concepts

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 workIf the richest gain an increase in wealth, thenThey 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 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…

Sectors of the economy

Sectors of the economy

The three main sectors of the economy are:Primary sector – extraction of raw materials – mining, fishing and agriculture. Secondary / manufacturing sector – concerned with producing finished goods, e.g. factories making toys, cars, food, and clothes. Service / ‘tertiary’ sector –  concerned with offering intangible goods and services to consumers. This includes retail, tourism, banking, entertainment and  I.T. services.A primitive economy will primarily be based on the primary…

Price Elasticity of Demand – Short and Long Run

Price Elasticity of Demand – Short and Long Run

Demand tends to be more price inelastic in the short-run as consumers don’t have time to find alternatives. In the long-run, consumers become more aware of alternatives. Price elasticity of demand measures the responsiveness of demand to a change in price.Demand is price inelastic if a change in price causes a smaller % change in demand. This gives a low PED <1. Demand is price elastic if a change in price causes a bigger % change in demand. This gives…

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.