My friends in St.Xaviers would know my love towards subject “Economics”. Untill few years they expected me to do majors in it and settle down as an Economist. But things and events turned around, changing the complete prospect of me becoming a economist.
But as you know, true love never fades out.
I never stopped thinking about it.
Hence I am here, exploring some funny Economic theories which may/can blow your mind by sheer simplicity and complete complexion it has embedded in it.
A General Economics/Commerce student would easily know that ECONOMICS is a Science which deals in production, distribution and consumption of Goods and Services. It’s divided into micro and macro economics. The former deals in small level economic aspects like individual, home and firm level economic things, while the later deals in economy or country (in general terms) as a whole.
Now I would take time to throw light on some humorous and little known economic theories…..
5.Paradox of Hedonism
Take me …. I Have passion of writing silly things with little sense of meaning in it.I do it because I like it, I love it.(now its another issue that I seldom end up eating your head ;) .
But in terms of economic theory of utilitarianism { marginal theory of utility }….. I do writing not because I love or like it..its because I seek pleasure out of it.
Yah, you read it right. Writing for me is an avenue towards acquiring pleasure…
So?
The hedonistic paradox or the pleasure paradox says that if one sets the targets to please oneself too highly then the whole mechanism would in fact jam itself decreasing my happiness and interest in the hobby I do.
# The more I pursue the risk is high, I may end up losing complete interest in writing.
Fact: that’s why students don’t take studies too seriously. Or else they would be in danger of losing control on it.
4. Lipstick Effect
Economics has many categories for “goods”. “Luxury Goods” are items that people buy more of as their income rises, as opposed to “Necessity Goods” like food and shelter, whose demand is unrelated to income. Examples of luxury goods include fine jewelry, expensive sports cars and designer clothing.
The Lipstick Effect is the theory that during an economic calamity(like recent recession), people buy more less costly luxury goods. Instead of buying a fur coat or Swatch watch, people will buy expensive lipstick. The idea is that people buy luxury goods even during economic hardships, they will just choose goods that have less of an impact on their funds. Other less expensive luxury goods besides cosmetics include expensive beer and small gadgets namely ipads.
Interesting Fact: After the 9/11 terrorist attacks on America, lipstick sales doubled. J
3. Tragedy of the Commons
The tragedy of the commons is a situation in which multiple individuals, acting independently, deplete a shared resource, even when it is not in anyone’s interest to do so.
The best current example of this is fishermen.
Nobody owns the earth’s fish populations, indeed, they are a shared resource. Fish are a good that people the world over consume, and as a result, there are multiple fisherman competing for these fish. Each fisherman will try to catch as many fish as possible in order to maximize his profits. However, it is also in the fishermen’s best interest to sustain the fish populations, i.e., leaving enough fish to repopulate, so that down the road, there are still fish to be caught. If each fisherman is concerned with sustainability, and they should be if they don’t want to find new careers in the near future, they theoretically will work to preserve the fish populations.
Here is the problem: there is a lack of trust. A fisherman that acts responsibly and limits the amount he catches will be screwed if all the other fisherman do not. The other fisherman get more fish than he does, make more in profits, and will ultimately deplete the fish population anyway. So each fisherman, believing that the others will take more than their sustainable share, will take as many fish as he can, and the world’s fish supplies will deplete, even though no one wants them to.
2. Information Asymmetry
Information asymmetry is a prevalent issue in economics. In most sales transactions, the seller has more information than the buyer, and as such has the opportunity to try to pass off low quality or defective products for higher prices.
This leads to buyer distrust and the old idiom: Buyer Beware.
Best information asymmetry example is the “Market for Lemons”, a term coined by the economist George Akerlof.
The used car market is the classic example of quality uncertainty. A defective used car (“lemon”) is generally the result of untraceable actions, like the owners driving style, maintenance habits and accidents. Because the buyer does not have this information, their best assumption is that the vehicle is of average quality, and therefore will pay only an average fair price.
As a result, the owner of a car in great condition (“cherry”), will not be able to get a price high enough to make selling the cherry worthwhile. End result: the owners of good cars will not sell their vehicles in the used-car market. This reduces the quality of cars in the used-car market, this reduces the price buyers will pay, this further reduces the quality of cars sold. You get the idea.
1.perverse incentive
A perverse incentive is an incentive that has an unintended and undesirable effect which is opposite to the initial interests. A type of unintended consequences, perverse incentives are the result of an honest good intention.
A historical example illustrates the problem: 19th century paleontologists traveling to China used to pay peasants for each piece of dinosaur bone that they presented. It was later found the peasants found bones and then smashed them into many pieces, which significantly reduced their scientific value, to get more payments. More modern examples include paying architects and engineers based on project costs, which leads to excessively costly projects as they overspend unnecessarily to make income.
Bonus : The cobra Effect
This is when the solution to a problem actually makes the problem worse. The term ‘Cobra effect’ comes from an anecdote from colonial India. The British government wanted to decrease the population of venomous cobra snakes, so they offered a reward for every dead snake. However, the Indians began to breed cobras for the income. When the government realized what was going on, the reward was canceled, and the breeders set the snakes free. The snakes consequently multiplied, and increased the cobra population. The term is now used to illustrate the origins of wrong stimulation in politics and economic policy. Unfortunately, Today the failed states like USSR have made people lethargic and lazy because of encouragement of non-working, free subsidies attitude.
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