A sunk cost is an irretrievable cost. Once spent, the sunk cost cannot be recovered when the firm leaves the industry. A sunk cost is incurred in the past and cannot be changed. A non-sunk cost is a cost that will only occur if a particular decision is made. Examples of sunk costs Advertising expenditure. …
Diminishing marginal utility of income and wealth suggests that as income increases, individuals gain a correspondingly smaller increase in satisfaction and happiness. In layman’s terms – “more money may not make you happy” Alfred Marshall popularised concepts of diminishing marginal utility in his Principles of Economics (1890) “The additional benefit a person derives from a …
Definition – An external benefit occurs when producing or consuming a good causes a benefit to a third party. The existence of external benefits (positive externalities) means that social benefit will be greater than private benefit. Example of external benefit In this example, of cycling to work, there is Private benefit We save on a …
In economics, marginal analysis means we look at the last unit of consumption/cost. It gives a different picture to the total cost. For example, the total cost of flying a plane from London to New York will be several thousand Pounds. However, with a plane 50% full, the cost of carrying one extra passenger is …
Readers Question: Could you please explain how positive externality (external benefit) lead to market failure in property industry? A positive externality occurs when a third party benefits from the production or consumption of a good. In many cases, building the right kind of housing can have benefits to the rest of society. Therefore, the social …
Economic growth means an increase in real GDP – an increase real incomes. This is usually considered beneficial, but there are also potential costs of economic growth such as: Inflation Boom and bust economic cycles Current account deficit Environmental costs – pollution, loss of non-renewable resources Congestion Potential of widening inequality. The costs of economic …
Readers Question: Should the government provide more welfare support programs such as child tax benefit and unemployment insurance in order to decrease economic inequality? This is a classic dilemma that governments face. To simplify the argument. Higher welfare benefits help to reduce inequality and reduce relative poverty. Higher benefits will give those on low income a better …
Readers Question: Why do some firms prefer to remain small? In recent times, the tendency is for product markets to be dominated by large multinational corporations who can benefit from various economies of scale. However, despite this general trend, there are still advantages to being a small firm. Benefits of being a small firm Concentrate …