Life-Cycle Hypothesis


Definition: The Life-cycle hypothesis was developed by Franco Modigliani in 1957. The theory states that individuals seek to smooth consumption over the course of a lifetime – borrowing in times of low-income and saving during periods of high income. The graph shows individuals save from the age of 20 to 65. As a student, it …

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Opportunity Cost Definition


Definition – Opportunity cost is the next best alternative foregone. If we spend that £20 on a textbook, the opportunity cost is the restaurant meal we cannot afford to pay. If you decide to spend two hours studying on a Friday night. The opportunity cost is that you cannot have those two hours for leisure. …

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Economies of scale examples


Economies of scale occur when increased output leads to lower unit costs. (lower average costs) Diagram Economies of Scale This diagram shows that as firms increase output from Q1 to Q2, average costs fall from P1 to P2. There are many different types and examples of how firms can benefit from economies of scale – …

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Benefits of Price Discrimination

Readers Question: Can price discrimination be of benefit to consumers?

Price Discrimination involves charging a different price to different groups of consumers for the same good. Price discrimination can provide benefits to consumers, such as potentially lower prices, rewards for choosing less popular services and helps the firm stay profitable and in business. The advantages of price discrimination will be appreciated more by some groups of consumers.

Benefits of Price Discrimination

pd-loss In the above diagram, there is no single price which enables the firm to make normal profit and stay in business. They would need price discrimination to increase profits.

  1. Allows an unprofitable business to avoid going bankrupt. In some cases, it may be possible that there is no one price that would enable a firm to make normal profits. (i.e. average costs would always be higher than demand curve) However, price discrimination may enable the firm to turn a loss into a small profit. This means that a business activity can keep going, rather than closing down. This is obviously beneficial for consumers because it increases their choice of goods and services. An example might be train services. Without price discrimination (off-peak, peak) train companies would make a bigger loss and may be discontinued.

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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 …

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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 …

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Definition of Consumer Surplus


Readers Question: what is meant by consumer surplus? Can firms reduce or eliminate consumer surplus? Consumer Surplus is the difference between the price that consumers pay and the price that they are willing to pay. On a supply and demand curve, it is the area between the equilibrium price and the demand curve For example, …

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