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5 Nobel Prize-Winning Economic Theories You Should Know About

Behavioural Economics

Behavioural Economics

The economic theory of expected utility maximization says that people will act out of rational self-interest. But psychologist Daniel Kahneman showed that it is incorrect.

  • Common cognitive biases cause people to use faulty reasoning to make irrational decisions, such as the anchoring effect, the planning fallacy, and the illusion of control.
  • People make decisions by using irrational guidelines such as perceived fairness and loss aversion, which are based on feelings, attitudes, and memories.
  • People tend to use general rules, such as representativeness, to make judgments in contradiction to the laws of probability.

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SIMILAR ARTICLES & IDEAS:

Microeconomics: Comparative Advantage
Microeconomics: Comparative Advantage

The law of comparative advantage was first mentioned in 1817 by English economist David Ricardo.

A company has a comparative advantage when it is able to provide a good or service at

Opportunity Cost

An opportunity cost is the potential ‘alternative’ or benefit that is forfeited when one chooses a particular option.

The other, foregone option, if it is lower than other companies, is the key factor in this trade-off.

Skills: Diversity And Specialization

Comparative advantage is also measured by the salary yardstick, and how much a person’s time, skills and core skill sets are worth.

Example: Michael Jordan is a skilled basketball player, and is very tall. If he wants, he could paint his own house by himself and do it quickly due to his height. But as he is also a skilled sportsperson, he could earn much more in that time, and probably hire someone else to paint his house, even if the hired painter (who has a comparative advantage due to his specialization of painting houses) takes more time to do it.

A financial crisis
A financial crisis

A financial crisis is often associated with a panic or a bank run where investors sell off assets or withdraw money from savings accounts.

  • Asset prices drop in value.
  • Consu...
Causes of a financial crisis

Generally, a crisis is caused if institutions or assets are overvalued, and can be worsened by panic and herd-like investor behaviour.

Contributing factors include systemic failures, unexpected or uncontrollable human behaviour, regulatory absence or failures, or contagions that is like a virus that spread from one institution or country to the next. If left unchecked, an economic crisis can cause a recession or depression.

Financial crisis examples
  • The Stock Crash of 1929. On Oct. 24, 1929, share prices collapsed after a period of wild speculation and borrowing to buy shares. It led to the Great Depression, which was felt worldwide. One trigger of the crash was a drastic oversupply of commodity crops, which led to a steep decline in prices.
  • The 20007-2008 Global Financial Crisis. This was the worst economic disaster since the Stock Market Crash of 1929. It started with a subprime mortgage lending crisis in 2007. Then it moved into a global banking crisis with the failure of investment bank Lehman Brothers in September 2008.
Marginal Benefit vs. Marginal Cost
Marginal Benefit vs. Marginal Cost

Marginal benefit and marginal cost are two measures of how the cost or value of a product changes.

  • The marginal benefit is a measurement from the consumer
Marginal Benefit

A marginal benefit change in a consumer's advantage if they use an additional unit of a good or service.

A marginal benefit usually declines as consumption increases. For example, the consumer may buy one ring for $100, but only willing to buy another if the second ring is $50. The consumer's marginal benefit reduces from $100 to $50 from the first to the second good.

Marginal Cost

Producers consider marginal cost, which is the small but measurable change in the expense to the business if it produces one additional unit.

In producing a product, efficiency in productivity can result in making more products in the same amount of time. The cost of raw materials may also go down if it is purchased in bulk, therefore, decreasing the marginal cost.