Behavioral Economics: Importance, Concept Examples

What it is: Behavioral economics is the branch of economics that studies how the effects of psychological factors influence and explain economic decision making. It studies the cognitive, emotional, cultural and social effects on decisions made by economic actors.

Behavioral economics emerged in the 20th century along with advances from the fields of psychology and neuroscience. Through his book The Economic Approach to Human Behavior in 1976, economist Gary S. Becker describes rational choice theory. The theory tells you that economic actors have stable preferences and seek to maximize behavior. He uses an economic approach to understand all human behavior including those related to social interactions, crime and punishment and irrational behavior. Some of the leading contributors to the study of behavioral economics are Herbert Simon, Daniel Kahneman, George Akerlof, Robert J. Shiller, and Richard Thaler.

The importance of behavioral economics

Behavioral economics is a relatively modern economic theory. It is important to understand economic behavior and understand the reasons why economic actors perform certain actions. Then, behavioral economists use social, moral, and psychological factors to study them.

In textbooks in general, economic actors are assumed to be rational. Individuals seek to maximize satisfaction when consuming goods and services. And, …

Types of Capital in Economics and Business

There are several types of capital in economics and business. Some contribute directly and are used to produce goods and services. Meanwhile, others contribute indirectly. And, here, we discuss four of them:

Physical capital

Physical capital or capital goods are man-made tools – such as machines and equipment – ​​that are used to produce goods and services. That is what “capital” means in the economist’s definition when describing factors of production or economic resources. It is one of four economic resources besides land, labor and entrepreneurship.

Physical capital is vital because it provides economic benefits to businesses. It contributes directly, which companies use to assist and support the production of goods or the provision of services. For example, manufacturing companies use machines to process raw materials into intermediate or final goods.

If the accumulated physical capital increases, we expect the firm to produce more output. Improved quality also contributes to increased output, for example by adopting more sophisticated technology. So companies can increase production by investing in more capital or better quality technology.

Furthermore, the company reports fixed capital as fixed assets. In financial statements, you may know it as property, plant and equipment (PP&E). Businesses often spend a lot …