And that's just the beginning. The main applications in this book, and traditionally, are in the study of oligopoly. Measurement Principles Economics is multidimensional, and that creates some difficulties in measuring things like production, incomes, and price levels. Some of the problems can be solved more or less fully. Since we measure production and related quantities in dollar terms, we have to correct for inflation.
Index numbers are a pretty good workable solution, but there are some problems and criticisms.
Medium of Exchange Money is whatever is generally acceptable as a medium of exchange. That means a bank, or similar institution, can literally create money, so long as people trust the bank enough to accept its paper as a medium of exchange. We might call this magical fact the Fiduciary Principle. The Surprise Principle People respond differently to the same stimuli if the stimuli come as a surprise than they would if the stimuli do not come as a surprise. Rational Expectations People don't want too many unpleasant surprises.