Category: Essential Economics for Business: Ch 03
“‘Capitalism,’ Schumpeter wrote, ‘is by nature a form or method of economic change and not only never is but never can be stationary … This process of Creative Destruction is the essential fact about capitalism”. In the article below William Keegan looks at this process of creative destruction and relates it to the current financial crisis and the downturn in the business cycle.
Moral hazard? It’s just another danger along the capitalist way Guardian (5/10/08)
Time To Drop The Baggage That Comes With Moral Hazard Financial Times (4/10/08)
Questions
| 1. |
Explain what is meant by the term ‘Creative Destruction’. |
| 2. |
Explain what is meant by the term ‘Moral Hazard’. |
| 3. |
“In theory, enlightened economic policies can moderate the workings of the business cycle”. Discuss possible policies that can moderate the workings of the business cycle. |
| 4. |
Discuss the extent to which the recent economic boom was an ‘asset-price boom’ rather than a ‘traditional one’. |
Behavioural economics looks at the way in which people behave when making economic decisions about spending. It looks essentially and what people buy and why they buy it. Research in behavioural economics has started to question some of the traditional economic assumptions of rationality and argues that habits and other psychological factors may be more important than conventionally assumed.
Why we buy what we buy Guardian (20/5/08)
Questions
| 1. |
Explain what is meant by ‘behavioural economics’. |
| 2. |
Evaluate the principal factors that people take into account when choosing to buy a consumer good. |
| 3. |
“….. average people are all far more irrational and more human than economists allow”. Discuss the extent to which this might be true. |
Increasing numbers of firms are offering goods to consumers for free. Chris Anderson, the editor of Wired magazine, has developed a thesis called freeconomics which postulates that this trend will increase and that firms that don’t join in will go to the wall. “As much as we complain about how expensive things are getting, we’re surrounded by forces that are making them cheaper,” Anderson wrote in a recent article.
The big giveaway Guardian (6/5/08)
Questions
| 1. |
Explain what is meant by the term ‘freeconomics’. |
| 2. |
How can firms afford to make goods and services available for free? |
| 3. |
“Anderson’s idea is that the internet, by reducing marginal costs, encourages businesses to make their money by offering free goods or services to an extent we have not witnessed before”. Discuss the extent to which doing business over the internet reduces marginal costs. |
Researchers at the California Institute of Technology have shown that a person’s enjoyment of wine is heightened if they are told that the wine is an expensive one. So what are the main factors determining the demand for wine? Is it really the taste or is it simply the expectation resulting from the price?
Raising a glass to pricey wine BBC News Online (14/1/08)
High price makes wine taste better Times Online (13/2/08)
Why expensive wine tastes the best Metro (13/2/08)
Questions
| 1. |
What are the main factors determining the demand for wine? Assess the relative importance of each of these factors in the overall level of demand. |
| 2. |
Analyse how utility theory can help to explain the level of demand for more expensive wine.
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| 3. |
How would marginal utility and market demand be affected by the knowledge that bottle of wine is a relatively expensive one? |