A-Level Economics -

1.2. How Markets Work

1.2.1. Rational Decision Making

• Syllabus Checklist:

  • The underlying assumptions of rational economic decision making:
    • Consumers aim to maximise utility.
    • Firms aim to maximise profits.
    • Governments aim to maximise social welfare.

• Assumptions of Rational Economic Decision Making:

  • Consumers aim to maximise utility:
    • Rational consumer = "homo economicus" (makes decisions by calculating the utility gained from each decision and chooses whichever will maximise satisfaction).
  • Firms aim to maximise profits:
    • Firms are run for owners and shareholders.
  • Governments aim to maximise social welfare:
    • Governments are voted in by the public and work for the public.

• Are these assumptions always correct?

  • No, behavioural economists have challenged these assumptions in recent years.
  • Economic agents do not always have the information necessary to act rationally, and consumers do not always make calculated decisions.

1.2.2. Demand

• Syllabus Checklist:

  • Distinction between movements along a demand curve and shifts of a demand curve.
  • Factors that may cause a shift in the demand curve (the conditions of demand).
  • Concept of diminishing marginal utility and how this influences the shape of the demand curve.

• Demand:

  • Demand = the ability and willingness to buy a particular good/service at a given price and at a given moment in time.

• Movements vs. Shifts of the Demand Curve:

  • Change in price of the good à movement along the demand curve (e.g., A --> B --> C).
  • A change in any of the factors that affect demand à shift in the demand curve (e.g., D1 --> D2).

• Movements Explained:

  • Movement A à B = contraction in demand.
    • Quantity demanded falls because of an increase in price.
  • Movement A à C = extension in demand.
    • Quantity demanded rises because of a decrease in price.

• Shifts Explained:

  • Shift from D1 à D2 = decrease in demand.
    • Fewer goods are demanded at each and every price.
  • Shift from D1 à D3 = increase in demand.
    • More goods are demanded at each and every price.

• Conditions of Demand (PIRATES):

  • Conditions of demand = the factors which cause the demand curve to shift.
    • Shift to the right = increase in demand.
    • Shift to the left = decrease in demand.

• PIRATES:

  • Population:

    • If population rises, demand for all products increases.
    • Demand will shift to the right.
    • The more people there are in the country, the more people who will want a good.

  • Income:

    • For most goods, if income increases, demand should increase (because a person can afford to buy more of a product).
    • If there is a fall in income, demand (for most products) should decrease and shift to the left.
    • For some goods, an increase in income can lead to a fall in demand and vice versa.

  • Related Goods:

    • If goods are complements or substitutes of each other then a change in price of another good can cause a shift in the demand curve.
    • Substitutes: two goods are substitutes if the demand for one good is likely to rise if the price of the other good rises (e.g., Adidas vs Nike).
    • Complements: two goods are complements if an increase in the price of one good causes the demand for the other good to fall (e.g., Golf clubs & golf balls).

  • Advertising:

    • If a firm carries out a successful advertising campaign, demand is likely to increase.
    • If a competitor carries out a successful advertising campaign, demand for the first firm will decrease (e.g., Pepsi/Coca Cola ads).

  • Taste:

    • If something becomes more fashionable, we expect demand to increase.
    • If something becomes less fashionable, we expect demand to decrease.

  • Expectations:

    • If people expect a shortage of something, or that price will rise in the future, then demand for that product will increase.
    • If people expect that the price will fall in the future, demand will decrease.

  • Seasons:

    • The weather will affect demand for certain products.
      • E.g., Hot summers à increased demand for sun cream & ice creams.
      • E.g., Wet summers à increased demand for umbrellas.

  • Government legislation:

    • Government legislation can also affect demand for goods.
      • E.g., Demand for car seats increased after the government made it a legal requirement.

• Why does the demand curve slope downwards?

  • There is an inverse relationship between price and quantity (ceteris paribus) which explains why the demand curve slopes downwards.
    • This can be explained by the law of diminishing marginal utility.

• Diminishing Marginal Utility:

  • Diminishing marginal utility: the satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed (assuming the consumption of all other goods remains constant).
    • Total utility: satisfaction gained by a customer because of their overall consumption of a good.
    • Marginal utility: extra satisfaction gained from consuming the next unit of the good.
      • The more that a good is consumed (e.g., pints of beer), the less satisfaction derived from the good. This means consumers are less willing to pay high prices at high quantities since they are gaining less satisfaction, and hence why the demand curve slopes downwards.

1.2.3. Price, Income & Cross Elasticities of Demand

• Syllabus Checklist:

  • Understanding of price, income and cross elasticities of demand.
  • Use formulae to calculate price, income and cross elasticities of demand.
  • Interpret numerical values of:
    • Price elasticity of demand: unitary elastic, perfectly and relatively elastic, and perfectly and relatively inelastic.
    • Income elasticity of demand: inferior, normal and luxury goods; relatively elastic and relatively inelastic.
    • Cross elasticity of demand: substitutes, complementary and unrelated goods.
  • Factors influencing elasticities of demand.
  • Significance of elasticities of demand to firms and government in terms of:
    • Imposition of indirect taxes and subsidies.
    • Changes in real income.
    • Changes in the prices of substitute and complementary goods.
  • Relationship between price elasticity of demand and total revenue (including calculation).

