolkovBot, Piersons Puppeteer, TXiKiBoT, Saber girl08, Imasleepviking,
JhsBot, Lamro, Macs RULE!, AlleborgoBot, SieBot, Pengyanan, ZyPfenix, Jack.schonbrun, Jojalozzo, Skipsievert, Bagatelle, Bombastus,
Foggy Morning, Corebreeches, ClueBot, ChandlerMapBot, Zack wadghiri, Alexbot, Erebus Morgaine, Razorame, FetteK, 88jim.klein,
Addbot, Some jerk on the Internet, Iceblock, CanadianLinuxUser, Asphatasawhale, MrOllie, LaaknorBot, AndersBot, Ehrenkater, Quantumobserver, WikiDan61, Xqt, AnomieBOT, Lab58, Bob Burkhardt, Maxis ftw, LilHelpa, Xqbot, Fundoctor, Srich32977, GrouchoBot,
Kyng, F.Pavkovic, Sophus Bie, Liyf, Touchatou, Iliketoeditx1, Opowell, Mydiscountprices, Adamovicmladen, Lkjhgfdsa 0, Aniten21, WikitanvirBot, Gfoley4, Oxbownet, Vsh3r, Luke Grecki, Punter30, Ho949494bot, Edmund O'Sullivan, ClueBot NG, MelbourneStar, Igorch,
BG19bot, Zyxwv99, Snow Blizzard, Glacialfox, Piero Testa, ChrisGualtieri, Irhyne, Epicgenius, Babitaarora, Robyvd, Simpuppy26015,
Linkedlibrary, KH-1 and Anonymous: 131
Gross domestic product Source: http://en.wikipedia.org/wiki/Gross%20domestic%20product?oldid=639906282 Contributors: AxelBoldt, The Cunctator, Andre Engels, Youssefsan, Enchanter, William Avery, SimonP, Heron, Ryguasu, Olivier, Edward, Llywrch, MartinHarper, Ixfd64, Sannse, TakuyaMurata, Minesweeper, Mkweise, Ahoerstemeier, Docu, Den fjttrade ankan, Darkwind, Ijon, Julesd,
Andres, Jiang, Kaihsu, Samw, Samuel, Mxn, Vroman, Mydogategodshat, Hashar, Jengod, Timwi, Savantpol, Fuzheado, Andrewman327,
Graculus, Wik, Markhurd, Peregrine981, Tpbradbury, Mrand, Rronline, Tempshill, Karukera, Joy, Jusjih, Gurry, Vergina, Finlay McWalter, UninvitedCompany, Donarreiskoer, Robbot, Fredrik, Chris 73, Nurg, Mayooranathan, PedroPVZ, Bmaisonnier, Texture, Sekicho,
Sunray, Hadal, Michael Snow, Aetheling, Mushroom, Cautious, Anthony, Dmn, Superm401, Adam78, Alexwcovington, Giftlite, JamesMLane, Fennec, Peruvianllama, Everyking, Subsolar, Henry Flower, Cantus, Ukaddiction, Guanaco, Bsoft, Rchandra, Kennethduncan,
SoWhy, Andycjp, Knutux, Calexico, Antandrus, Beland, Onco p53, OverlordQ, Robert Brockway, Bongbang, Josquius, Gsociology, Zfr,
Nick2588, Pgreennch, Grunners, Neutrality, Urhixidur, Jcw69, Gerrit, Subsume, Absinf, Chrisbolt, Atlastawake, Jayjg, Trollhammer,
Discospinster, Guanabot, Michaels vandalism, Ragnrok, Green Troll, Cacycle, Green Trolls, Dealing with vandalism, Notinasnaid, Ibagli,
Paul August, Bender235, ESkog, Kjoonlee, JoeSmack, STHayden, Project2501a, Mwanner, Shadow demon, Sietse Snel, Just zis Guy, you
know?, Grick, Bobo192, Cretog8, Whosyourjudas, Per Olofsson, Che090572, Shenme, Cmdrjameson, Johnteslade, Dungodung, Maurreen, Pokrajac, Jerryseinfeld, Jojit fb, Kjkolb, Nk, Microtony, Eritain, JesseHogan, Stephen Bain, Mdd, Klafubra, Knucmo2, Jumbuck,
Alansohn, Civvi, John Quiggin, Fritts1227, Riana, SHIMONSHA, Lightdarkness, Cdc, Malo, Snowolf, RainbowOfLight, Mcmillin24,
Vuo, Bsadowski1, Mattbrundage, Palea, Bookandcoee, Dan100, Kardrak, Markaci, Dennis Bratland, Ultramarine, Sylvain Mielot, Velho,
Distantbody, 2004-12-29T22:45Z, Mindmatrix, Lochaber, LOL, Scjessey, Before My Ken, Eclecticos, Miss Madeline, Bkwillwm, Srborlongan, Terence, Bluemoose, GregorB, SCEhardt, Snagari, Vkbenson, CharlesC, Zzyzx11, Tom W.M., DocRuby, Wayward, Gimboid13,
Tokek, DaveApter, Dysepsion, Obersachse, SqueakBox,
, Ash211, Rjwilmsi, Joe Decker, Koavf, Armandeh, Jlundell, John Nixon,
Gudeldar, Nneonneo, XLerate, S Chapin, Czalex, Bhadani, DirkvdM, 50Stars, Wragge, SeptimusOrcinus, Ysangkok, Gurch, Fephisto,
Jezarnold, Glenn L, King of Hearts, Visor, Bgwhite, Crosstimer, Gwernol, Dnadan, Vmenkov, Carlosvigopaz, Roboto de Ajvol, Wavelength, Hairy Dude, Deeptrivia, Huw Powell, RussBot, Open4D, Akamad, Chensiyuan, Manop, Gaius Cornelius, Pseudomonas, Aetil, Wiki
alf, Grafen, Jaxl, Johann Wolfgang, Rjensen, RazorICE, Cypherrange, Daniel Bonniot de Ruisselet, Farmanesh, RUL3R, Amakuha, Tony1,
Epipelagic, Zirland, Todfox, DeadEyeArrow, Psy guy, Jurriaan, Speedoight, Robertbyrne, Wknight94, ElHornberg, Ynysgrif, Boivie,
Flagboy, 21655, EcoRat, Closedmouth, Jwissick, Arthur Rubin, RaveX, Josh3580, JocPro, Cjfsyntropy, Michigan user, Kungfuadam, Appleseed, Otto ter Haar, Teryx, Roke, Mardus, XieChengnuo, SG, Veinor, SmackBot, YellowMonkey, Ashley thomas80, Prodego, Alex1011,
Lawrencekhoo, Fulldecent, Jrosenau, Jrockley, Delldot, Timeshifter, Boris Barowski, ZS, HalfShadow, Alsandro, Ga, Gilliam, Ohnoitsjamie, Chaojoker, Ppntori, MPD01605, Anwar saadat, Chris the speller, Keegan, JF Manning, Gmobus, Miquonranger03, SchftyThree,
BrendelSignature, Sampi, Serhio, Conquest1980, Colonies Chris, Snipeseye, A. B., Mexcellent, Chendy, Can't sleep, clown will eat me,
Brimba, Ignirtoq, Georey Gibson, Addshore, Celarnor, Stevenmitchell, Arab Hafez, Khoikhoi, Flyguy649, Nakon, Looris, John wesley, Dreadstar, RandomP, RafaelG, Soobrickay, Bombshell, DMacks, CartoonDiablo, MadCow257, Deiz, Kukini, Byelf2007, Nishkid64,

