4.1.1 –economic methodology rationing scarce …
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RATIONINGSCARCERESOURCES
ByMarketPrice ByConsumerIncome
ByAssessmentofPeople’sNeed
ByHouseholdPostcode
ByEducationLevel
ByAge ByGender ByNationality
4.1.1– ECONOMICMETHODOLOGY 7
RATIONINGSCARCERESOURCES
RationingisonewayofallocatingscarcegoodsandserviceswhenmarketdemandexceedsavailablesupplyExamplesofrationing• Healthrationingoccurswhendemandforhealthcareservicesoutstripstheavailableresourcesleadingtowaitinglistsanddelaysforhealthtreatments
• Cashrationing inIndianbankswhenthegovernmentin2016tooklargerdenominationsofbanknotesoutofcirculationinabidtoreducecorruption
• Ticketrationingbyclubswhendemandforticketsforabigmatchexceedscapacityofastadium
4.1.1– ECONOMICMETHODOLOGY
LOSSAVERSION4.1.2INDIVIDUALDECISIONMAKING
Value
Losses Gains
ReferencePoint
Thebasicideabehindlossaversionisthatpeoplefeellossesmuchmorethangains.
Lossaversionisoftenseeninfinancialmarkets:Thereissomeevidencethatstockmarketinvestorsholdtheirinvestmentpositionswithpaperlossestoolongandselltheirinvestmentpositionswithpapergainstooearly.
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LOSSAVERSION4.1.2INDIVIDUALDECISIONMAKING
MarketingemphasisesdiscountsratherthanavoidingasurchargeExample:
1. Renewaseasonticketbefore1st Julytogetadiscountof£502. Seasonticketrenewedafter1st Julyincreasesinpriceby£50
Professionalgolfersputbetterforaparthanforabirdie– theyreallydon’tlikelosingashottopar“SaveMoreTomorrow”(Nobel-winnerProfessorRichardThaler)• RichardThalercreatedapensionplanwhereinvestorssignedupfor
apensionthatcostsnothinguntiltheyreceiveapayrise• Atwhichpointapercentageoftheirpayrisewouldautomaticallybe
directedintotheirpensionfund• Bymakingsurethesaverneversawareductioninhisdisposable
income,pensioncontributionsamongthisgrouprose200%
INFERIORGOODS
Ownlabeldiscounters Urbanbustransport Cigarettes
Economyclasstravel Own-labelcereals EconomyFoodstuffs
4.1.3PRICEDETERMINATION 59
INFERIORGOODS
Whatisaninferiorgood?If,followinganincreaseinrealincome,lessofthegoodispurchased,thenthegoodisaninferiorgood.InferiorgoodshaveanegativeYED,i.e.YED<0Whenrealincomesarerisingduringaperiodofeconomicgrowth,thendemandforinferiorgoodswillfallcausinganinwardshiftofthedemandcurveWhenrealincomesarefallingduringaperiodofrecessionormoregenerally,ifwagesarerisingmoreslowlythanprices,thenmarketdemandforinferiorgoodswillrise.Inferiorgoodsaresometimescalledcounter-cyclical products
4.1.3PRICEDETERMINATION
POSITIVEEXTERNALITIESFROMCONSUMPTION
Healthprogrammese.g.HNSservices
Earlyyearseducatione.g.
nurseryprovision
SubsidisedBikeSchemesinurban
areas
Publiclibraries/communityspaces
MuseumsandGalleries
Freeschoolmeals/nutritionaladvice
4.1.8MARKETFAILURE&INTERVENTION 80
POSITIVEEXTERNALITIESFROMCONSUMPTION
Costs,Benefits£s
Output/Quantity
MarginalPrivateCost
P1
Q1
MarginalPrivateBenefit
MarginalSocialBenefit
P2
Q2
Ifthemarketpriceignorespositiveexternalities,thentherewillbeunder-consumption
SocialoptimumpositionisoutputQ2whereasthemarketequilibriumisQ1
ThisistheareaofsocialwelfarelossbecausethemarketoutputQ1islowerthanthesociallyefficientlevel
4.1.8MARKETFAILURE&INTERVENTION
INDIRECTTAXESANDELASTICITYOFDEMAND
Iftheco-efficientofpriceelasticityofdemand>1,thenmostoftheburdenofanindirecttaxwillbeabsorbedbythesupplier
Price
Quantity
P2
D
Q2
S1
S1+tax
Q1
P1
P3
Paidbyconsumer
Paidbysupplier
Iftheco-efficientofpriceelasticityofdemand<1,mostofanindirecttaxcanbepassedontothefinalconsumer
Price
P2
Demand
P1
Q2
S1
S1+tax
Q1
P3 Paidbyconsumer
Paidbysupplier
TaxPerUnit
Quantity
4.1.8MARKETFAILURE&INTERVENTION 100
INDIRECTTAXESANDELASTICITYOFDEMAND
Price
P2
Demand
P1
Q1
S1
S1+tax
TotalTaxRevenue
(paidbytheconsumer)
Price
Demand
S1
S1+tax
Q1Q2
P2
P1
Totaltaxpaidbytheconsumer
PerfectlyInelasticDemandAllofthetaxispaidbytheconsumer
PerfectlyElasticSupplyAllofthetaxispaidbytheconsumer
TaxPerUnit
Toensurethatsuppliersreceivetherequiredminimumpriceafteranindirecttax,themarketpricemustrisebythe
fullamountofthetax.
QuantityQuantity
4.1.8MARKETFAILURE&INTERVENTION