concepts

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…

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….

Why does capitalism cause monopoly?

Why does capitalism cause monopoly?

Readers question: Firstly, I wholeheartedly praise the magnificent work done by you in exhibiting economic knowledge and demystifying it to us, the mediocre audience. I seriously question one fact that you presented about capitalism and how it “inevitably causes monopoly”. I grew really surprised and perplexed the moment I read that in “The problems of Capitalism” of yours. If you reconsider, Capitalism with its competitiveness, equal free chances, and free markets with no intervention from a higher authority ( The government ) actually endeavour towards diminishing Monopoly. A good…

How to know when you’re in a recession?

How to know when you’re in a recession?

A recession is defined as a decline in real GDP for two consecutive quarters. We will know an economy is in an official recession after six months of falling national income. A recession will typically lead to higher unemployment, decline in confidence, falling house prices, decline in investment and lower inflation. However, although that may seem quite straight forward, in practise it can be difficult to know. GDP stats may not tell us until a significant time lag after the event. The ability to know whether you’re in a recession is…