Economic Theories and Market Analysis: A Comprehensive Summary

This assignment provides a comprehensive overview of various economic theories and their applications in market dynamics. It covers topics such as the economic problem, market for lemons, Hayek's information theory, and Stigler's search theory. It also delves into market equilibrium, entrepreneurship, cost analysis in classical and neoclassical economics, and the structure-conduct-performance (SCP) approach to market concentration. Furthermore, the assignment addresses externalities, Coase theorem, managerial theories of the firm, innovation, regulation, and contemporary topics like cryptocurrency and blockchain. Each topic is summarized to highlight key concepts and their practical implications, offering a thorough understanding of the complexities within economic systems. The document aims to provide students with a clear, concise review of these essential economic principles.

Topic1-: Economic problem arises when there are insufficient resources to satisfy unlimited
human needs and wants. It assumes that human needs are unlimited and resources to satisfy those
wants are limited. Market for lemons refers to the problem that arises due to asymmetric
information between buyer and seller of product about its value (McCann, 2016). Quality,
uncertainty and market mechanism are the factors which determine value and asymmetry leave
only lemons behind. Hayek theory says knowledge is unevenly dispersed among individuals and
people with local knowledge can take best decisions rather than central authority. Search theory
refers to individual strategy of choosing from the variety of options available of similar quality
under the assumption that delaying is costly. According to Hayek-Misses demand and supply are
taken into consideration to achieve equilibrium and in Langer-Lerner means of production and
trial and error approach are taken into consideration to determine output and economic
equilibrium.
Topic2-: Market is a medium that allows buyers and sellers of goods and services to interact and
make exchange of goods and services. General equilibrium theory fails due to unrealistic
assumption of perfect competition; all consumers have same aims, taste and preferences and their
economic decisions are in harmony with each other; all consumers consume same product
without any time lag (Chand, 2018). Problems associated with standard price theory is it
provides theoretical analysis of individual parts of economy which is difficult to study as it
changed frequently; based on data which is not reliable; efficient use of scarce resources. Role of
entrepreneur is to take risk of developing new goods and services and bringing these products
into the market for financial gains. Short selling refers to sale of securities not owned by the
seller on the belief that price will fall and brought back will make profit. Insider dealing is an
illegal practice of trading on stock exchange for your benefit through access to confidential
information (Starr, 2011).
Topic3-: According to classical economics cost is determined by the sum of cost of resources
that are required to make a product. It includes cost of capital, land, labor and taxation.
According to neo classical approach cost is determined as a total of cost of resources that are
required to make a product along with profit margin and opportunity cost that is sacrificed in
producing that product (Anushree., 2018).Cost is subjective in any theory of choice where the
cost of producing one good is the amount of goods that have been produced instead. It is a
predictive theory of economic behavior where choice is involved and cost become subjective.
Private cost refers to internal cost of producing goods such as inputs, labor, rent and depreciation
and public cost includes internal cost as well as external cost such as cost of environmental
damage.
Topic4-: Structure, conduct and performance is a framework to establish relation between
market structure, market conduct and market performance. In structure variables are stable and
effect behavior of buyers and sellers; in conduct behavior of buyers among themselves and
against each other are studied; in performance the result of firm is compared with industry.
Market concentration measures the extent to which sales of the market are influenced by one or