8.12. TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

79

ArglebargleIV, Harryboyles, Rklawton, Kuru, Davy.zou, Aaronchall, Tanvirchowdhury, Chodorkovskiy, Adam7davies, Postscript07,
JHunterJ, Hvn0413, TastyPoutine, Tuspm, Ryulong, Graufbold, Peter Horn, Akinara, Sgstarling, Hu12, Levineps, Iridescent, K, WAREL,
Laurens-af, Missionary, Joseph Solis in Australia, Wjejskenewr, JHP, Onathinwhiteline, Igoldste, Mulder416sBot, Courcelles, Woodshed, Saamah, Frank Lofaro Jr., Tawkerbot2, JRSpriggs, Barbaar, CmdrObot, Van helsing, Megaboz, KyraVixen, Antriver, Benwildeboer,
Requestion, Rain74, Karenjc, Funnyfarmofdoom, Nilfanion, Cydebot, Crossmr, Gogo Dodo, Anonymi, Chasingsol, Tfmgames, Omicronpersei8, JodyB, Richhoncho, CieloEstrellado, Thijs!bot, Epbr123, D4g0thur, Andri Egilsson, Jackofh3arts, N5iln, Jg1way, Antoniosteve,
Marek69, D.Tzumli, Es-won, Mailseth, Son of Somebody, NERIUM, PaulVIF, Sean William, Thomas Paine1776, Sherbrooke, Escarbot,
Oreo Priest, Beeezy, Trengarasu, Mentisto, AntiVandalBot, BokicaK, Seaphoto, Carolmooredc, Doc Tropics, Masterchip27, Gregalton,
Dylan Lake, LibLord, Zeitlupe, Ioeth, JAnDbot, Chaitanya.lala, Tigga, Sun1, Thoerin, MER-C, CosineKitty, Briancollins, Giler, BK,
Maqayum, Hut 8.5, Dhone Dognani, Yahel Guhan, Meeples, Magioladitis, Bongwarrior, VoABot II, Dekimasu, Professor marginalia,
Wikidudeman, Kuyabribri, Pixel ;-), ele Kula, Mouchoir le Souris, Brusegadi, Magasin, Kokootchke, 28421u2232nfenfcenc, Allstarecho, Kawaputra, Toddcs, Chivista, Cpl Syx, DerHexer, Olivierchaussavoine, Robotam, Hdt83, MartinBot, Ghorbanalibeik, CliC, Poeloq,
Anaxial, Kostisl, CommonsDelinker, AgarwalSumeet, Etidepeti, Nima1981, Tgeairn, J.delanoy, Pharaoh of the Wizards, InTheZone, Maurice Carbonaro, Mynameiscurtis, Hdurina, Aformalevent, CzarNick, Furypanda, Robertson-Glasgow, Goingstuckey, SJP, LeighvsOptimvsMaximvs, Nay Min Thu, Jackaranga, Tjhuang88, Brahmastra, Goldcakes, Bonadea, Andy Marchbanks, Nwanda, Idioma-bot, Lights, X!,
Chinneeb, Nitroshockwave, MagicLove, Je G., JohnBlackburne, Vrac, Maple iitk, SexyBern, Philip Trueman, TXiKiBoT, Jomasecu,
Zidonuke, Dwight666, Olly150, Lradrama, Cheskis, Martin451, LeaveSleaves, PDFbot, Bob f it, Lilgeopch81, Greswik, Kanogul, Andrewaskew, Lamro, FinnWiki, Clintville, Falcon8765, AgentCDE, Homunculus 2, The Devils Advocate, CarbonRod85, Brianga, Farcaster, MaCRoEco, AlleborgoBot, Logan, Alexnicholls, Nick jord, Pbit, Scottywong, Beadbs, Zebas, Aleksael, Hughey, Deconstructhis,
Roryclarke, SieBot, Brenont, Spartan, Snoopy'07-EN, Dawn Bard, Tamarslay3, Yintan, Fatjoe8, Blitz.ldn, Flyer22, Emilfarb, Vanished
user ojwejuerijaksk344d, JuanFox, Wpotato, Faradayplank, Nuttycoconut, Hello71, Bujo64, Huangkai, Lordofolympia 14, Mr. Stradivarius, Yair rand, Centrelink1, Mohammad Aziz, Jan Jansson, Efe, Rinconsoleao, Spleetwalker, WikipedianMarlith, Faithlessthewonderboy, Sfan00 IMG, ClueBot, Enkiduk, Owlpamy, Orangedolphin, The Thing That Should Not Be, Yuslo, Tsba, Cambrasa, Lawrence
Cohen, Polyamorph, Joao Xavier, Ventusa, Paulboboc, LizardJr8, Ottawahitech, I am a violinist, Auntof6, Justrick, Dwrcan, Takeaway, Excirial, Alexbot, Jusdafax, Goetheschule, Noneforall, Eeekster, Lartoven, Stevewaller, I Enjoy Commenting, Loools, Bur, Markie doom,
Sharathd, Bonewah, Moberg, Matthew Desjardins, Chaosdruid, Thingg, Aitias, V i P, PotentialDanger, Mythdon, Goodvac, Cournot,
XLinkBot, Kw27, Nannan123, Rror, Pgallert, Sepes, WikHead, Pa68, Jo Alem, The Aviv, Mifter, Kolacinski, Jd027, Abebe45, ZooFari,
Wikipire, Addbot, Finder222, Krawndawg, Some jerk on the Internet, Lgm821, Niall4fran, Jeanmark04, Ronhjones, Camillaschippa,
Fieldday-sunday, CanadianLinuxUser, Leszek Jaczuk, Creionul, MrOllie, LaaknorBot, Chamal N, Casperdc, Jamiechilders, Favonian,
Exor674, LinkFA-Bot, 5 albert square, Mitch Skinner, Tide rolls, Vanished user 38hfun34tunkewj4t, OlEnglish, Avono, Apteva, Teles,
Gail, Zorrobot, Eb, Thatoneguy89, Legobot, Luckas-bot, AadaamS, Yobot, DvK, Fraggle81, Be so empty without me, Nirvana888,
Anigma10363, Mmxx, Carleas, THEN WHO WAS PHONE?, Runningdoglackey, KamikazeBot, Johanesw, Eric-Wester, Tempodivalse,
AnomieBOT, Archon 2488, Galoubet, Unit226, World aairs, Kingpin13, Nick UA, Flewis, Ithaka84, Materialscientist, Citation bot,
Maxis ftw, Vulcan Hephaestus, Maru4u, Xqbot, Bakerccm, Dowjgyta, Timir2, Capricorn42, DSisyphBot, Steveneustace, Axan.bulut,
Wilkos, Joshsmith65536, Julle, Lam-ang, Nikkon, Omnipaedista, Shirik, Hoddyman, SassoBot, Amaury, Rstln3, Sqgl, Smallman12q,
Sesu Prime, Grinofwales, Ahuey123, Liridon, Y4cy, Ong saluri, Michael93555, Bob Finkley, Meux33, Jamesooders, CircleAdrian,
