2. Demand and Behavioural economics Flashcards
Market
where buyers and sellers come together to carry out an economic transaction
Name 4 different types of markets
factor, product, stock, international financial
Demand
the quantity of a good or service that consumers are willing and able to purchase at different prices in a given time period
Law of demand
as the price of a product falls, the quantity demanded will usually increase, ceterus pareibus (downward slope)
A movement along the demand curve
when a change in price leads to a change in QUANTITY DEMANDED - price determinants
A shift in the demand curve
when something other than price leads to a change in Qd
Non price determinants of demand
PINTE Price of other products Income of buyers Number of Buyers (and other factors) Taste / Preferences Expectations of Future
I of PINTE
- as income rises the demand for a normal good will shift to the right
- as income rises the demand for an inferior good will shift to the left
Normal goods
as income rises, the demand for this product will also rise
Inferior goods
as income rises, demand for this product will fall as consumers start to buy higher priced substitutes
P of PINTE
- if products are substitutes for each other, a change in price (movement along) of one will change in demand (shift) for another
Complimentary goods
product or service that adds value to another
T of PINTE
if tastes change in favor of a product, demand will increase and vice versa
- affected by advertising, marketing, peer pressure and media influence
E of PINTE
if consumers think that price will increase in the future, they may demand more in the present to take advantage of lower prices, shifting D to the right
example. black Friday is a future fall in price
N of PINTE
increase in the number of consumers shifts D to the right
relating to size of a population or demographic changes (age, income)
What is the difference between a movement and a shift in the demand curve?
- change in the price of a good itself –> movement along
- change in non price determinant –> shift
veblen good
goods that are bought as a display of wealth, price rise makes them more desirable, price fall makes them less desirable
total Market demand
adding individual demands at each price - horizontal summing
income effect as an explanation for the law of demand
when the price of a product falls, then people will have an increase in their real income or purchasing power making them more able if they’re willing to buy
substitution effect as an explanation for the law of demand
when the price of a product falls, people will gain the same amount of utility but pay less so their ratio of satisfaction to price improves
- making it relatively more attractive to SIMILAR products that are unchanged in price
key assumption behind the theory of demand
that consumers
- behave rationally in ways that maximizes their utility
- have self control
- are unbiased
bounded rationality
rationality and decision making of what to buy is limited by available information, time, and cognitive abilities they have
bounded self control
natural tendency to give in to temptation
bounded selfishness
humans innately care about others (volunteer, charity) so they don’t always act in their own self interest
imperfect information
where buyers and/or sellers do not have all of the necessary information to make an informed decision about the price or quality of a product
availability bias
availability of recent information and examples/events tend to overinfluence people’s decision making
anchoring bias
when someone uses the value of something as a reference point to influence future choices and decisions
eg. salespeople may offer a very high starting price and accept a lower price that is still higher than what the product should cost
framing bias
information could be framed in a positive or negative way such as 90% fat free yogurt rather than 10% fat
social conformity/herd behavior
when you do the same thing as the majority of people to fit in eg. fashion trends
status quo/inertia bias
when given too large or confusing of a set of choices, sometimes people prefer to just not do anything eg. when you cant decide what drink to get so you don’t get anything at all
loss aversion bias
people feel that losses are far more significant than gains eg. buy now before stocks run out
hyberbolic discounting
preferring the smaller short term rewards over larger later rewards
choice architecture
decisions we make are influenced by the way in which choices are presented to us eg. supermarkets putting stuff at the cashier so you impulse by
how can people work past choice architecture?
by changing default choices eg. your go to at a cafe, google being the default browser
how might people work to increase supply of organs available for transplants?
increase the number of people who consent to donate their organs
- opt in system: requires people to sign up - less organs
- opt out: makes donating the default - more organs unless they choose not to
nudge theory
consumers have the ability to choose but are encouraged to make better decisions
eg. putting healthy foods at a place that is easier to see and reach
