concepts

Gravity theory – economics

Gravity theory – economics

In economics, gravity theory relates to how international trade between countries is influenced byGeographical proximity Economic size (mass) of the respective countries (M) Similarities in consumer preferences and economic developmentThe 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 unemploymentGenerous 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 UnemploymentIn 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…

Fairness and Reciprocity

Fairness and Reciprocity

In behavioural economics, studies have suggested individuals value the concept of reciprocity. If people are kind to us, we have a greater tendency to respond in kind – behaving more altruistically than self-interest theory suggests. Reciprocity can also work in a negative sense, with agents willing to ‘punish’ those who abuse the ‘rules of the game.’ We can be willing to punish others, even if it harms our own individual utility. The importance of fairness and reciprocity is that it suggests the importance of social rules for influencing decisions and economic…

The relationship between economics and politics

Readers question: Why cannot politics and economics be seen in isolation? Economics is concerned with studying and influencing the economy. Politics is the theory and practice of influencing people through the exercise of power, e.g. governments, elections and political parties. In theory, economics could be non-political. An ideal economist should ignore any political bias or prejudice to give neutral, unbiased information and recommendations on how to improve the economic performance of a country. Elected politicians could then weigh up this economic information and decide.

Money and credit

Money and credit

Readers Question: In simple terms what is the difference between credit and money? Credit Credit is any form of deferred payment. For example, if you purchase on a credit card – a bank effectively pays on your behalf – anticipating you will pay back the amount to the credit card company in six weeks time. If a bank lends money to a consumer, this is a form of credit. The consumer is given money, which it later has to pay back to the bank. Money Money is any item or electronic record that can…

Mental accounting

Mental accounting

Mental accounting is a concept to describe how individuals can separate their budget into different accounts for specific purposes. For example, we may earmark $50 a week for entertainment and $100 for food. Mental accounting suggests people do not treat money as fungible (the concept all money is interchangeable), but mentally link spending to particular budgets.For example, if we win £40 on a lottery ticket, we may feel that this bonus win enables us to spend on going out for…

Extra charges by airlines

Extra charges by airlines

In recent years, airlines have become adept at charging customers for ‘extra services’. These extra services include:Seats with more leg room. Choosing a seat earlier Paying a penalty to check in at airport (budget airlines) Priority boarding Checked in luggage (budget airlines) Meals debit /credit card surcharges (Ryanair)Economic concepts involvedPrice discrimination/price targeting – charging different prices for relatively similar goods Allocative efficiency – charging a price equal to…