Cannolis, Foobar35, Aamirhatif, Biker Biker, SpacemanSpi, Pinethicket, I dream of horses, Rushbugled13, Rishsn, Rovanion, Pristino,
Jirka.h23, 155ws, Elekhh, FoxBot, TobeBot, A-tron, Jonkerz, Attila.lendvai, Comet Tuttle, Kmw2700, Vrenator, Duoduoduo, Theo10011,
Lneal001, Hugh Small, Antarctica365, Suusion of Yellow, Tbhotch, Bluemoons, Mean as custard, The Utahraptor, IANVS, Polly Ticker,
BobbyChristmas, Dwvisser, EmausBot, John of Reading, WikitanvirBot, WeiszGypsy305, Ibdbgr, Charles2711, Manogor, Tommy2010,
RememberingLife, Wikipelli, Aeiuthhiet, Walrus1234567, Dacker13, John Cline, Illegitimate Barrister, DavidMCEddy, F, Josve05a, Tulandro, Arrala, Anand deadly, Marlgryd, Everard Proudfoot, Git2010, Hydriz, Gumbick, J-Playah, Staszek Lem, TyA, Gsarwa, Donner60,
Pun, ChuispastonBot, Wakebrdkid, TYelliot, Nijusby, DASHBotAV, 28bot, Tomzuk, Budavari1970, ClueBot NG, Gareth Grith-Jones,
Jack Greenmaven, MarginalCost, Somedierentstu, Loew Galitz, Alexhch, Shaun courtice, Primergrey, Muon, Mortenmallorca, Widr,
Theopolisme, Jk2q3jrklse, Helpful Pixie Bot, Dlsterling, HMSSolent, Gob Lofa, DBigXray, Guest2625, BG19bot, Ahendrl, Jpinkevi,
Rtaitm, Walk&check, Juro2351, Amelapay, Kndimov, Hallows AG, HIDECCHI001, Patrick750, Jim Sukwutput, Defabc456123, Mark
Arsten, Suzi kaur, Cadiomals, Gayathri47, Altar, Eztoastbom, Bilderbear, Jayadevp13, TrueBisector, Polmandc, Glacialfox, Erigra, Rocketrick217, Bigsam087, Anbu121, Royal888, Sadib en, Shahnawaz243, Liam987, Baboshgastringo, TheCascadian, KATANAGOD, Cyberbot II, ChrisGualtieri, JBrown23, Mediran, Benjamin890, Ducknish, Legalise-regulate-enjoy, MrNiceGuy1113, GrowsWalt, AutomaticStrikeout, Dexbot, Stanley dale, Sae Harshberger, Webclient101, Geremy.Hebert, Graphium, The Anonymouse, TheWikiTroll500,
BeachComber1972, Bontairo, Epicgenius, Eyesnore, SamX, DavidLeighEllis, Quandapanda, LouisAragon, RubleuleR, Evil Connor, Bronx
Discount Liquor, Kkkaaaiii, Whizz40, , Rebanna8*, Skr15081997, Csusarah, Fdhgjkhafdgh, ParacusForward, Crossswords, Monkbot,
Cctush, Filedelinkerbot, SantiLak, Boba22CZ, Pranavashu, Dromore45, DailyEconomic, Ksjdhhdhbehehw, Alexlenk, Brianrisk, Apenuta,
Harusmakan and Anonymous: 1460
BSE SENSEX Source: http://en.wikipedia.org/wiki/BSE%20SENSEX?oldid=641231349 Contributors: Paul A, DropDeadGorgias, Andrewman327, Topbanana, Jayakumar, Hemanshu, Auric, R. end, Mukerjee, Pmanderson, Rich Farmbrough, Neko-chan, IndianCow,
Hayabusa future, Saturnight, Kappa, Jerryseinfeld, Bawol, Rje, Alansohn, Gurudev123, Keenan Pepper, Cdinesh, Crharish, Flamingspinach, Graham87, Sj, Rjwilmsi, Mitul0520, ManuP, Bhadani, FlaBot, KFP, Bmicomp, Bgwhite, Gaius Cornelius, Irishguy, Nishant12, Rajeshroshan, Open2universe, Wikicheng, Shyam, Draicone, Santoo9, Appy, SmackBot, Elonka, C.Fred, Thunderboltz, Jab843,
Ohnoitsjamie, Jprg1966, A. B., Deepakshenoy, RedHillian, Ohconfucius, Pizzadeliveryboy, Kuru, Npindia, Gadiyar, Abhishek-Kumar,
MaximvsDecimvs, S.Sadagopan, Sumit Kumar, Heilme, Dl2000, Jijithnr, SkyWalker, PPrakash, Jesse Viviano, Outriggr, Anil1956, KoolSIM, Cydebot, Ramitmahajan, Alaibot, Thijs!bot, Mercury, Senthil nathan, Mentisto, AntiVandalBot, Nshuks7, IndianGeneralist, MERC, Dalek Cab, Mr.Slick, Acroterion, VoABot II, Durai yuvaraj, Abhinavkumar1987, Mayankkapoor, Iahead, Glen, Pax:Vobiscum, Kayau,
Axlq, Deepa js2000@yahoo.com, R'n'B, S.K.Dhandeshwaran 1, Krisyonline, J.delanoy, Bhaskarchoudary, Ginsengbomb, Abhijitsathe,
STBotD, Brahmastra, Karthikemuthu, Thomas.W, Jamcib, Je G., Abhiag, Nubin wiki, Naveenpf, Mtdhryk, SkumarP, UnitedStatesian,
Vimalkalyan, Falcon8765, Enviroboy, Surenther.ss, Ramki0007, SieBot, Yamum1234, VasuVR, Tarun.Varshney, Jojalozzo, Wilson44691,
Bhatiacane, Lightmouse, Cyfal, ClueBot, Ninadhardikar, Amitvikramsingh, EoGuy, Flyingkolours, Vj 8980, DragonBot, Alexbot, Jotterbot, Sachank, Kaiba, Dchoudhary, XLinkBot, Jytdog, Jovianeye, Andrewackor, Dwilso, Addbot, Some jerk on the Internet, Betterusername, Hepp2, Blue Square Thing, Glane23, Buddha24, Akshaydotrajeatgmaildotcom, , Yanguas, Unstudmaddu, Enthusiast10,
Luckas-bot, Ujjwalkashyap, Yobot, Hghwymn,
, Anu cool hot, AnomieBOT, Jim1138, Naresh200325, Eumolpo, Bittu jrs, Capricorn42, Mccleskeygenius8, Mccleskeygenius9, TheIntersect, GrouchoBot, Amaury, Aaditya 7, Eugene-elgato, Anshul2406, Shivbuyya,
SaraSmith775741, FrescoBot, Altafqadir, Viv.rad, DrilBot, SpacemanSpi, Samsung octoedge, Jonesey95, Jashuah, Bnharsha, Trickytext, Tbhotch, RjwilmsiBot, DASHBot, John of Reading, WikitanvirBot, Dewritech, Saumil555, Indianinvestor, Tommy2010, Wikipelli,

