concepts

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Neoliberalism – examples and criticisms

Neoliberalism is a term commonly used to describe free-market economics. Neoliberalism involves policies associated with free trade, privatisation, price deregulation, a reduced size of government and flexible labour markets. Recently, neoliberalism has been associated with the policies of austerity and attempts to reduce budget deficits – usually by cutting government spending on social programmes. Neo-liberalism is closely associated with the Washington Consensus – the free market approach of the IMF and other institutions. It also closely overlaps with the classical economic…

herding

Herding behaviour

Herding behaviour refers to how individual decisions are influenced by group behaviour. It stems from the observation that if a herd of animals starts moving in one direction, all the animals want to follow the herd. Why herding behaviour occurs Following the crowd. In economics, we can see a similar behaviour. For example, if individuals see there is popular interest in buying a particular asset, they may take this popular support as a reason to follow the crowd. Because people consciously or unconsciously…

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. In layman’s terms – “more money may not make you happy” Alfred Marshall popularised concepts of diminishing marginal utility in his Principles of Economics (1890) “The additional benefit a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has” – Alfred Marshall, Principles of Economics Utility means satisfaction, usefulness, happiness gained. Utility could be measured by the amount…

Profit satisficing

Profit satisficing

Profit satisficing is a situation where there is a separation of ownership and control. As a result, the owners are likely to have different objectives to the managers and workers. In short, owners wish to maximise profits, but workers and managers may not. It is an example of the principal-agent problem. The shareholder is the principal. The workers are the agent The owners of a firm are likely to have a goal of profit maximisation, however, they delegate the running of the…

Trickle down economics

Trickle down economics

Trickle down economics is a term used to describe the belief that if high-income earners gain an increase in salary, then everyone in the economy will benefit as their increased income and wealth filter through to all sections in society. How the trickle-down effect may work If the richest gain an increase in wealth, then They will spend a proportion of this extra wealth. The extra wealth will cause an increased demand for goods and services, causing higher employment and rise in…

Gravity theory – economics

Gravity theory – economics

In economics, gravity theory relates to how international trade between countries is influenced by Geographical proximity Economic size (mass) of the respective countries (M) Similarities in consumer preferences and economic development The gravity theory of trade suggests, ceteris paribus, an economy will gravitate towards trading with its closest neighbours and economies which are similar in terms of size, cultural preferences and stage of development. It is based on Newton’s law of gravity that there is gravitational pull of objects directly proportional to the mass of objects and inversely proportional to the…

Voluntary unemployment

Voluntary unemployment

Voluntary unemployment is defined as a situation where the unemployed choose not to accept a job at the going wage rate. Reasons for voluntary unemployment Generous unemployment benefits, which make accepting a job less attractive. High marginal tax rates, which reduce effective take home pay. Unemployed hoping to find a job more suited to skills/qualifications. Some jobs are seen as ‘demeaning’ or too tedious. For example, fruit picking/security guard. Preferenc.e for ‘leisure’ (not working) over working. Examples of Voluntary Unemployment In the 1970s…

Transactional utility

Transactional utility

Transactional utility is a term to describe the happiness a consumer gets from the perceived value of the deal. ‘Transactional utility’ was developed by Richard Thaler and is said to be the difference between the actual price and your reference price – the price you expect to pay. Example, Suppose you expect to pay $50 for a new coat. However, when you go into the shop, you find there is an unexpected sale of 20%. Therefore, the price you actually pay is $40. You gain the utility of buying the…