Category : Economics

Lines of best fit: how to derive the simple OLS estimators

If you ever encounter some data in your life, you’re likely to come across a scatter diagram, which plots two variables against each other. You’re also quite likely to see a ‘line of best fit’ going through those points, which describes the apparent trend or correlation between the two variables, as suggested by the data points you’ve observed. It’s quite possible that in your early school days, you had to draw a line of best fit through some data by […]

House price vs wage: which city is the most expensive place to live?

I’d noticed recently that a few people had mentioned the expensive cost of housing in relation to the average salary in their area. So I was interested to find out which places were particularly bad in the grand scheme of things. To do this, I picked some major cities from around the (reasonably developed) world. I used payscale.com to get data for the median salaries for these cities, and predominantly numbeo.com for data on housing. Methodology Initially, I thought I’d […]

Asymmetric information and high school effort grades

In high school, I remember thinking how our grading system was a total farce. We weren’t graded on ‘results’, allegedly. Instead, our teachers gave us a grading based on our ‘effort’. There were 5 grades in total: C – Commendable G – Good S – Satisfactory D – Disappointing U – Unsatisfactory To me this was complete nonsense, because effort is not observable! What the teachers did was to look at the end product, and use that to infer some […]

Intelligence and wage – a positively skewed hump?

Labour economists devote much of their time to looking at what factors affect wages. The classic regressions they run show that you are likely to have a higher wage if you’ve been to school for more years and if you have more work experience. This seems pretty intuitive and obvious. They’ve also looked at how IQ/intelligence affects wages. The general consensus is the common sense one – you earn more if you’re smarter. Again, this makes sense intuitively. There’s a […]

The Groin Strike Dilemma

Back when the Ultimate Fighting Championship (UFC) was in its infancy, there were very few rules. Ex-presidential candidate John McCain actually described it as the human equivalent of a cock fight, and to be fair to him, the lack of rules made for a rather unsavoury spectacle in some cases. One of the most notable cases in question happened in UFC 4, when strikes to the groin were completely legal. It saw Keith Hackney punch Joe Son (in the photo) […]

Are ‘sunk costs’ really sunk?

What are ‘sunk costs’? ‘Sunk cost’ is a term commonly used in economics. It refers to a cost that you or a firm might incur which is irretrievable – you can’t get it back. Suppose you own a large cheese company which has a cheese factory. You want to build an extension to your factory after a bumper year of exotic cheese sales (sorry, it’s lunchtime). If you bought some steel girders for £100,000 to lay some sort of framework […]

Daniel Kahneman, Loss Aversion and a video

Out of all of the various areas and branches of economics, none has captured my interest more than ‘behavioural economics’. This studies the links between psychology and economics to try to discover more about how the individual thinks when faced with decisions. It brings to light the irrationality of the human being, and the flaws of many classical economic models, which assume rational behaviour at all times. Israeli psychologist Daniel Kahneman was one of the pioneers of this field of […]

Dutch Auction Shops

Japan have been struggling for some time with poor aggregate demand in their economy. The interest rate has been near zero (and actually zero at some points) for a very long time to try and stimulate borrowing and investment. I saw an interesting programme on NHK World (Japanese news channel) a few weeks ago. It was about consumption and consumer attitudes in Japan. Lots of things both surprised and intrigued me, such as the fact that the youth of Japan […]

Cost Curves and a Nice Proof

As I like to do before getting down to some hardcore maths, I’m going to take an artistic break and present to you a Haiku that I wrote a couple of days ago: The flower withers Petal falls on wilted earth New shoot takes its place There, that’s enough of the artsy fartsy stuff for now. What’s all this about? I will firstly explain briefly what cost curves are, and why they look like they do. I will then go […]

Present Discounted Value

Before we get down to the maths, let me digress to explain why there is a still from BBC’s motoring magazine Top Gear at the top of this page. In the last few series of the show, I have noticed an interesting tendency for BBC to include attractive women in the camera shot whilst the presenters are sitting in the foreground. The image above shows a prime example of this. Whether this is a conscious attempt at subliminal messaging targeted […]