80

CHAPTER 8. SUPPLY AND DEMAND

Tcekarthik, Kkm010, Dineshvanan, Yuvsore2, Shubhangi194, Rocketrod1960, ClueBot NG, Gareth Grith-Jones, Sriramgopu, Electriccatsh2, Ajay19aug, DBigXray, BG19bot, Krenair, MKar, Metricopolus, Compfreak7, Pradeeptubati, Crthirushankar, Ankit.s.anand,
Riley Huntley, Pratyya Ghosh, Khazar2, Mogism, Scientist Prateek Kumar Das, Hair, Metilda Benedict, Wiki GSD, Pritamsharma02,
Eyesnore, BSEINDIA, Passtimes, Swarajkaran, Belalquamar, Noyster, Mahesh1pareek, 22.mukul, Rakaaaa, Akshesh06, Dsprc, Paisarepa,
Vijaymahan, Shivam.tickoo13 and Anonymous: 373
Consumer price index Source: http://en.wikipedia.org/wiki/Consumer%20price%20index?oldid=639201996 Contributors: Heron,
Ryguasu, Edward, Cyde, Delirium, Mac, Poor Yorick, Jeandr du Toit, Cherkash, JASpencer, Mydogategodshat, Majabl, Jitse Niesen,
WhisperToMe, Gakmo, Shantavira, Donarreiskoer, Robbot, Chris 73, Goethean, Altenmann, Texture, LGagnon, Jpbrenna, Michael
Snow, Vikingstad, Alan Liefting, Centrx, J heisenberg, Zj, Cantus, Chris Wood, Jlm255, OverlordQ, Secfan, Marcus2, Davidstrauss,
Kate, Monkeyman, Rich Farmbrough, Kdammers, YUL89YYZ, Crypticrey, Lalala666, CanisRufus, Bdoserror, Causa sui, Bobo192,
Cretog8, Maurreen, Jerryseinfeld, Cavrdg, Daf, Haham hanuka, JavOs, Gary, Gerweck, Guy Harris, Atlant, Andrewpmk, John Quiggin,
Mac Davis, Batmanand, Hu, Snowolf, RainbowOfLight, Grenavitar, Japanese Searobin, JarlaxleArtemis, Chochopk, Eigenwijze mustang,
Tabletop, Bkwillwm, Puersh101, Banpei, Pete142, Rjwilmsi, Joe Decker, Vary, JHMM13, Lairor, MartinC, Yamamoto Ichiro, Michaelbluejay, Dijitalboy, RobyWayne, Luciuskwok, Nicholasink, Chobot, Volunteer Marek, Korg, Digitalme, YurikBot, Wavelength, Stephenb,
Manop, Shell Kinney, Gaius Cornelius, IdeaG, RattleMan, Cleared as led, Voidxor, Trainra, EconomistUK, Closedmouth, Fourohfour,
Tom Morris, Minnesota1, KnightRider, A bit iy, SmackBot, Mitteldorf, Tmandry, Kedar damle, Eskimbot, Commander Keane bot,
Afa86, Anwar saadat, Simon123, Jayanta Sen, Jerome Charles Potts, DHN-bot, Zven, Bringmemybow, Darth Panda, Ramas Arrow,
HoodedMan, Onorem, LucVerhelst, Andyparkins, Matchups, Realberserker, AndrewStellman, Er Komandante, DKEdwards, Gloriamarie,
Kuru, Nagle, TastyPoutine, Agent 86, Carbonate, Culnacreann, Joseph Solis in Australia, W0le, JHP, Benplowman, Tawkerbot2, JForget,
LordRex, Scohoust, JohnCD, Iamcuriousblue, N2e, Thomasmeeks, Naturagirl, Michaelas10, ST47, Pilcrow, CieloEstrellado, Epbr123,
Simonk133, Supermood00d, Faigl.ladislav, Infernix, Headbomb, AntiVandalBot, WinBot, Majorly, Fayenatic london, Myanw, Cnadolski,
Giler, BK, Radzimir, Jhamilton2087, Bongwarrior, Nyq, Hasek is the best, Kayau, Jikbusai, Rricci, Sm8900, Glennobrien, J.delanoy,
Pharaoh of the Wizards, Mourya09, Numbo3, 72Dino, Mynameiscurtis, Skier Dude, Pluto the Planet, Bobbeers, CardinalDan, VolkovBot,
TXiKiBoT, Broadbot, CountPointercount, Squaretex, Wildone786, Feretus2, Beadbs, Resurgent insurgent, SieBot, Flyer22, Faradayplank,
RalphTurvey, Langus-TxT, Seilidair, Hmhowarth, Rinconsoleao, Banshee101, ClueBot, The Thing That Should Not Be, Esa3000, Arjayay, SchreiberBike, BOTarate, Stepheng3, Thingg, More20, NJGW, Qwfp, DumZiBoT, Cournot, XLinkBot, Sepes, Salam32, Karpouzi,
Gunnex, Wyatt915, Addbot, Giftiger wunsch, WilliamMThompson, Albamhandae, Ronhjones, Fieldday-sunday, SpillingBot, AndersBot, SpBot, West.andrew.g, 84user, Numbo3-bot, Amoleji, Luckas Blade, Yobot, Cm001, Lronhubbard234, Charybdisz, Eric-Wester,
AnomieBOT, Tucoxn, Kingpin13, Jclchan, Bluerasberry, Materialscientist, PennySeven, Citation bot, ArthurBot, Xqbot, Srich32977,
Lawboy41, RibotBOT, Smallman12q, Joxemai, Lil cloud 9, Mtownene, Causeality, FrescoBot, Paine Ellsworth, Jocelynp85, Foobar35,
Adamovicmladen, DrilBot, Deckardt, RedBot, Kpbuckley, Djomladam, Merlion444, TobeBot, Ioan BOGDAN, AGConsulting, Rdbusser, DARTH SIDIOUS 2, RjwilmsiBot, EmausBot, Tommy2010, Serketan, Thecheesykid, DavidMCEddy, LightSParker, Dreispt,
Tolly4bolly, Erianna, Thine Antique Pen, Lifechamp, Pardocz, Ain92, Pandapoker911, Petrb, ClueBot NG, Chrisminter, Frietjes, Antiqueight, Mikehira, Amelapay, Faramarz.Khg, KateWoodhouse, Absconditus, BattyBot, Ben-lut, Avatar1981, JYBot, GopherNut, Rubyjac, Vanamonde93, Rmsonot, Monkbot, Linkedlibrary, JKlipstine, Chen4119 and Anonymous: 351
