Definition of Ratchet effect:
Tendency of people to be influenced by the previous highest (or best) level of a factor (variable). For example, workers satisfaction from the current salary increment depends on how it compares with the highest increment received in the past.
An effect whereby a trend or tendency in cost, demand, etc., is maintained incrementally so that it becomes, or appears to become, irreversible; also in extended use.
Certain trends in economics tend to self-perpetuate, particularly for production. For example, if a store whose sales have been stagnant for some time adopts some company changes such as new managerial strategies, staff overhaul, or better incentive programs, and the store earns greater revenues than it had previously, the store will find it difficult to justify producing less. Since firms are always seeking growth and greater profit margins, it is hard to scale back production. .
The ratchet effect, a Keynesian theory, states that once prices have risen in lockstep to a rise in aggregate demand, they do not always reverse when that demand falls.
How to use Ratchet effect in a sentence?
- The primary problem with the ratchet effect is that, in certain situations, people become accustomed to constant growth, even in markets that may be saturated.
- You need to understand how a ratchet effect may change the market and quickly adapt to it as best you can.
- The ratchet effect first came up in Alan Peacock and Jack Wiseman's work: The Growth of Public Expenditure in the United Kingdom.
- Even though John received a 4% increase in salary this year, it was not quite as good as the 8% he got a few years ago. This ratchet effect caused him to not enjoy the raise as much as before.
- The ratchet effect, a Keynesian theory, states that once prices have risen in lockstep to a rise in aggregate demand, they do not always reverse when that demand falls.
- The ratchet effect of reducing the size of a large soda, is people now feel like they are not getting their moneys worth of the product.
Meaning of Ratchet effect & Ratchet effect Definition