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Theories and Basics


Articles explaining and demystifying every key term and theory in economics.


A Beginner’s Guide to the Big Mac Index

What is the Big Mac Index? The Big Mac index was first used by The Economist in 1986 as an informal guide to purchasing power parity (PPP). The basket of goods in this case is a Big Mac. It was chosen because…

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Purchasing Power Parity (PPP) Explained

Purchasing power parity (PPP) is a theory developed by Gustav Cassel, a Swedish economist, in 1918. It states that the exchange rate between two countries is in equilibrium when their purchasing power is the same. This means that the exchange rate should adjust so that consumers can buy the same basket of goods at home and abroad using the same amount of domestic currency…

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Frictional Unemployment

Quick Definition: Frictional unemployment is the unemployment created with the movement between jobs in a dynamic economy. What is frictional unemployment? Unemployment is a situation in an economy where there are people who are willing and able to work but do not…

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Game Theory: The Paradox of Collective Action

The Paradox of Collective Action is a situation where more than one party is involved in an action but they fail to reach a better Nash Equilibrium because of the free-rider and information problem. The existence of externalities is the main assumption…

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Third Degree Price Discrimination Explained

Third-degree price discrimination (TDPD) is possible when the firm knows that there are segments within the market (e.g. Museum XYZ knows that some people are willing to pay £6 but others are willing to pay only £4), and is able to distinguish between them (e.g. Museum XYZ knows that it is students who are only willing to pay £4, and adults who are willing to pay £6)…

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A Beginner’s Guide to Say’s Law

What is Say’s Law? Say’s Law is a theory developed by the French economist Jean-Baptiste Say in 1803, and has become one of the main assumptions in classical economics. The law is often misinterpreted as “supply creates its own demand”, as quoted…

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Regional Trade Agreements Explained

Quick Definition: Regional trade agreements are when a group of states within a specific region focus on trade negotiations and reforms. These agreements aim to reduce barriers to trade and increase the movement of goods, services, people and capital within member states.…

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First Degree Price Discrimination Explained

First-degree price discrimination is a theoretical pricing strategy which involves a firm charging every consumer the maximum price that the individual consumer is willing to pay. This results in consumers receiving no consumer surplus, and the firm receiving all gains from the transaction…

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