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Emperorbma, Taxman, Paul-L, Jni, Robbot, KeithH, Jakohn, PxT, Guy Peters, Oobopshark, Alan Liefting, Dave6, Fennec, Bkonrad,
Piotrus, Vanished user 1234567890, The Land, Ary29, M1ss1ontomars2k4, Trevor MacInnis, Rich Farmbrough, Max Terry, Modargo,
Bender235, CanisRufus, Sietse Snel, Cretog8, Maurreen, Kappa, Scott Ritchie, Jerryseinfeld, La goutte de pluie, TheProject, ACW,
Samulili, Pearle, Alansohn, Gary, John Quiggin, Fixman88, Mikeo, SteinbDJ, Philthecow, Mindmatrix, Bluemoose, Miros, Yamamoto
Ichiro, TeaDrinker, YurikBot, JDnCoke, Sceptre, RussBot, Bhny, Manop, Morphh, Wimt, Ahutson, E rulez, Zwobot, Bota47, Tomisti,
Zzuuzz, GrinBot, Yvwv, SmackBot, TestPilot, Lawrencekhoo, Eskimbot, George Rodney Maruri Game, SchftyThree, D-Rock, SundarBot, Khukri, RJN, Michael Bernstein, Bjankuloski06en, Peter Horn, Gregdragon, Aren't I Obscure?, Andreworkney, Levineps, IvanLanin,
JohnCD, Thomasmeeks, Casper2k3, Iokseng, Karimarie, Gogo Dodo, Skittleys, IAmRodyle, Viridae, Zalgo, Thijs!bot, Neil916, Gcolive, EdJogg, Wayiran, JAnDbot, MER-C, VoABot II, Askari Mark, Nyttend, Mtd2006, Aschwa5, SlamDiego, Glen, MartinBot, Snozzer,
Pharaoh of the Wizards, Balsa10, Bergin, Champ32, Sophienaimacaird, The Behnam, Idioma-bot, Funandtrvl, TXiKiBoT, Sean D Martin,
Tryingtomakethingsright, Fredsmith2, LeaveSleaves, Luuva, WikiCantona, Zhenqinli, Ramiromagalhaes, Insanity Incarnate, Dan Polansky, SieBot, Bibulin2000, Byrialbot, Geraldk, Tnolley, Digisus, Pinkadelica, Asdirk, Escape Orbit, ClueBot, NickCT, The Thing That
Should Not Be, Cfsenel, Quercus basaseachicensis, Jusdafax, Worth my salt, Vivio Testarossa, Thingg, 9Nak, Aitias, The-verver, DumZiBoT, Catuireal, Thebestofall007, Addbot, Elemented9, Ccacsmss, Favonian, Xev lexx, Timeu, Ehrenkater, Fraggle81, Grochim, Zagothal,
Max, Materialscientist, A123a, GeniusAyaz, Xqbot, Joshuacub, HN45, Trut-h-urts man, Smallman12q, Thehelpfulbot, Dave b 93555,
Mr fabs, FrescoBot, TheSlyvester, Pinethicket, LittleWink, Lotje, Seahorseruler, DARTH SIDIOUS 2, Bento00, EmausBot, NotAnonymous0, Sheeana, Bahb the Illuminated, Manboychum, Manboychum3, Shmilyshy, Freddyrubio, ClueBot NG, Little shop a holic, Widr,
MerlIwBot, OrganizedGuy, Corn cheese, Dawgman18, NIXONDIXON, Tentinator, William3576 and Anonymous: 144
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Heron, Patrick, Pit, Lousyd, Ahoerstemeier, Andrewa, Glenn, Andres, Mydogategodshat, Emperorbma, Wik, Timc, Shizhao, Joy, Flockmeal, Robbot, MrJones, Jakohn, Stewartadcock, T0ky0, Cecropia, Cyrius, Superm401, Matthew Stannard, Zigger, Utcursch, Andycjp,
BozMo, Beland, Quill, Discospinster, Triskaideka, CanisRufus, Coolcaesar, Mike Schwartz, Maurreen, Pokrajac, Scott Ritchie, Pearle,
Mdd, Alansohn, Gary, John Quiggin, TerryElliott, Jguk, Bellenion, Dozenist, Tabletop, MarcoTolo, Mandarax, BD2412, Casey Abell,
Daniel Collins, Yamamoto Ichiro, David91, Wavelength, RussBot, Gaius Cornelius, Bovineone, Morphh, Dhollm, Mkill, Trainra, CLW,
Closedmouth, Drable, Vanka5, SmackBot, TestPilot, McGeddon, Lawrencekhoo, Paxse, Veesicle, Edgar181, Anwar saadat, Bluebot, IAmAI, SonOfNothing, KaiserbBot, Khukri, Nakon, Dreadstar, Richard001, Only, Trojan traveler, Mr. Lefty, IronGargoyle, Kvng, Snezzy,
Levineps, Mrdthree, Martin Kozk, Charles T. Betz, JForget, Blue-Haired Lawyer, Thomasmeeks, Cydebot, Mojo Hand, Nick Number,
AntiVandalBot, Luna Santin, Fayenatic london, Specstalk, JAnDbot, The Transhumanist, M8 Electric, Geniac, VoABot II, Avicennasis, Jim.henderson, Snozzer, Rguevara, J.delanoy, Trusilver, Gzkn, Marley katie, AntiSpamBot, Richard D. LeCour, NewEnglandYankee,
Snghmiranda, Bonadea, Funandtrvl, TXiKiBoT, Five 5 ngers, Fredsmith2, Naive rm, Foodchain, Ricabisous, Meters, Hopefully acceptable
username, PGWG, Jean-Louis Swiners, SieBot, WereSpielChequers, Gerakibot, Lucasbfrbot, Perspicacite, Oxymoron83, Kskk2, Sanya3,
OKBot, Kerouac1337, Counterfact, ClueBot, Snigbrook, Amh15, Liempt, PaulGHz, Sun Creator, SchreiberBike, The-verver, Apparition11, MMich, Good Olfactory, Addbot, Leszek Jaczuk, CarsracBot, Ccacsmss, Lightbot, ScAvenger, Zorrobot, Cchow2, Luckas-bot,
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81

