DEFINITION of 'Property Rights'

Laws created by governments in regards to how individuals can control, benefit

from and transfer property. Economic theory contends that government
enforcement of strong property rights is a determinant regarding the level of
economic success seen in the area. Individuals will create new forms of property to
generate wealth, only when they are assured that their rights to their property will
protect them against unjust and/or unlawful actions by other parties.
INVESTOPEDIA EXPLAINS 'Property Rights'
For example, if property rights were not established to prevent a government from
freely expropriating foreign created business ventures without proper
compensation, then it is unlikely that any foreign company would risk going into
that
country
for
risk
of
losing
their
entire
operation.
While property rights regarding physical property has been well established. Many
justice systems must now contend with property that solely exists in a digital or
virtual setting. For example, who ultimately owns a house built in a game on the
Internet, the user that created the house with his character? Or the game
development company that created the game who also owns the server in which
the house resides in?
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Microeconomics is generally the study of individuals and business decisions,
macroeconomics looks at higher up country and government decisions.
Macroeconomics and microeconomics, and their wide array of underlying concepts,
have been the subject of a great deal of writings. The field of study is vast; here is a
brief summary of what each covers:
Microeconomics
Microeconomics is the study of decisions that people and businesses make
regarding the allocation of resources and prices of goods and services. This means
also taking into account taxes and regulations created by governments.
Microeconomics focuses on supply and demand and other forces that determine the
price levels seen in the economy. For example, microeconomics would look at how a
specific company could maximize its production and capacity so it could lower
prices and better compete in its industry. (Find out more about microeconomics
in How does government policy impact microeconomics?
Microeconomics' rules flow from a set of compatible laws and theorems, rather than
beginning with empirical study.
Macroeconomics

Macroeconomics, on the other hand, is the field of economics that studies the
behavior of the economy as a whole and not just on specific companies, but entire
industries and economies. This looks at economy-wide phenomena, such as Gross
National Product (GDP) and how it is affected by changes in unemployment, national
income, rate of growth, and price levels. For example, macroeconomics would look
at how an increase/decrease in net exports would affect a nation's capital
account or how GDP would be affected by unemployment rate. (To keep reading on
this subject, see Macroeconomic Analysis.)
John Maynard Keynes is often credited with founding macroeconomics. He started
the use of monetary aggregates to study broad phenomena; some economists
reject his theory and many of those who use it disagree about how to interpret it.
While these two studies of economics appear to be different, they are actually
interdependent and complement one another since there are many overlapping
issues between the two fields. For example, increased inflation (macro effect) would
cause the price of raw materials to increase for companies and in turn affect the
end product's price charged to the public.
The bottom line is that microeconomics takes a bottoms-up approach to analyzing
the economy while macroeconomics takes a top-down approach. Microeconomics
tries to understand human choices and resource allocation, and macroeconomics
tries to answer such questions as "What should the rate of inflation be?" or "What
stimulates economic growth?"
Regardless, both micro- and macroeconomics provide fundamental tools for any
finance professional and should be studied together in order to fully understand how
companies operate and earn revenues and thus, how an entire economy is
managed and sustained.
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The Power of Incentives
Most of economics can be summarized in four words: "People respond to
incentives." The rest is commentary.
"People respond to incentives" sounds innocuous enough, and almost everyone
will admit its validity as a general principle. What distinguishes the economist is his
insistence on taking the principle seriously at all times.
I remember the late 1970s and waiting half an hour to buy a tank of gasoline at a
federally controlled price. Virtually all economists agreed that if the price were
allowed to rise freely, people would buy less gasoline. Many noneconomists
believed otherwise. The economists were right: When price controls were lifted, the
lines disappeared.
---

There is evidence that people respond significantly to incentives even in

situations where we do not usually imagine their behavior to be rational.
Apparently psychologists have discovered by experiment that when you hand a
person an unexpectedly hot cup of coffee, he typically drops the cup if he perceives
it to be inexpensive but manages to hang on if he believes the cup is valuable.
Indeed, the response to incentives may be as innate as any other instinctive
behavior. In a series of experiments at Texas A&M University, researchers have
allowed rats and pigeons to "purchase" various forms of food and drink by pushing
various levers. Each item has its price, such as three lever pushes for a drop of root
beer or ten for a piece of cheese. The animals are given "incomes" equal to a
certain number of pushes per day; after the income is exhausted the levers become
inoperable. In some versions of the experiments the animals are able to earn
additional income by performing various tasks. They earn additional lever pushes
at a fixed wage rate for each task they perform.
The researchers have found that rats and pigeons respond appropriately to
changes in prices, changes in income, and changes in wage rates. When the price
of root beer goes up, they buy less root beer. When wage rates go up, they work
harder -- unless their incomes are already very high, in which case they choose to
enjoy more leisure. These are precisely the responses that economists expect and
observe among human beings.
Incentives matter. The literature of economics contains tens of thousands of
empirical studies verifying this proposition, and not one that convincingly refutes
it. ...
Demand curve, in economics, a graphic representation of the relationship between
product price and the quantity of the product demanded. It is drawn with price on
the vertical axis of the graph and quantity demanded on the horizontal axis. With
few exceptions, the demand curve is delineated as sloping downward from left to
right because price and quantity demanded are inversely related (i.e., the lower the
price of a product, the higher the demand or number of sales). This relationship is
contingent on certain ceteris paribus (other things equal) conditions remaining
constant. Such conditions include the number of consumers in the market,
consumer tastes or preferences, prices of substitute goods, consumer price
expectations, and personal income. A change in one or more of these conditions
causes a change in demand, which is reflected by a shift in the location of the
demand curve. A shift to the left indicates a decrease in demand, while a movement
to the right an increase. Compare supply curve.
Q = f (P) (e.g. Q = 200 10P) ; - Elasticity point :(dq/dp x p/q);
Qd = Qs Equilibrium, Find Price and then Quantity

DEFINITION of 'Substitution Effect'

The idea that as prices rise (or incomes decrease) consumers will replace more
expensive items with less costly alternatives. Conversely, as the wealth of
individuals increases, the opposite tends to be true, as lower-priced or inferior
commodities are eschewed for more expensive, higher-quality goods and services this is known as the income effect.
INVESTOPEDIA EXPLAINS 'Substitution Effect'
Although beneficial to some (i.e. discount retailers), in general, the substitution
effect is very negative in nature, as it limits choice. This is true not only for
products, but also for services. Examples of the substitution effect in action can
sometimes be observed over the winter holiday season, where, in lean economic
times, discount retailers often hold up well.
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