Summary
Summary Abstract Book Microeconomics and Behaviour
- Course
- Institution
- Book
Summary of part of the book "Microeconomics and behavior" written by Robert Frank and Edward Cartwright. Chapter 1, 10, 12 and 13 missing.
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
Seller
Follow
leannedekker
Reviews received
Content preview
SamenvattingECH-10406
Microeconomics and behaviour
Robert Frank & Edward Cartwright
Inhoudsopgave
Chapter 2: Supply and Demand 2
Chapter 3: Rational Consumer Choice 9
Chapter 4: Individual and Market Demand 19
Chapter 5: Applications of rational choice and demand theories 28
Chapter 6: Choice under uncertainty and the economics of information
41
Chapter 7: Explaining tastes: the importance of altruism and other non-
egoistic behaviour 46
Chapter 8: Cognitive limitations and consumer behaviour 53
Chapter 9: Production 59
Chapter 11: Perfect competition 66
1
,Chapter 2: Supply and Demand
Why do markets function so smoothly most of the time? – Basic supply and demand
analysis.
Why are attempts at direct allocation so often problematic?
Supply and demand curves
Market – consists of buyers and sellers of a good or service.
An umbrella is a completely different product when the sun shines, than when it rains.
Demand curve:
Real price of a product – its price relative tot h prices of other goods and services.
Horizontal interpretation of the demand curve – the demand curve as a schedule telling
how much of a product consumers wish to purchase at various prices.
Vertical interpretation – See graph – when the quanitity of tulips sold is 4000 per day, the
demand curve tells us that the marginal buyer’s reservation price is 8 cents per tulip.
Key property of the demand curve – downward slope: the quantity demanded rises as the
price of the product falls this is called the law of demand.
Law of demand – the empirical observation that when the price of a product falls, people
demand larger quantities of it.
There are two independent reasons fort he quantity demanded to fall when price rises:
- Many people switch to a close substitute good (vervangend goed, goedkoper).
- People are not able to buy as much as before.
The cost side of the calculation the price of the product.
The benefit side of the calculation the satisfaction provided by the product.
Supply curve:
2
,Law of supply – the empirical observation that when the price of a product rises, firms
offer more of it for sale.
Supply curves can either be horizontally and vertically interpreted.
Horizontally interpretation – begin with a price, then go over tot he supply curve to read
the quantity that sellers wish to sell at that price on the horizontal axis. (e.g. for 8 cents
people wish to buy 2000 tulips) – If the supplier sells less or more than 2000 tulips for 8
cents, he would not be satisfied.
Vertical interpretation – begin with the quantity, go up tot he supply curve to read the
corresponding marginal costs on the vertical axis. (e.g. if sellers supply 5000 tulips per
day, the opportunity cost of the last tulip supplied by the marginal seller would be 20
cents).
An alternative way of describing the supply schedule is to call it the seet of price-quantity
pairs for which suppliers are satisfied.
Equilibrium quantity and price:
The price-quantity pair at which both buyers and sellers are satisfied.
Excess supply (surplus) – prijs gaat naar beneden. Belangrijk om te zien dat in die markt
er allerlei krachten aan het werk die toewerken naar dat evenwicht. Dat evenwicht is een
STABIEL evenwicht.
Excess demand (shortage) – prijs is te laag, vraag is hoger dan het aanbod, de prijzen
hebben de neiging om te stijgnen naar dat evenwicht toe.
The equilibrium point is a point we want to reach, but this never works. But we can see it
as a goal, because at that point the suppliers and the demanders are happy.
3
, The equilibrium outcome has some attractive features.
If price and quantity take anything other than their equilibrium values, however, it will
always be possible to reallocate so as to make at least some people better off without
harming others.
E.g. the tulip example. Price of 8 cents, suppliers therefore offering only 2000 tulips. The
vertical interpretation of the demand curve tells us that when only 2000 tulips are
available, buyers are willing to pay 16 cents. The vertical interpretation of the supply
curve tells us that when 2000 tulips a day are supplied, the marginal costs of delivering
another tulip is only 8 cent. When the value tot he buyer of the last tulip grown (16 cents)
is higher than the costs of supplying it (8 cents), there is room to cut a deal. If a
dissatisfied buyer were to offer a supplier 10 cents for a tulip, the buyer’s position is
improved by 6 cents (16 – 10) and the seller’s position is improved by 2 cents (10 – 8).
No matter whether price starts out above or below its equilibrium value, a mutually
beneficial transaction will always be possible.
Although all markets in the world are at their equilibrium point, this does not mean all the
poor people also can buy everything.
Airlines always overbook their flight; this is because some people will not show up (often).
So, if there are 150 seats on a plane, they have booked 160 seats for that plane, because
they think that around 10 people won’t show up. If more than 150 people show up, they
will ask for volunteers to take another flight, and those volunteers will get money or a
flight ticket for example. They will increase the money until they have enough volunteers.
A poor person will surely be more likely to find cash payment a compelling reason to
volunteer. This says that the cash payment is worth the wait. Many people say this is not
fair.
Rent control is used to protect households from unaffordable rent hikes. Such laws are
motivated by an honest concern for the well being of low-income citizens. But their
economic consequences are not less damaging for being unintended.
Equilibrium rent is €600. Than there would be 60.000 apartments rented. The
government has passed a law that holds rents at €400, or €200 below the market-
clearing value price ceiling – level above which the price of a good is not permitted
by law to rise.
At €400 80.000 apartments, but suppliers are only willing to offer 40.000. Excess
demand: 40.000. If the rent stays €400 excess demand grows as population grows and
inflation reduces the value of money.
Offering only 40.000 apartments, the renters would be willing to pay €800 vertical
interpretation of the demand curve. The pressure will always (legal or illegal) find its way.
Rent controls are an example of a price ceiling that prevents the price from rising to its
equilibrium level.
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller leannedekker. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.93. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
56326 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now