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Ryopus and Anonymous: 141
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Crocker, The Anome, Ed Poor, Jrincayc, Enchanter, William Avery, DavidLevinson, Zoe, R Lowry, Tzartzam, Patrick, Michael Hardy,
Isomorphic, Dcljr, Pde, Linkan, Mac, Darkwind, Susurrus, Jiang, Rl, Ruhrjung, Mydogategodshat, Pushmedia1, Pm67nz, Doradus, Maximus Rex, Taxman, AaronSw, Raul654, Frazzydee, RadicalBender, Jni, Chuunen Baka, Robbot, Fredrik, Zandperl, Tomchiukc, Chris 73,
Naddy, Sam Spade, Lowellian, Henrygb, Academic Challenger, Ojigiri, Meelar, Bkell, Rcook, Fuelbottle, Cyrius, Cordell, Terjepetersen,
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yu, Econrad, Discospinster, Rich Farmbrough, FWBOarticle, Gloucks, Bender235, ESkog, Timbojones, Kbh3rd, Fenice, MBisanz, El C,
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Hooperbloob, Alansohn, Gary, Tablizer, 119, Andrewpmk, John Quiggin, Water Bottle, Kurieeto, Mailer diablo, PAR, Silvanus, Tony Sidaway, Grenavitar, Versageek, MIT Trekkie, Ghirlandajo, Gatewaycat, Angr, Woohookitty, Blair P. Houghton, MGTom, Bkwillwm, Damicatz, Karmapoliceman, Bluemoose, Unnamedculprit, Wayward, Jacj, Marudubshinki, Matturn, FreplySpang, Dpv, Rjwilmsi, Jweiss11, Jake
Wartenberg, Commander, Linuxbeak, Tangotango, ManuP, Danfuzz, RobertG, TokyoJunkie, Winhunter, RexNL, Gurch, Alphachimp,
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Luk, Harthacnut, SG, SmackBot, Pegasovagante, Melchoir, McGeddon, The Monster, DCDuring, Lawrencekhoo, Korossyl, Jagged 85,
MrBoyt, D Morlo, Timeshifter, BiT, Moralis, Gilliam, Folajimi, Rmosler2100, Teemu08, Improbcat, Audacity, Basketdan, EncMstr, Deli
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Jackson744, 16@r, JHunterJ, MrArt, Elb2000, Badlermd, Levineps, Wjejskenewr, JHP, Igoldste, RekishiEJ, Lenoxus, Eassin, Az1568,
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Taku99, FisherQueen, Red1 D Oon, Mathnerd314, Truelife, NAHID, Ron2, Mschel, 1337B3A57, R'n'B, J.delanoy, Pharaoh of the Wizards, Ebudae, El Belga, Lee Vonce, Eliz81, Oxguy3, Cpiral, McSly, JayJasper, Coppertwig, AntiSpamBot, WHeimbigner, Richard D.
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Sroc, Gwib, Vipinhari, Scholodnjak, Joel Kincaid, Akronpow, Dilli2040, Qxz, Gerdemb, Nonstandard, Corvus cornix, LeaveSleaves,
Doctormark007, GuidedByPavement, Anarchangel, ARUNKUMAR P.R, Miwanya, Duest, Jordansbighead, Andy Dingley, Wolfrock,
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4wajzkd02, Jauerback, Sakkura, Davidpetersonharvey, Countrychick79, Happysailor, JD554, Strife911, Oxymoron83, Steven Zhang,
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Anonymous: 884

