4.1.1 –ECONOMIC METHODOLOGY RATIONING SCARCE …

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.

29

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