A. Examples of Theories
Theory of Demand, Supply and Price Mechanism, the demand for a particular product by an individual consumer is based on three important factors. Firstly, the price of the product determines how much of the product the consumer buys, given that all other factors unchanged, In general the lower the prices of the product, the more a consumer buys.
Secondly, the consumer’s income also determines how much of the product the consumer is able to buy, given that all other factors remain constant, In general the greater is his or her income, and the more commodities a consumer will buy.
Thirdly, prices of related products are also important in determining the consumer’s demand for product. The total of all consumer demand, yield, the market demand for a particular commodity. Also the market demand curve shows quantities of the commodity demanded at different prices given that all other factor remains constant, as price increases the quantity demand falls .The amount supplied by an individual firm depends on profit and cost considerations.
Also other application of demand and supply include the distribution of income, labour and capital through factor market, and the following is the diagram of demand and supply;
Theory of Marginality, this theory describes the consumer’s as attempting to reach most preferred position, subject to consume and wealth constraints while producers attempt to maximize profits to their own constraints including demand for goods produced, technology and the price of inputs. For the consumers that point comes where marginal utility of goods, net of price, reaches zero, leaving no net gain from further consumption increases. Theory of Firm, in this theory people frequently do not trade directly on markets. Instead, on the supply side, they may work in and produce through firms. The most obvious kinds of firms are corporations, partnerships and trusts. According to Ronald Coase. People begin to organise their production in firms when the cost of doing business becomes lower than doing it on the market. Firms combine labour and capital and can achieve for greater economies of scale then individual market trading. Uncertainty and Game Theory, According to John Von Neumann and Oskar Morgenstern. Uncertainty in economics is an unknown prospect of gain or less whether quantifiable as risk or not. Without it, household behaviour would be unaffected by uncertain employment and income prospects, financial, and capital markets would reduce to exchange of a single instrument in each market period and there would be no communications industry. Also Game Theory is a branch of applied mathematics that considers strategic interactions between agents, one kind of uncertainty. It provides a mathematical foundation of industrial organization.
B. Price Theory and Income Theory
Is an economic theory that contends the price for any specific goods or service in relationship between forces of supply and demand. The theory price says that the point at which the benefit gained from those who demand the entity meets the seller’s, marginal costs is the most optimal market price for the goods or service. For example, suppose that market forces determine that is costs $5 for budget. This suggests that widget buyers are willing to forgo the utility in $5 in order to posses the widget and that the widget seller perceives that $g is a fair price in exchange for giving up the widget.
This is a body of economic analyses concerned with the relative levels of output, employment and price s in economy. By defining the inter relation of these macro economics factors government try to create policies that contribute to economic stability. Morden interest in income and employment theory was triggered by the severity of great depression of the 1930’s in the Unites States and Europe. In its failure to explains persistent high levels of employment and the low levels of business productivity.
John Maynard Keynes offered new thinking on income and employment on income and employment theory with the publication of general theory of interest and money in (1936). Building on his theory Keynesians have stressed the relationship between income, output and expenditure.
The relationship can be expressed in the form of a simple equation;
Y = O = D Where;Y = is the national income ( i.e. purchasing power)
O= is the value of national output
D= is national expenditure
This equation means that effective demand is equal to income as well as to output. Since consumers can either spend or save their income.
Y = C + S Where; C = is consumption
S = saving
In Economics a model is theoretical construct representing economic processes by a set of variables and a set of logical and quantitative relationships between them. The economic model is a simplified frame work designed to illustrate complex processes, often but not always using mathematical techniques.
In general terms, Economic models have two functions first is a simplification of and abstraction from observed data and second is a means of selection of data based on a paradigm of econometric study.
Types of Economic Models
a. Stochastic Models
These models are formulated using stochastic processes. They model economically observable values over times
b. Non- Stochastic models
It’s may be purely qualitative, For example relating to social choice theory or quantitative involving rationalization of financial variables, For example with hyperbolic coordinates and specific forms of functional relationships between variables.
c. Qualitative models
Although almost all economic models involve some form of mathematical or quantitative, qualitative models are occasionally used. One example is qualitative scenario planning in which possible future events are played and another example is non-numerical decision analyses.
The Uses or Forms of Models
і. Fore casting economic activity in a way in which conclusions are logically related to assumptions.
іі. Proposing economic policy to modify future economic activity.
ііі. Presenting reasoned arguments to politically justify economic policy at national level to explain and influence company strategy at the level of the firms, or to provide intelligent advice for household economic decisions at the level of households.
іv. Planning and allocations in the case of centrally planned economies and on smaller scale in logistics and management of business.