A2.01.02: The Assumptions Underlying the Demand Curve

Question 1

What is the directionality of the demand curve

Answer 1

Demand curve always slopes downwards

Question 2

What are the main assumptions of humans?

Answer 2

• Humans are rational, seek to maximise utility and having perfect information is equal to making decision that give the most utility

Question 3

What do behavioural economists say?

Answer 3

• Different agents will lead to different info, lack of ability and time to process info, inability to control themselves and give in to temptation
• Humans don’t act in their own self-interest (e.g. charity)
• Humans are biased, limited, have incomplete information, have bounded rationality, self-control issues and change tastes

Question 4

What are the 7 cognitive biases? [AAS FHL]

Answer 4

• Availability Bias
• Anchoring Bias
• Framing Bias
• Social Conformity or Herd Behaviour
• Status Quo or Inertia Bias
• Loss Aversion Bias
• Hyperbolic discounting

Question 5

What is the availability bias

Answer 5

• Info influences decision making
• for example, young people smoke as they see adults are healthy

Question 6

What is the anchoring bias

Answer 6

• Having a certain value as a reference and buying more of a product when there are discounts
• Producers use that to set high prices initially and then lower them

Question 7

What is the framing bias

Answer 7

• Positive or negative advertisement of products leads to consumers thinking more positively or negatively

Question 8

What is the social conformity or herd behaviour

Answer 8

• Because we want to fit in with others, we buy what the majority thinks is good

Question 9

What is the status quo or intertia bias

Answer 9

• Many options may lead to doing nothing instead because it takes too much time to research and choose which will lead to mobile phone contracts

Question 10

What is the loss aversion bias

Answer 10

• Losing has a bigger psychological effect on consumers than gaining something
• Producers will take advantage of this and would say “buy now before stock runs out”

Question 11

What is hyperbolic discounting

Answer 11

• Humans prefer short-term rewards over long-term rewards hence leading to putting off work and enjoying a night out instead of benefitting from completing your work

Question 12

Explain the law of diminishing marginal utility

Answer 12

• States that as the successive consumption of a good or service increases, there will be progressively smaller increases in utility

Question 13

How is the law of diminishing marginal utility to the downward slopping demand curve?

Answer 13

• As utility derived progressively decreases, firms will have to decrease prices in order for consumers to purchase additional units and therefore quantity demanded increases