consumer behaviour Flashcards
total v marginal utility
utility can mean-happiness, benefit or satisfaction - marginal utility is additional utility from consuming an extra unit = total utility is utility from consuming all units rational consumer will aim to maximise utility
diminishing marginal utility
Diminishing marginal utility says that, as you consume more of a good, the utility (or satisfaction) that you get from each additional unit will decrease.
diminishing marginal utility demand curve
Since consumers receive less benefit from each additional unit consumed, they are willing to pay less for each extra unit. This means that, as quantity increases, the price decreases and so there is a downward sloping demand curve.
rational man ryan stuff
the rational man would aim to maximise utility and that’s it but behavioural economics takes into account that this is not realistic and consumers act irrationally through;
bounded rationality, bounded self-control, altruism,
social norms, anchoring bias, availability bias, rules of thumb - these are grouped under cognitive biases
what are the irrational behaviour cognitive biases
social norms, anchoring bias, availability bias, rules of thumb
bounded rationality
we don’t have enough brain power and mental processing is bounded/limited when making decision leading to wrong decisions this is worsened by time constraints
bounded self-control
our self control is limited/bounded leading us to make irrational decisions
altruism
when we care about increasing the utility of other people motivated by fairness but decreasing our own utility
studies shows that when waiter gave a free mint tips were increased by 3% and 2 free mints tips increased by 14%
cognitive bias-social norms
cognitive bias (predictable mental errors in decision making) we are almost always influenced by what other people think or do-social norms or norms- HERD BEHAVIOUR- leading to irrational descision. how 1292 people end up in jail
cognitive bias-anchoring bias
behavioural trickery -fake high price flashy discount - consumers are anchored/influenced too much by the 1st piece of information they see usually enhanced through behavioural trickery on things like big deals
cognitive bias-availability bias
influenced too much by the most recent information they’ve seen
eg plane example the most recent piece of information they have seen is the plane crash in the news. This has caused a cognitive bias which means that they think a plane crash is much more likely than it actually is. This can cause them to avoid purchasing a plane ticket even if it would actually increase their utility - this is an irrational decision.
cognitive bias-rules of thumb
when consumers use mental shortcuts to make decisions quickly eg checking reviews or buying special offer food to save money barring its expiry date
choices architecture and nudges
now that we know that consumers act like this we can influence their decisions through choice architecture-Choice architecture describes the layout of our available choices i.e. the way that a choice is presented to you.
nudges
A nudge is a change in choice architecture (the layout of choices), which does not restrict choices but does try to influence people’s behaviour.
framing
Framing is the way a choice is presented to you.
The way that the choice is presented can have an important impact on the way that people respond to that choice.
three main types of choice
default ,restricted and mandated choices
A default choice is when someone is automatically enrolled into a certain choice.
A restricted choice is when consumers are still able to choose between options, but the difficulty of choosing some options is much higher than others.
A mandated choice is when people are legally required to make a choice.
using behavioural economics to evaluate
in a micro economics essay you could be asked on the impact of an increase in price for say coca cola-for one of your points you could say assuming consumers are rational they may purchase the substitute Pepsi-but behavioural economics states we aren’t and we can use the 7 information’s to prove this
eg bounded rationality say s we have limited mental ability therefore maybe not noticing a price change and may still get coke due to social norms or if someone they love likes coke due to altruism they may still buy coke to increase the utility of their loved one
behavioural economics policies de merit goods
behavioural economics suggests three strategies that governments and policy makers can use to help people make better decisions
choice architecture, nudges (picturing on cigarette boxes nudging consumers to not smoke through availability bias
framing- information campaigns PUBLIC HEALTH ENGLAND STATES - 81% of adults in the Uk don’t smoke and smoking is declining- using framing to create a social norm
and restricted choice policies - illegal to smoke inside from 2007
all of this is to reduce the consumption of a de merit good
opt out nudges schemes
so few people were donating organs so since 2018 everyone in the uk has been automatically signed up to donate there organs unless they sign up to be taken of the list this is an example of an opt out policy
pension schemes- government created auto enrolment scheme for pension contributions when people get payed they pay their pension unless you sign and opt out
therefore more people are contributing to there pension and government wont have to invest more money in social care spending
both increasing the consumption of merit goods