8.12.2

Images

File:2005gdpServices.png Source: http://upload.wikimedia.org/wikipedia/commons/1/18/2005gdpServices.png License: Public domain

Contributors: Based on File:BlankMap-World.png; created by Anwar saadat on en.wikipedia; transfered to Commons Original artist: Anwar
saadat
File:AdamSmith.jpg Source: http://upload.wikimedia.org/wikipedia/commons/0/0a/AdamSmith.jpg License: Public domain Contributors: http://www.library.hbs.edu/hc/collections/kress/kress_img/adam_smith2.htm Original artist: Etching created by Cadell and Davies
(1811), John Horsburgh (1828) or R.C. Bell (1872). The original depiction of Smith was created in 1787 by James Tassie in the form of
an enamel paste medallion. Smith did not usually sit for his portrait, so a considerable number of engravings and busts of Smith were made
not from observation but from the same enamel medallion produced by Tassie, an artist who could convince Smith to sit.
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BY-SA 3.0 Contributors: Own work Original artist: Sadib

82

CHAPTER 8. SUPPLY AND DEMAND

File:Ballard_Farmers{}_Market_-_vegetables.jpg Source: http://upload.wikimedia.org/wikipedia/commons/9/92/Ballard_Farmers%

27_Market_-_vegetables.jpg License: CC-BY-SA-3.0 Contributors: Photo by Joe Mabel Original artist: Joe Mabel
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Tango! Desktop Project. Original artist:
The people from the Tango! project. And according to the meta-data in the le, specically: Andreas Nilsson, and Jakub Steiner (although
minimally).
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License: GFDL Contributors: Transferred from en.wikipedia to Commons by User:Sreejithk2000 using CommonsHelper. Original artist:
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Contributors:
File based on the specication given at [1]. Original artist: User:Verdy p, User:-x-, User:Paddu, User:Nightstallion, User:Funakoshi,
User:Jeltz, User:Dbenbenn, User:Zscout370
File:Flag_of_France.svg Source: http://upload.wikimedia.org/wikipedia/en/c/c3/Flag_of_France.svg License: ? Contributors: ? Original
artist: ?
File:Flag_of_Germany.svg Source: http://upload.wikimedia.org/wikipedia/en/b/ba/Flag_of_Germany.svg License: ? Contributors: ?
Original artist: ?
File:Flag_of_India.svg Source: http://upload.wikimedia.org/wikipedia/en/4/41/Flag_of_India.svg License: Public domain Contributors:
? Original artist: ?
File:Flag_of_Italy.svg Source: http://upload.wikimedia.org/wikipedia/en/0/03/Flag_of_Italy.svg License: ? Contributors: ? Original
artist: ?
File:Flag_of_Japan.svg Source: http://upload.wikimedia.org/wikipedia/en/9/9e/Flag_of_Japan.svg License: ? Contributors: ? Original
artist: ?
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artist: ?
File:Flag_of_South_Korea.svg Source: http://upload.wikimedia.org/wikipedia/commons/0/09/Flag_of_South_Korea.svg License: Public domain Contributors: Ordinance Act of the Law concerning the National Flag of the Republic of Korea, Construction and color guidelines
(Russian/English) This site is not exist now.(2012.06.05) Original artist: Various
File:Flag_of_Spain.svg Source: http://upload.wikimedia.org/wikipedia/en/9/9a/Flag_of_Spain.svg License: ? Contributors: ? Original
artist: ?
File:Flag_of_Sweden.svg Source: http://upload.wikimedia.org/wikipedia/en/4/4c/Flag_of_Sweden.svg License: ? Contributors: ? Original artist: ?
File:Flag_of_Switzerland.svg Source: http://upload.wikimedia.org/wikipedia/commons/f/f3/Flag_of_Switzerland.svg License: Public
domain Contributors: PDF Colors Construction sheet Original artist: User:Marc Mongenet
Credits:

