The accelerator theory explains the relationship between change in output or income and the rate of investment. In this theory, a change in income or output causes a change in…
The life-cycle hypothesis was postulated by Ando and Modigliani in an attempt to explain the behaviour of consumption function in the long and short run. According to this theory, current…
Duesenberry took a different approach to develop a model explaining consumption behaviour. While other models such as the permanent income hypothesis are based on utility function independent of consumption by…
Empirical studies and observations exposed the shortcomings of the absolute income hypothesis. It failed to explain the patterns of consumption over a long period of time. Moreover, it did not…
Consumption expenditure plays an important role in determining the gross national product (GNP). Consumption generally contributes the biggest portion of GNP, becoming a decisive factor responsible for the national income…
To illustrate simultaneous equilibrium, we will consider a 2*2*2 model with two products (X and Y), two consumers (A and B) and two factors of production (L and K). The production…
We already discussed the Production Possibility Curve associated with two outputs and the Economies of Scope. Here, we will analyze how a multi-product firm can achieve equilibrium. It can help…
The Production Possibility Curve is also referred to as the product transformation curve and production possibility frontier. Firms often produce more than one outputs that are closely related to each…
The expansion of output can be accompanied by increasing, constant or decreasing returns to scale. These can also correspond to Economies of scale. As discussed in production theory, returns to…
In the long run, firms have a lot more flexibility in the choice of inputs. In addition to labour, firms can choose to expand their capital by setting up new…
In the production theory, we discussed how inputs are used to generate output in the short run and the long run. We also analyzed the effects of changing technology on…
All factors of production are variable in the long run. Moreover, technology does not remain constant in the long run. Research, development and technical progress in production can have a…
In the short run, capital is a fixed factor of production and only labour can be varied by firms to change output. The Law of Variable Proportions holds in the…
Production can be defined as the process by which inputs are used to make outputs. Inputs, also known as factors of production, include resources such as labour, capital and raw…
Price control refers to government intervention in the market where a price higher or lower than the equilibrium price is fixed by the government to protect the interests of the…
