Ratchet Effect - Explained
What is the Ratchet Effect?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is the Ratchet Effect?
The Ratchet Effect refers to the escalation of production, price, or wage that tends to self-perpetuate and resist fall back. People are influenced by the previous best or highest level, which makes it difficult to reverse the change.
For example, if a person receives a 12% salary hike during the last appraisal and is offered a 7% hike in the current appraisal, he or she might feel disappointed with the present hike. Similarly, if a company implements a new strategy, employs extra workers, offers more incentive, and invest more capital for increasing the production, it is difficult for them to scale back the production to its previous level even if the new strategy proves to be costly for them.
Related Topics
- Self Interest
- Cost-Benefit Analysis
- Enlightened Self-Interest
- Fisher's Separation Theorem
- Ratchet Effect
- Total Utility (Economics)
- Efficiency Principle
- Expected Utility
- Subjective Theory of Value
- Positional Goods
- Utilitarianism
- Indifference Curve
- Time Preference Theory of Interest
- Incentives
- Marginal Benefit
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Allocative Efficiency
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
- Normative Economics
- Positive Economics
- Invisible Hand
- Sunk cost