8.12. TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

83

File:Flag_of_Turkey.svg Source: http://upload.wikimedia.org/wikipedia/commons/b/b4/Flag_of_Turkey.svg License: Public domain

Contributors: Turkish Flag Law (Trk Bayra Kanunu), Law nr. 2893 of 22 September 1983. Text (in Turkish) at the website of the
Turkish Historical Society (Trk Tarih Kurumu) Original artist: David Benbennick (original author)
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File:Flag_of_the_People{}s_Republic_of_China.svg Source: http://upload.wikimedia.org/wikipedia/commons/f/fa/Flag_of_the_
People%27s_Republic_of_China.svg License: Public domain Contributors: Own work, http://www.protocol.gov.hk/flags/eng/n_flag/
design.html Original artist: Drawn by User:SKopp, redrawn by User:Denelson83 and User:Zscout370
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Contributors: ? Original artist: ?
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File:GDP_Categories_-_United_States.png Source:
http://upload.wikimedia.org/wikipedia/commons/f/f6/GDP_Categories_-_
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Commerce
File:GDP_growth_(annualized).png Source: http://upload.wikimedia.org/wikipedia/commons/0/03/GDP_growth_%28annualized%
29.png License: Public domain Contributors: Bases on the United Nations Statistics Devision data. Original artist: This work has been
released into the public domain by its author, Emilfaro. This applies worldwide.
In some countries this may not be legally possible; if so:

Emilfaro grants anyone the right to use this work for any purpose, without any conditions, unless such conditions are required by law.
File:Gdp_real_growth_rate_2007_CIA_Factbook.PNG Source: http://upload.wikimedia.org/wikipedia/commons/1/11/Gdp_real_
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File:Karl_Marx_001.jpg Source: http://upload.wikimedia.org/wikipedia/commons/d/d4/Karl_Marx_001.jpg License: Public domain
Contributors: International Institute of Social History in Amsterdam, Netherlands Original artist: Unknown .
File:Late_Medieval_Trade_Routes.jpg Source: http://upload.wikimedia.org/wikipedia/commons/e/e1/Late_Medieval_Trade_Routes.
jpg License: Public domain Contributors: Own work Original artist: Lampman
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Contributors: http://www.ibiblio.org/wm/paint/auth/lorrain/lorrain.seaport.jpg downloaded from en Original artist: Claude Lorrain
(1604/16051682)
File:Map_of_countries_by_GDP_(nominal)_in_US\protect\char"0024\relax.png Source: http://upload.wikimedia.org/wikipedia/
commons/0/08/Map_of_countries_by_GDP_%28nominal%29_in_US%24.png License: CC BY-SA 3.0 Contributors: Own work Original artist: Quite vivid blur
File:Map_of_world_countries_by_GDP_(nominal)_in_US\protect\char"0024\relax.png Source:
http://upload.wikimedia.org/
wikipedia/commons/5/5a/Map_of_world_countries_by_GDP_%28nominal%29_in_US%24.png License: CC BY-SA 3.0 Contributors:
Own work Original artist: Quite vivid blur
File:Mergefrom.svg Source: http://upload.wikimedia.org/wikipedia/commons/0/0f/Mergefrom.svg License: Public domain Contributors:
? Original artist: ?
File:Office-book.svg Source: http://upload.wikimedia.org/wikipedia/commons/a/a8/Office-book.svg License: Public domain Contributors: This and myself. Original artist: Chris Down/Tango project
File:Padlock-silver.svg Source: http://upload.wikimedia.org/wikipedia/commons/f/fc/Padlock-silver.svg License: CC0 Contributors:
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from English WP by User:Eleassar. Converted by User:AzaToth to a silver color.
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Public domain Contributors: Own work Original artist: User:Mattes
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File:Question_book-new.svg Source: http://upload.wikimedia.org/wikipedia/en/9/99/Question_book-new.svg License: Cc-by-sa-3.0
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Tkgd2007
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Original artist: Original uploader was Mydogategodshat at en.wikipedia. Later version(s) were uploaded by VladGenie at en.wikipedia.

84

CHAPTER 8. SUPPLY AND DEMAND

File:Smokestack_in_Detroit.jpg Source: http://upload.wikimedia.org/wikipedia/commons/8/87/Smokestack_in_Detroit.jpg License:

CC-BY-SA-3.0 Contributors: Own work Original artist: Gyre
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File:Supply-demand-right-shift-demand.svg
Source:
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with_red_question_mark.svg License: Public domain Contributors: Created by bdesham with Inkscape; based upon Text-x-generic.svg
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File:Types_of_goods.svg Source: http://upload.wikimedia.org/wikipedia/commons/f/f5/Types_of_goods.svg License: CC BY 3.0 Contributors: Own work Original artist: Mr fabs
File:US_Consumer_Price_Index_Graph.svg Source: http://upload.wikimedia.org/wikipedia/commons/3/34/US_Consumer_Price_
Index_Graph.svg License: CC-BY-SA-3.0 Contributors: Data source at [1] (US Government public domain); Original image at
Image:Consumer Price Index US 1913-2004.png Original artist: Original image by User:donarreiskoffer, new SVG version made with
Gnumeric (from original data; now covers 19132013)
File:US_employment_1995-2012.png Source: http://upload.wikimedia.org/wikipedia/commons/e/e9/US_employment_1995-2012.png
License: Public domain Contributors: http://research.stlouisfed.org/fred2/graph/?id=EMRATIO Original artist: Federal Reserve Bank of
St. Louis
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Contributors: International Monetary Fund: http://www.imf.org/external/np/adm/pictures/images/hwmkm.jpg Original artist: International
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Simon.
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on original logo tossed together by Brion Vibber

8.12.3

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