Markets topic- eco

term 2 test 3 money markets management

Traditional view of consumer behaviour: rationality, self-interest, self-control

The traditional view of consumer behavior suggests that consumers make purchasing decisions based on rational thinking, where they seek to maximize their utility while prioritizing their own interests and exercising self-control in their spending.

The rational consumer

We assume consumers carefully weigh up the costs and benefits of diffrents choices before making a decision

The self-interested consumer

we assume consumers make choices that they belive will give them the greatest personal benefit.

The self-controlled consumer

we assume consumers make decisions that are in their long-term best intrests, rather than giving into short term temptation.

Features of bounded rationality

limited cognitive ability, limited time, metal shortcuts.

Bounded rationality: Herd behaviour

people tend to follow the actions of a larger group, especially in uncertain situations. for examples you buy a certain pair of runners not because they are comftorable or you like the style, but rather because all your friends have the same brand.

Bounded rationality: Loss aversion

Definition: The idea that the pain of losing something is felt more strongly than the pleasure of gaining something of equal value. Example: losing $10 feels worse than gaining $10

Bounded rationality: The framing effect

Definition: The way information is presented (the “frame”) can influence decisions, even when the underlying facts are the same. Example: A food label that says “90% fat-free” is more appealing than one that says “10% fat,” even though they mean the same thing.

Features of Bounded Self-interest

Definition: The idea that people often act in ways that are not purely selfish or profit-maximising. They may care about fairness, ethics, or the wellbeing of others. example, A consumer buys fair-trade chocolate even though it costs more, because they care about the workers who produced it.

Features of Bounded Willpower

Definition: the idea that people may make choices that are not always in their long-term best interests due to a lack of self-control or discipline. example, A consumer plans to save money for a house but buys takeaway after work because they are tired and hungry.

Definition of macroeconomics

Macroeconomics is about the big economic issues that affect the living standards of a whole country.

Macroeconomic issues: Economic growth, unemployment, inflation, living standards.

1. Economic growth	Is the economy producing more goods and services over time?
2. Unemployment	Are people who want work able to find jobs?
3. Inflation	Are prices rising too quickly?
4. Living standards	Are people’s lives improving or getting worse?

Material living standards

A measure of someones access to goods and services dependent on income.

Non-material living standards

A measure of someones quality of life and wellbeing.

How unemployment affects living standards

Lower unemployment can improve material living standards because more people are earning an income, allowing them to access more goods and services.

It can also improve non-material living standards because employment can increase people’s sense of purpose, confidence, social connection and therefore overall wellbeing.

Definition of inflation

Inflation is a sustained increase in the general level of prices in an economy over time.

How is inflation measured: Consumer Price Index (CPI)

The CPI measures the price of a ‘basket’ of goods and services commonly bought by households.

Examples in the ‘basket’: food, rent, petrol, electricity, clothing, health care, education, transport, recreation

If the CPI rises, it means the average cost of this basket has increased.

Consequence of inflation: loss of purchasing power

Inflation reduces purchasing power, which is the amount of goods and services your money can buy.

Example:  $20 used to buy you lunch and a drink, but now only buys you lunch.

Cause of inflation: Demand inflation

Demand inflation: occurs when consumers are spending a lot, causing demand for goods/services to rise. If businesses cannot produce enough to keep up, prices increase.

“Too many buyers chasing too few goods and services”

Cause of inflation: Cost inflation

Cost inflation: when it becomes more expensive for businesses to produce goods/services, causing them to increase prices.

Examples: higher wages, higher oil/fuel prices, higher electricity prices

Businesses pass on higher costs to consumers through higher prices.

How to decrease demand inflation: increasing interest rates

Interest rates are the cost of borrowing money, or the reward for saving money, usually shown as a percentage.

How does increasing interest rates reduce inflation?

•Higher interest rates make borrowing more expensive. Households will spend less. Less spending means demand for goods and services falls, making it harder for businesses to keep raising prices.

How to decrease demand inflation: Change in government spending

•The Australian government is the biggest ‘spender’ in the economy

•The Australian government spends approximately $800 billion a year!

How does decreasing government spending lower inflation?

•Decreasing government spending reduces the total amount of spending in the economy, which lowers demand for goods and services and reduces pressure on prices.

How to decrease cost inflation: decreasing costs for businesses

Main costs for businesses: Wages, rent, electricity, fuel, transport, taxes and raw materials.

How does lowering business costs reduce inflation?

•Lowering business costs can lower inflation because businesses can produce goods and services more cheaply, reducing the pressure on them to increase prices.

•This will decrease cost inflation

How businesses use behavioural economics

Businesses don’t assume customers are rational anymore, they use the insights from behavioural economics to influence consumers to buy things they might not have otherwise.

How businesses use bounded self-interest

Consumers may be willing to pay a higher price because buying the product makes them feel that they are supporting a good cause or acting consistently with their values.

Example: A business may promote a product as environmentally friendly, Australian-made, fair trade or ethically sourced.

How businesses use herd behaviour

Businesses can use herd behaviour by showing that many other people have purchased, liked, reviewed or recommended a product.

Example: Businesses may label products as “best seller” or “most popular”. Consumers may think that if many people are buying the product, it must be a safe or desirable choice.

How businesses use bounded willpower

Businesses can use bounded willpower by making immediate consumption easy, attractive and convenient.

Example: Buy Now, Pay Later services (like Zip and Afterpay) allow consumers to receive a product immediately and delay payment.

Consumers may focus on the immediate benefit, while giving less attention to the future cost of repayment.