• Price Elasticity of Demand (PED):

  • Price elasticity of demand (PED): responsiveness of demand to a change in price of a good/service.
    • $PED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$

• PED Values:

  • Perfectly elastic: PED = infinity
    • Change in price --> demand falling to zero. (Demand curve = horizontal.)
  • Relatively elastic: PED > 1
    • Change in price --> greater than proportional change in demand.
  • Unitary elastic: PED = 1
    • Change in price --> proportional change in demand.
  • Relatively inelastic: PED < 1
    • Change in price --> proportionally smaller change in demand.
  • Perfectly inelastic: PED = 0
    • Change in price --> no change in demand. (Demand curve = vertical.)

• Factors Affecting PED:

  • Availability of substitutes
  • Necessity
  • Time
  • % of total expenditure
  • Addiction

• Factors Affecting PED Explained:

  • Availability of a substitute:
    • If a product has lots of substitutes, people will switch to other products when prices rise (PED = elastic).
    • If a product has no/few substitutes, people will continue to buy the product even if prices rise (PED= inelastic).
  • Necessity:
    • Necessary goods will be more PED inelastic.
    • Luxury goods will be more PED elastic.
  • Time:
    • The longer the time period, the easier it will be for someone to find an alternative product/supplier (more elastic over time).
    • In the short term, many goods are inelastic as people may not even realise the increase in price.
  • % of Total Expenditure:
    • If a good/service represents a small proportion of someone's expenditure, an increase in price will likely lead to a smaller than proportional fall in demand (thus inelastic).
    • If a good/service represents a significant proportion of someone's expenditure, an increase in price likely lead to a greater than proportional fall in demand (thus elastic).
  • Addiction:
    • If a good/service is addictive (e.g., cigarettes), the demand curve will tend to be inelastic.

• Significance of PED & Taxes:

  • The price elasticity of demand and price elasticity of supply determine the effects of indirect taxes and subsidies.
    • The more elastic a good/service, the lower the incidence of tax on the consumer.
      • The tax will only lead to a small price rise & the supplier will have to cover the majority of the tax.
    • The less elastic, the higher the incidence of tax on the consumer.
      • The tax will mainly be passed on to the consumer and will be ineffective at reducing demand. However, the less elastic PED also means the higher government revenue.

• Significance of PED: Elastic PED/Tax:

  • Elastic demand (gradient demand curve is shallow).
    • A small increase in price --> larger fall in output.
    • Large producer burden.

• Significance of PED: Inelastic PED/Tax:

  • Inelastic demand (demand curve is very steep).
    • A large increase in price --> small fall in output.
    • Large consumer burden.

• Significance of PED & Subsidies:

  • Subsidies on goods/services with inelastic demand are ineffective at reducing output.
  • However, they are cheaper for the government to impose since output increases by less and so the government has to pay the subsidy on fewer goods.

• Significance of PED: Elastic PED/Subsidy:

  • With a subsidy, elastic demand means that the consumer sees a smaller fall in price, whilst the producer gains a lot in extra revenue.
    • Price change --> proportionally larger change in output.

• Significance of PED: Inelastic PED/Subsidy:

  • The more inelastic PED, the more price the price falls following a subsidy.
    • Price change --> proportionally small change in output.

• Relationship Between PED & Revenue:

  • Elastic demand curve:
    • Decrease in price --> increase in revenue.
    • Increase in price --> increase in revenue.
  • Inelastic demand curve:
    • Increase in price --> increase in revenue.
    • Decrease in price --> decrease in revenue.
  • Unitary demand curve: change in price does not change total revenue.

• Income Elasticity of Demand (YED):

  • Income elasticity of demand (YED): responsiveness of demand to a change in income.
    • $YED = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}$

• Income Elasticity of Demand: Numerical Values:

  • Inferior good: YED < 0
    • Rise in income --> fall in demand
  • Normal good: YED > 0
    • Rise in income --> rise in demand
  • Luxury good: YED > 1

• Significance of YED:

  • It is important for businesses to know how sales will be affected by changes of income in the population.
    • If an economy is improving, and people's incomes are rising in tandem, a business needs to know whether sales will increase or not as it may have an impact on what type of goods the business produces.
      • During times of prosperity, firms might produce more luxury goods and fewer inferior goods.

• Cross Elasticity of Demand (XED):

  • Cross elasticity of demand (XED): responsiveness of demand of one product (A) to a change in the price of another product.
    • $XED = \frac{\% \text{ change in quantity demanded for product A}}{\% \text{ change in price of product B}}$

• Cross Elasticity of Demand (XED): Numerical Values:

  • Substitutes: XED > 0
    • Increase in price of good B (e.g., Coca Cola) --> increase in demand for good A (e.g., Pepsi)
  • Complements: XED < 0
    • Increase in price of good B (golf balls) --> decrease in demand for good A (e.g., golf clubs).
  • Unrelated goods: XED = 0
    • Change in price of good B has no impact on demand for good A.

