Supply & demand & elasticity issues. Theories of the firm Essay

Supply & demand & elasticity issues. Theories of the firm. Macroeconomic issues - Essay Example The governmental actions include labor reforms which are discussed under a separate head. Supply & Demand and Elasticity Issues, Theories of the firm, Macroeconomic issues Table of contents PART ONE: Supply & Demand and Elasticity Issues 4 1. Supply and demand 4 2. Elasticity of demand 5 PART TWO: Theories of the Firm 7 1. Premises which underline the classical firm 7 Competitive markets 7 Perfect information 8 Full employment 8 Pricing of the products 9 2. Environmental changes 9 Role of the governments 9 Legal system 10 Globalization and liberalization 10 Corporate social responsibility 10 3. Theories of the firm 11 The Neoclassical Theory 11 The Transactions Cost Theory 12 The Principal–Agent Theory 12 Evolutionary theory 12 Behavioural theory 13 PART THREE: Macroeconomic Issues 15 i) GDP and Budget deficit 15 ii) Governmental actions and economy 16 Cuts in spending    16 Tax hikes 17 Borrowing money 18    Multiplier effect 18 Aggregate Demand 19 Aggregate Supply 20 Spe cific actions 20 iii) Supply side reform of the labour market 21 Conclusion 22 References 23 PART ONE: Supply & Demand and Elasticity Issues 1. Supply and Demand - Analysis of Statements â€Å"Both factors of demand depend on the market price. When the market price for a product is high, the demand will be low. When price is low, demand is high.† (Whelan & Msefer, 1996, p. 6) a) The price of a good falls, causing the demand for another good to rise. Hence, the two goods are substitutes. In fact in the case of substitutes, the demand for the substitute will fall leading to the price of the substitute to fall. Example: If the price of mutton falls, demand for mutton will increase, and not the demand for chicken which is a substitute for mutton. Conclusion: The statement is not correct. b)... This essay presents a modern comprehensive analysis of the relevance of the fundamental principles of supply and demand and elasticity concept in the today`s world. Also various microeconomic theories of the firm are discussed in the paper, such as neoclassical theory, transactions cost theory, principal agent theory, evolutionary theory and behavioral theories. The impacts of macro-economic factors on the firms are analyzed. The relevance of GDP and budget deficit to the operations of the firm in terms of its impact on their business is discussed with particular reference to Spain’s economy. The micro and macro economic theories have been evolving over the period time in tune with the changes that have taken place. What is relevant during a particular period of time loses its validity under the changed circumstances. However, the understanding of these concepts is very important for charting out the new course of actions and formulate future strategy Since 1945, many of the premises which underpin profit maximisation have been questioned, in particular whether firms operating in the real world actually behave like the â€Å"classical† firm. There are changes which have taken place in the structure and/or conduct of industry that provide evidence to reject the â€Å"classical firm hypothesis†. Maintaining flexibility in production and supplies is essential for responding quickly to the changes in the external environment which may be caused due to competition, governmental actions or state of the economy.