A. Koutsoyiannis

Theory of Demand

The purpose of the theory of demand is to determine the various factors that affect demand. One often reads that the raison d’e tre of the theory of demand is the establishment of the law of demand’ (that the market demand is negatively related to the price) but this is misleading in that it concentrates on price as the sole determinant of demand, ceteris paribus.

Pricing of Factors of Production and Income Distribution

The subject-matter of the theory of income distribution is the study of the determination of the shares of the factors of production in the total output produced in the economy over a given time period. If, for simplicity, we assume that there are two factors of production, labour and capital, their shares are defined as follows where w = wage rate r = rental of capital L = quantity of labour employed K = quantity of capital employed X = value of output produced in the economy.

General Equilibrium Theory

In the preceding chapters we have adopted a partial equilibrium approach, concentrating on decisions in a particular segment of the economy in isolation of what was happening in other segments, under the ceteris paribus assumption.

Properties of the Least Squares Estimates

6.1 Note: The basic distributional assumptions of the linear model are (a) The errors are unbiased: E[ε] = 0. (b) The errors are uncorrelated with common variance: cov(ε) = σ 2 I.

Baumol’s Theory of Sales Revenue Maximisation

W. J. Baumol suggested sales revenue maximisation as an alternative goal to profit maximisation.1 He presented two basic models: the first is a static single-period model, the second is a multi-period dynamic model of growth of sales revenue maximisation. Each model has two versions, one without and one with advertising activities. We will first present these models, examine the predictions of Baumol’s theory in various situations, and then discuss the empirical evidence from research directed to the verification of the sales maximisation hypothesis. Finally, we state some criticisms of Baumol’s theory.

Theory of Production

The production function is a purely technical relation which connects factor inputs and outputs. It describes the laws of proportion, that is, the transformation of factor inputs into products (outputs) at any particular time period.1 The production function represents the technology of a firm of an industry, or of the economy as a whole. The production function includes all the technically efficient methods or production (see below).

Theory of Games

The interdependence of firms in oligopolistic markets and the inherent uncertainty about competitors’ reactions to any course of action adopted by a firm cannot be analysed effectively by the traditional tools of economic theory.

Marris’s Model of the Managerial Enterprise

The goal of the firm in Marris’s model1 is the maximisation of the balanced rate of growth of the firm, that is, the maximisation of the rate of growth of demand for the products of the firm, and of the growth of its capital supply:

Recent Developments in the Theory of Limit-Pricing

Sylos-Labini1 developed a model of limit-pricing based on scale-barriers to entry. His model is clumsy, due to its unnecessarily stringent assumptions and the use of arithmetical examples. However, his analysis of the economies-of-scale barrier is more thorough than that of Bain. He highlighted the determinants of the limit price and discussed their implications, thus providing the basis for Modigliani’s more general model of entry-preventing pricing.

Non-Collusive Oligopoly

In this section we will first present three models of duopoly, which is the limiting case of oligopoly. The common characteristic of these models is that they assume a certain pattern of reaction of competitors in each period and despite the fact that the ‘expected’ reaction does not in fact materialise, the firms continue to assume that the initial assumption holds. In other words, firms are assumed never to learn from past experience, which makes their behaviour at least naive (if not stupid).