Author: Tejvan Pettinger

Sunk Cost Fallacy

Sunk Cost Fallacy

The sunk cost fallacy is when we continue an action because of our past decisions (time, money, resources) rather than a rational choice of what will maximise our utility at this present time. For example, because we order a big meal and have paid for it, we feel a pressure to eat all the food. “The sunk cost effect is manifested in a greater tendency to continue an endeavor once an investment in money, effort, or time has been made.” Hal Arkes and Catherine Blumer. (1985), The psychology of sunk costs….

Price of Car Parking in City Centres

Price of Car Parking in City Centres

On a recent visit to New York, my friends took me to a popular part of Queens to an Indian restaurant. Because it is a popular area it was very difficult to find a car parking space. We ended up driving round in circles for 15 minutes before a space finally became available. When we finally parked, I was surprised to see there was no charge for parking in this busy area. Diagram showing Excess Demand…

Happiness economics

Happiness economics

The economics of happiness seeks to relate economic decisions to a wider measure of welfare than traditional measures of income and wealth. Happiness economics attempts to evaluate a wider range of factors affecting well-being, quality of life and self-reported levels happiness. There are now several measures of happiness, such as Gross Domestic Happiness. (GDH) Countries such as Bhutan, France and UK have, to varying degrees, started using ‘happiness indexes’ in measuring economic performance. Happiness economics challenges the assumption of neo-classical economics which…

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Principal-Agent Problem

The principal-agent problem occurs when a principal delegates an action to another individual (agent), but the principal does not have full information about how the agent will behave. Secondly, the interests of the principal diverge from that of the agent, meaning that the outcome is less desirable than the principal expects.   Shareholder and manager For example, a shareholder (principal) wants to maximise profits for his firm. He hires a manager (agent) to run the business. However, due to agency costs the shareholder cannot fully know how hard the agent is working…

Measuring utility

Measuring utility

Utility is a concept given to how much satisfaction/happiness a person gains from a particular action. Utility derived from the philosophy of utilitarianism. An early advocate of Utilitarianism was Jeremy Bentham who argued that utility was the accumulation of pleasure and avoidance of pain. The concept was refined by others such as J.S. Mill who argued there were higher pleasures, such as a love of literature and culture. Therefore, a decision to forego pleasure now and study could be a rational way to maximise total utility. Utils We can try to measure utility…

What is the opposite of shrinkflation?

What is the opposite of shrinkflation?

Shrinkflation occurs when firms reduce the size or quantity of a good and keep prices the same.  Shrinkflation is as an alternative to inflation. Rather than increasing prices you get a smaller quantity. To buy the same quantity you have to spend more. Recently, it has received a lot of press attention, and The OED is now considering adding the word to the OED. As the OED blog states: “Shrinkflation is a portmanteau, made from combining shrink: ‘to become or make smaller in size’, with the economic sense of…

Gary Becker

Gary Becker

Gary Becker (1930 –  2014) was an American economist who helped to spread economics into fields of social science, such as sociology, demography and criminology. Becker undertook economic analysis in areas such as racial discrimination, the incentives of crime, drug addiction and family relationships. Becker also helped to popularise and develop the concept of human capital. Becker was awarded the Nobel Prize in Economics (1992) for “having extended the domain of microeconomic analysis to a wide range of human behaviour and…

The economics of discrimination

The economics of discrimination

Discrimination in the labour market occurs when employers make decisions on wages and employment based on prejudices, such as race, gender, religion. It can lead to variations in wages for the same job and different employment rates. Kenneth Arrow defined discrimination as: “the valuation in the market-place of personal characteristics of the worker that are unrelated to worker productivity.” For example, employers refusing to employ people from ethnic minorities or paying women lower wages for comparable work. In 1968, 850 women machinists at the Ford factory in Dagenham went on strike over equal…