two firms (Eduquas., 2016). Market concentration can be measured on the basis of level of
competition and whether the firm is price taker or price maker. Price discrimination refers to the
strategy of charging different prices from different customers for the same product. The seller
charges the maximum amount which the buyer is willing to pay. Empirical test of market power
and profitability helps to know the power gained and profits occurred over a period of time on
the basis of experience or direct data.
Topic5-: Externality is a positive or negative consequence of an industrial or commercial
activity which is experienced by unrelated third parties. It’s an activity which affects third parties
without being reflected in prices.Policy relevant to externality means cost and benefits will effect
parties who choose to incur them. It will not affect parties who are external to it and are not
involved in cost and benefits (Caplan, 2017). Coase theorem is a legal and economic theory that
assumes that market is highly competitive and there is no transaction cost. An efficient set of
input and output is selected from optimal production distribution regardless of how property
rights are divided. In relation to property rights coase thermo states that if property rights are
clearly defined and there is no transaction cost then people can be held responsible for negative
externalities they impose on others.
Topic6-: Managerial theory of firm explains behavior of managers and effect of his conduct on
the company and economy as a whole. The managers want to maximize rate of growth of firm
which has connections with both sales and profits of firm. According to coasiantheory of firm
transaction cost is the cost of providing for goods and services from the market rather than from
within the firm itself. Institution and transaction cost is the expense incurred in buying and
selling of goods and service (Allen & Doherty, 2013). It also includes dealer commission which
is the difference between price charged by dealer and paid by buyer (Annoynomous., 2017).
Vertical integration is a strategy in which a company expands its business operations into
different steps on same production path. Williamson transaction cost analysis covers cost such as
communication charges, legal fees, information cost for searching information about price,
quality and durability along with transportation cost (Lambertini, 2017).
Topic7-: Innovation means new idea,method or product that creates value which is paid by the
customer. Innovation as market failure means that product or idea is not able to gain acceptance
by the customer and has failed to flourish (NA., 2016). Research and development is undertaken
to innovate, introduce and improve products and services. Innovation system refers to the flow of
technology and information among people, enterprise and institutions. In this system an idea is
converted into a product, process and service through a medium. Innovation as an
entrepreneurial theory means innovative ideas so as to increase profits and growth of firm.
Nowadays there is an increase in popularity concept of inside the black box. It is used in
evaluation of performance of product, process, service or innovative idea. It is used to analyses
whether it is profitable or not or an idea should be converted into product or not.

Topic8-: Public interest theory states government regulation is required for the interest of public
whenever there is market failure due to lack of competition, barriers to entry, information
asymmetry and public goods product (Domas, 2003). This theory is based on the assumption that
economic markets are subject to market imperfection or transaction failures. Private interest
theory is based on the assumption that individuals workfor their own self-interest and they will
form groups for their economic interest. They are motivated by the concept of fame, power,
wealth and self-interest. In this theory public interest is not considered rather personal interest is
taken into consideration. Institutional possibility frontier is a tradeoff between disorder and
dictatorship. This theory implies that social institutions are situated between two extremes of
dictatorship and disorder each has its own continuum of social losses. It signifies that tradeoff
between dictatorship and disorder is more severe and causes huge losses at both ends.
Topic9-: Bit coin is a crypto currency and a new type of worldwide payment method. It is the
first decentralized digital currency which works without a central bank or single administrator. In
it transactions take place between users directly. Crypto currency is not money rather they are
unique financial instrument which is used in exchange of goods and services with no
intermediaries in between. Ledgers play as important role in shaping economic institutions as it
is these leaders which keeps the record of every transaction and parties involved separately.
Block chain is a growing list of records called blocks which are linked and secured using
cryptography. It can support and compete with firms, markets and government as it maintains
record so it supports by providing information what and when required and it helps to compete
by comparing information of different firms, markets and government about the same concept
Topic10-: Bureaucracy is a system of government in which most of the important decisions are
taken by the state officials rather than the elected representatives. It is managed by department
staff which is non-elected officials. All important decisions are taken by staff by following the
rules and regulations carefully. Democracy is a system of government in which citizen exercise
power directly or chooses a representative from among themselves to form a governing body. It
is also known as rule of the majority in which all citizens take part to form government in the
form of elections. It is a government for the people, by the people and to the people. Voting is a
process in which people express their decisions in favor or not in favor regarding a particular
topic or activity or government with the help of votes. It is an expression of opinion followed by
debates and disscussions.

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