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Ratchet effect and Demonstration effect

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According to Dussenberry’s Relative income hypothesis, consumption function is not independent but is interdependent upon the relative position in the society. The consumption habits may change if the relative position of individuals changes in the society. It is explained through Ratchet effect and demonstration effects . Every man wants to imitate the higher standard of living of their neighbors. He wants to live up their Joneses. This is called as demonstration effect in consumption behavior. There is another influencing behavior in the consumption. When a man regards himself as equals to the neighbors, he was to express his superiority. Thus, when income level increases, the consumption level is likely to go up.   Another feature of Dussenberry’s consumption function is that once the higher standard of living of the consumer is achieved, it cannot come down with the decrease in their income. This is called ratchet effect of consumption function. Under such conditions, a fal...
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Lancastrian Demand Theory and Linier Expenditure function

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Lancastrian demand theory was developed by Australian Economist Kelvin Lancaster. He published an article on Journal of Political Economics in 1966 entitled “ A new approach in consumer theory ” and also published a book called    “ Consumer Demand: A new approach ” in 1971. According to Lancaster, A consumer chooses to buy a particular product not only because of its Utility and cost but based on the combination of attributes which includes Taste, color, size, weight, price, etc. Thus, U = f ( Taste, color, price, weight, size, etc. ) He explained it further by taking in consideration of why an individual buys a particular food item. Let consumer buy the food item based on two nutritional factors: Vitamin (a 1 ) and Calories (a 2 ). Suppose there are three items in consumption basket x, y and z. Then, a 1 = a 1 x x + a 1 y y+ a 1 z Z a 2 = a 2 x x+ a 2 y y + a 2 z Z Where, a 1 x = the vitamin obtained from good x a 1 y = he vitamin obtained from good ...
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Nash equilibrium and The Prisoner’s Dilemma

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Nash equilibrium was a concept developed by John Forbes Nash who was awarded novel prize in economics in 1994 for his contribution in developing game theory. It is the concept in game theory that determines the optimal strategy in a non-cooperative game in which each player lacks any incentive to change his/her strategy. It conceptualizes the behavior and interactions between game participants to determine the best outcomes and also helps in predicting the decision of players if they are making decisions at the same time and the decision of player takes into account the decision of other players. Under Nash equilibrium, a player does not gain anything from deviating from the initial chosen strategy assuming that the other player keeps their decision intact. There may be Single or Multiple Nash equilibrium Single Nash equilibrium Imagine two competing companies: A and B. Both the companies want to determine whether they should launch a new advertising campaign for their products. ...
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