concepts

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…

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…

Rotten Kid Theorem

Rotten Kid Theorem

The Rotten Kid Theorem states that in a family with a wealthy altruistic parent  – even selfish kids – can have a financial incentive to be harmonious and kind to their siblings. This theory of family behaviour was first proposed by Gary Becker in an article (1974). “A Theory of Social Interactions”. He later expanded on the idea in ‘a Treatise on the Family’ (1981) Assumptions of the Rotten Kid Theorem We start off with a wealthy family head. This head of…

Economies of scope

Economies of scope

Economies of scope occur when a firm can gain efficiencies from producing a wider variety of products. These efficiencies can involve lower average costs. It can also involve increased revenue from being able to increase sales in new, related markets. It is similar to concept of economies of scale – where higher output leads to lower average costs. But, there is a difference. Economies of scope is not about producing the same good at lower average cost, but using its size and resources to produce similar or related goods. Examples of…

Rational expectations

Rational expectations

Rational expectations is an economic theory that states – when making decisions, individual agents will base their decisions on the best information available and learn from past trends. Rational expectations is the best guess for the future. Rational expectations suggests that although people may be wrong some of the time, on average they will be correct. In particular, rational expectations assumes that people learn from past mistakes. Rational expectations has implications for economic policy. The impact of say expansionary fiscal policy will be different if people change their behaviour because they expect…

Diminishing marginal utility of income and wealth

Diminishing marginal utility of income and wealth

Diminishing marginal utility of income and wealth suggests that as income increases, individuals gain a correspondingly smaller increase in satisfaction and happiness. Utility means satisfaction, usefulness, happiness gained. Utility could be measured by the amount you are willing to spend on a good. Marginal utility of first £100 If you have zero income and then gain £100 a week. This £100 will improve your living standards significantly. With this £100 you will be able to pay for the basic necessity of life – food, drink, shelter and heating. Without this basic £100…

Positive feedback loop

Positive feedback loop

A positive feedback loop is a situation where two events are mutually reinforcing. With this situation a small change in one input can cause a bigger final increase in both the initial input and the secondary effect. Suppose, there is a rise in demand for buying a commodity. This rise in demand leads to rising prices. However, rising prices can encourage many investors to take interest in the commodity and also buy the commodity. Therefore, the rise in price encourages more demand. Positive feedback loop – house prices

Lump of labour fallacy – immigration

Lump of labour fallacy – immigration

The lump of labour fallacy is the contention that the amount of work available in an economy is fixed.  But, most economists argue this belief there is a fixed number of jobs (or fixed number of hours) is usually incorrect. In summary Fallacy – “Immigrants take jobs of native workers.” Why this is a fallacy – immigrants who gain work, also gain income to spend in the rest of the economy, creating new jobs. The number of jobs is not fixed….