2. Demand and Behavioural economics

Question 1

Market

Answer 1

where buyers and sellers come together to carry out an economic transaction

Question 2

Name 4 different types of markets

Answer 2

factor, product, stock, international financial

Question 3

Demand

Answer 3

the quantity of a good or service that consumers are willing and able to purchase at different prices in a given time period

Question 4

Law of demand

Answer 4

as the price of a product falls, the quantity demanded will usually increase, ceterus pareibus (downward slope)

Question 5

A movement along the demand curve

Answer 5

when a change in price leads to a change in QUANTITY DEMANDED - price determinants

Question 6

A shift in the demand curve

Answer 6

when something other than price leads to a change in Qd

Question 7

Non price determinants of demand

Answer 7

PINTE
Price of other products
Income of buyers
Number of Buyers (and other factors)
Taste / Preferences
Expectations of Future

Question 8

I of PINTE

Answer 8

• 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

Question 9

Normal goods

Answer 9

as income rises, the demand for this product will also rise

Question 10

Inferior goods

Answer 10

as income rises, demand for this product will fall as consumers start to buy higher priced substitutes

Question 11

P of PINTE

Answer 11

• if products are substitutes for each other, a change in price (movement along) of one will change in demand (shift) for another

Question 12

Complimentary goods

Answer 12

product or service that adds value to another

Question 13

T of PINTE

Answer 13

if tastes change in favor of a product, demand will increase and vice versa
- affected by advertising, marketing, peer pressure and media influence

Question 14

E of PINTE

Answer 14

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

Question 15

N of PINTE

Answer 15

increase in the number of consumers shifts D to the right

relating to size of a population or demographic changes (age, income)

Question 16

What is the difference between a movement and a shift in the demand curve?

Answer 16

• change in the price of a good itself –> movement along

- change in non price determinant –> shift

Question 17

veblen good

Answer 17

goods that are bought as a display of wealth, price rise makes them more desirable, price fall makes them less desirable

Question 18

total Market demand

Answer 18

adding individual demands at each price - horizontal summing

Question 19

income effect as an explanation for the law of demand

Answer 19

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

Question 20

substitution effect as an explanation for the law of demand

Answer 20

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

Question 21

key assumption behind the theory of demand

Answer 21

that consumers

• behave rationally in ways that maximizes their utility
• have self control
• are unbiased

Question 22

bounded rationality

Answer 22

rationality and decision making of what to buy is limited by available information, time, and cognitive abilities they have

Question 23

bounded self control

Answer 23

natural tendency to give in to temptation

Question 24

bounded selfishness

Answer 24

humans innately care about others (volunteer, charity) so they don’t always act in their own self interest

Question 25

imperfect information

Answer 25

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

Question 26

availability bias

Answer 26

availability of recent information and examples/events tend to overinfluence people’s decision making

Question 27

anchoring bias

Answer 27

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

Question 28

framing bias

Answer 28

information could be framed in a positive or negative way such as 90% fat free yogurt rather than 10% fat

Question 29

social conformity/herd behavior

Answer 29

when you do the same thing as the majority of people to fit in eg. fashion trends

Question 30

status quo/inertia bias

Answer 30

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

Question 31

loss aversion bias

Answer 31

people feel that losses are far more significant than gains eg. buy now before stocks run out

Question 32

hyberbolic discounting

Answer 32

preferring the smaller short term rewards over larger later rewards

Question 33

choice architecture

Answer 33

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

Question 34

how can people work past choice architecture?

Answer 34

by changing default choices eg. your go to at a cafe, google being the default browser

Question 35

how might people work to increase supply of organs available for transplants?

Answer 35

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

Question 36

nudge theory

Answer 36

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