Economics Essay

1308 words - 6 pages

Option 1 a
A basic assumption in traditional economics is that utility increases with the consumption of more goods and services, the concept mostly commonly known as “more is better” this concept explains that all else equal, a person prefers more consumption to less. However their consumption may not always be what they prefer, they may be restricted in their preferences due to resource constraints such as time and money, money being the most prevalent constraint. This gives rise to the notion that happiness is positively related to income.

The notion that income is positively related to happiness, is this true? This notion suggests that as ones income level increases, so too does ...view middle of the document...

Income effect is brought about by the change in the consumers’ real purchasing power, thus resulting in a change in the consumption of a good.

Budgets are the measures of resources consumers have at their disposal to acquire a good. If a good is unattainable within a budget, consumers then have to make a choice to substitute the good for an alternative that provides an equivalent level of satisfaction and maintain the same level of utility. As represented below, the indifference curve shows the rate at which a product can be substituted for another – a consumers’ willingness to give up one unit of a good to gain an additional unit of another, a compromise. The slope of the curve is the marginal rate of substitution.

With the limited budgets that they have, consumers have to make do with what they have. A collaboration with two Princeton professors and their colleagues at the University of California-San Diego, the University of Michigan and the State University of New York-Stony Brook to study the relationship between income level and happiness to ascertain if there truly is a positive relationship between the two. The study instead, indicated that this relationship is mostly illusory – "People with above-average income are relatively satisfied with their lives but are barely happier than others in moment-to-moment experience, tend to be more tense, and do not spend more time in particularly enjoyable activities."(http://www.physorg.com/news70817137.html). This was a comprehensive study as it not only surveyed the household incomes and overall life satisfaction of participants, but also their moment to moment experiences.
The study showed that contrary to popular belief, there was only a weak correlation between income level and moment to moment experiences as compared to overall life satisfaction. It also revealed that the relationship between happiness and income level has been vastly exaggerated.

Option 1 b
The relationship between happiness and income level can also be understood through the study of behavioral economics. “Behavioral economics is a branch of economics that draws strongly on psychology and other disciplines such as sociology.” (http://www.australiancollaboration.com.au/_factsheets/1.%20Behavioural_Economics.pdf). This model developed in this branch of economics uses actual observations of real behavior rather than the assumptions of perfect rationality to explain the happenings in different aspects of society.

Behavioral economics is derived from the study of human reactions to given situations, consumer behavior. Applying behavioral economics to the relationship between income and well being it becomes clear that consumers think rationally before sacrificing resources that they have, deliberating a need over a want due to its necessity. Their current financial position is shaped by their past experiences as well as their current relative position within society hence point of time evaluations are based on the...

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