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Lecture notes Microeconomics and Behaviour (UEC10406)
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Extensive lecture notes of the course Microeconomics and Behaviour (UEC10406) given at Wageningen University.
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Microeconomics and Behaviour1. Thinking like an economost (H1)
Standard economics vs. behavioral economics
Standard economics assumes:
• People act as if they calculate costs and benefits of their actions
- Behavioural eocnomics observes
• People do not always act as if they calculated
• Even though the standard model is descriptively incorrect, it often provides useful guidance for
decisions
Homo economicus
• Stereotypical decision maker in the self-interest model:
- Guided by material benefits associated with selfish behaviour
• Behavioural economics
- Bounded selfishness, bounded rationality, bounded will-power
Some assumptions of rationality
- Correct assessment of information
- Calculation
- Self control
- Self-interest
Two ways in which people depart from rationality:
• Judgement (beliefs, evaluations)
- Optimism (rooskleurig beeld van hoe dingen zullen verlopen)
- Context dependence (Wanneer biefstuk eten? Waarderen product op basis van de prijs)
- Etc.
• Choice (behaviour, decisions)
- Self control
- Decisions over time → ongeduldig, mensen zijn niet goed in het uitstellen van beloningen,
irrationele beslissingen op de lange termijn
- Charity
Development of rational behavior
Do market forces make people more rational?
- They only provide incentives, not enforcement (punishment may even drive out intrinsic
motivation to behave oneself)
- Real life frequently provides no arbitrage opportunities for irrational choices (even in finance
‘smart money’ should follow ‘dumb money’)
- Life is not an experiment. Beslissingen komen niet heel vaak voor / vaak maar één keer.
Does evolution make people more rational?
- Evolution may weed out both rational (cf. game theory) and irrational behavior (cf.
overconfidence).
- Misverstand evulatie – leidt niet to optimalisatie, maar leidt tot werkende oplossingen.
,Does learning make people more rational?
- Much behavior takes a long time to be learned or learning is not possible at all (e.g. retirement
decisions)
- Oppurtunity costs of learning or experimenting may be too high (e.g. study or work decision)
- Grotere beslissingen kosten veel tijd en geld / niet mogelijk (alternatieven). Zinvol om te leren?
Of gewoon kiezen wat goed lijkt?
Bounded human nature, three unrealistic traits
- Unbounded rationality → loss aversion, decision heuristics, satisficing (e.g. overconfidence in
financial markets, taxi cab drivers)
- Unbounded willpower → self-control problems
- Unbounded selfishness → free rider problem, charity, volunteer work, dictator game, ultimatum
game
Some examples of bounded human nature
Finance
- Frequent traders obtain less net return than non-frequent traders
- 1/n heuristic (naive diversification) – zelfde bedrag op alle aandelen ipv kijken welke de beste
optie is.
- Predictability of stock prices:
➢ January effect – januari gemiddeld aandelen meer stijgen dan in andere maanden
➢ Friday effect – op vrijdag stijgen aandelen vaak meer
➢ Overreaction (long run)
➢ Disposition effect – aandeel in bezit of niet: hoe waardeer je het. Aandelen verkopen zodra het
goed gaat met een bedrijf – terugzien van stijging in portemonnee.
2. Supply and Demand (H2) & Rational Consumer Choice (H4)
Supply and demand curves
Demand curve
- Demand curve= how much buyers want to purchase for each possible price (horizontal
interpretation)
- Inverse demand curve= price at which buyers would demand specific quantities of the product
(vertical interpretation)
- Price ~ the marginal buyer’s reservation price – hoeveel wil een koper geven voor die
hoeveelheid
- Law of demand= demand curves are downward sloping, this means that: when the price of a
product falls, demand for the product will increase
Supply curve
- Supply curve= the quantity that sellers are willing to supply at any possible price (horizontal
interpretation)
- Inverse supply curve= price at which sellers would supply specific quantities of product (vertical
- Price ~ the marginal cost of supplying an additional unit of product
Equilibrium
Equilibrium= Pareto efficient → no reallocation can make some people better off without harming at
least one other person. Verbetering alleen ten koste van een ander.
,Te hoge prijs → Excess supply. Te veel aanbod. Verschil tussen prijs en vraag.
Te lage prijs → excess demand. Te veel vraag. Prijs zal stijgen tot evenwicht.
Price Ceilings and Price Support
A price cealing is a level beyond which prices are not permitted to rise (prijs plafond).
A price ceiling below the equilibrium price creates excess demand.
A price cealing above the equilibrium price has no effect.
A price support (or price floor) keeps prices above their equilibrium levels.
This leads to excess supply and requires the government to become an active buyer in the market.
The rationing and Allocative Function of Prices
Prices serve two important fuctions:
1) Rationing function of price – equilibrium prices ration scarce supplies to the users who place the
highest value on them (meeste willen betalen, kortetermijn)
2) Allocative funciton of price – signals to direct productive resources among different sectors of
the economy (ingezet in die sectoren waar het meeste winst / productiviteit gehaald kan
worden, meer langetermijn functie van de prijs – investeringen en hun effect)
Determinants of Supply and Demand
Demand curve
• Incomes
- Normal goods: quantity demanded at any price rises with income
- Inferior goods: quantity demanded at any price falls with income (worst, hamburgers, als
inkomens stijgen liever biefstuk)
• Tastes
• Price of substitues and complements
- Complements: an increase in the price of one good decreases demand for the other good (samen
gekocht: brood & boter)
- Substitutes: an increase in the price of one good will increase the demand for the other
(vervangbaar: Coca cola, Pepsi cola)
• Expectations (verwacht een lockdown → toitletpapier kopen)
• Population size
, Supply curve
• Technology
- A cost-saving invention increases supply
• Factor prices (salaris, arbeid, rentes etc.)
- An increase in factor prices decrease supply
• The number of suppliers (meer aanbieders, meer aanbod)
• Expectations
- If prices are expected to increase in the future, there may be a decrease in current supply
Huidige aanbod laten afnemen, om in de toekomst meer te kunnen aanbieden tegen hogere
prijzen
• Weather (oogst beschadigd etc.)
Consequences of a Shift in the Demand of Supply Curve
Two Sources of Seasonal Variation
Appels → aanbod stijgt in zomer,
verschuiving naar rechts van aanbodscurve.
Prijs zakt.
Vakantiehuisjes → vraag stijgt in zomer,
toename prijs.
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