If were to ask a 1st year economics student what the first and most important idea of economics, they would probably mention equilibrium. Neo-classical economics is based upon the theory that the economy is in equilibrium. This literally means balance or stability, but is usually expanded to mean not just any balance between supply and demand, but that there is only one and it is the optimal position for the economy. From this comes most neo-classical arguments about the economy, in particular the idea that the government only distorts the market and any intervention is necessarily inefficient. But is it actually true? Does the economy ever reach equilibrium? Continue reading “Do We Ever Reach Equilibrium?”
In chapter 2 of Dan Ariely’s fantastic “Predictably Irrational”, he discusses how supply and demand are not the independent forces that drive prices in the market as usually described. Instead consumers are subject to anchoring and arbitrary coherence which nudges them towards higher or lower prices. Our first impressions have a large effect on later decisions so that too an extent, the market drives the consumer not the other way around. As Tom Sawyer discovered, people pay a high price for what is hard to get regardless of its supply or demand curve. Continue reading “Predictably Irrational Chapter 2 – The Fallacy Of Supply And Demand”
Orthodox economics treats labour as a good like any other subject to the laws of supply and demand. However this misses a crucial point that we are not dealing with commodities but rather people. With goods, demand is decided by consumers and supply by producers, whereas with labour, demand is decided by producers and supply by consumers. The entire system is turned on its head yet neo-classical economics claims the results will be the same.
Continue reading “Labour Market In The Real World”