Price Elasticity of Demand – Short and Long Run

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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 …

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Fairness and Reciprocity in economics

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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 …

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Rational expectations

rational-expectations

Definition of Rational expectations – 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 are the best guess for the future. Rational expectations suggest that although people may be wrong some of the time, on average they …

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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 be used for the purchase of goods,  provide a store of account, and can be used as a medium of exchange.

If you buy on a debit card, you are using actual money in your bank account. You have a certain amount, and once your bank account is depleted, you can’t spend any more money. People will accept your money as legal tender in that country.

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Example of difference between money and credit

If you buy on a credit card, the amount you can spend depends on the generosity of your credit card company. For example, you may spend £3,000 on credit (money you may or not have). However, the credit card company may decide to increase the amount of credit that it gives you, it can increase your credit card limit to £5,000 and more credit is created. But, you have to pay this back. This credit is not negotiable; you can’t go to a shop and directly offer them some of your credit card limit.

You can’t increase the amount of money you have (without earning it), but you can increase the amount of credit you receive – if banks are willing to lend it to you. In this sense, you could think of money as more tangible, and credit is more intangible.

As a youngster, you will be told ‘money doesn’t grow on trees’. You can’t personally create money out of thin air.

But credit in a way can be created out of thin air. If a bank decides to lend you more.

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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 …

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Extra charges by airlines

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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 involved Price discrimination/ price targeting …

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The knowledge economy

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Definition of knowledge economy The sector of the economy which is increasingly based on knowledge-intensive activities, creating a greater reliance on intellectual capital rather than physical inputs. The OECD state the knowledge economy is associated with: High-tech manufacturing (computer, electronics, aerospace), Service sector industries, such as education  healthcare and software design Business services such as …

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Rational economic man – Homo Economicus

rational-expectations

Homo Economicus is a hypothetical concept that humans are: Self-interested Know what they want Make rational choices to maximise their utility. These choices are based on the concept of marginal utility. This concept of a rational economic man is an important cornerstone of neo-classical economic theory. It creates a framework to model how consumers and …

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