• Significance of XED:

  • Firms need to be aware of their competition and those producing complementary goods.
    • They need to know how price changes by other firms will impact them so that they can take appropriate action.

1.2.4. Supply

• Syllabus Checklist:

  • Distinction between movements along a supply curve and shifts of a supply curve.
  • Factors that may cause a shift in the supply curve (the conditions of supply).

• Supply:

  • Supply = the ability and willingness to provide a good/service at a particular price at a given moment in time.

• Why the Supply Curve is (Usually) Upward Sloping:

  • If prices are higher, firms will increase production to take advantage of higher profits they can make.
  • If prices are lower, firms will cut back on any unprofitable production and so supply will decrease.
  • Higher prices will encourage new firms to enter the market as it seems more profitable and so output will increase.

• Movements vs. Shifts of the Supply Curve:

  • A movement along the supply curve is caused by a change in price of the good.
  • A shift of the supply curve is caused by a change in any of the factors which affect supply.

• Movements of the Supply Curve:

  • A movement from A --> B = a contraction in supply.
    • Quantity supplied falls because of a decrease in price.
  • A movement from A --> C = an extension in supply.
    • Quantity supplied rises due to an increase in price.

• Shifts of the Supply Curve:

  • A shift from S1 --> S2 = a decrease in supply.
    • Fewer goods are supplied at each and every price.
  • A shift from S1 --> S3 = an increase in supply.
    • More goods are supplied at each and every price.

• Conditions of Supply:

  • Costs of production
  • Price of other goods
  • Weather
  • Technology
  • Goals of the supplier
  • Government legislation
  • Taxes & subsidies
  • Producer cartels

• Conditions of Supply Explained:

  • Costs of Production:
    • If a business has an increase in their costs but their selling price stays the same, they will make less money on what they sell. Therefore, they will put up their price to avoid making a loss and so less is supplied at each price, meaning the supply curve will shift to the left.
    • If they have a decrease in their costs, then the supply curve will shift to the right as they will make more money on what they sell.
  • Price of Other Goods:
    • Joint supply is where the production of one good automatically causes the production of another good (e.g., the production of beef produces leather).
      • If the price of beef rises, more cows will be slaughtered, creating more leather, causing a right shift and increase in supply.
    • Competitive supply is where the production of one good prevents the supply of another good (e.g., if the farmer slaughters his cows, he can no longer produce the milk).
      • Therefore, the rise in the price of beef may cause a decrease in the supply of milk, and a shift to the left.
  • Weather:
    • The supply of certain goods (e.g., agricultural products) is dependent on the weather.
      • e.g., If the weather is good, more wheat will be produced so the supply curve for wheat will shift to the right.
      • e.g., If the weather is bad, less wheat will be produced so the supply curve will shift to the left.
  • Technology:
    • New technology --> higher productive efficiency --> fall in production costs --> firms to lower prices or produce more foods for the same price --> supply curve to shift to the right.
    • War or natural disasters --> supply curve to shift to the left as companies may have less efficient technology at their disposal.
  • Goals of the Supplier:
    • If a supplier is motivated by helping society and providing a service, they may increase supply even when that doesn't yield extra profit.
      • e.g., Nationalised industries such as the NHS.
  • Government Legislation:
    • If the government passes laws that mean cars require catalytic converters supply of cars with catalytic converters will increase.
    • High levels of regulation may increase costs and so decrease supply.
  • Taxes and Subsidies:
    • A tax decreases supply and a subsidy increases supply by affecting the costs of production.
  • Producer Cartels:
    • Some firms or countries club together to decrease supply and therefore increase the price of their good to increase profit.
      • e.g., OPEC

1.2.5. Elasticity of Supply

• Syllabus Checklist:

  • Understanding of price elasticity of supply.
  • Use formula to calculate price elasticity of supply.
  • Interpret numerical values of price elasticity of supply: perfectly and relatively elastic, and perfectly and relatively inelastic.
  • Factors that influence price elasticity of supply.
  • Distinction between short run and long run in economics and its significance for elasticity of supply.

• Price Elasticity of Supply:

  • Price elasticity of supply (PES) = the responsiveness of supply to a change in the price of the good.
    • $PES = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}$

• Price Elasticity of Supply: Numerical Values:

  • Unitary elastic PES: PES = 1
    • Quantity supplied changes by exactly the same percentage as price.
  • Relatively elastic PES: PES > 1
    • Quantity supplied changes by a larger percentage than price so supply is relatively responsive to price. Supply curve = shallow.
  • Relatively inelastic PES: PES < 1.
    • Quantity supplied changes by a smaller percentage than price so supply is relatively unresponsive to price. Supply curve = steep.
  • Perfectly elastic PES: PES = infinity
    • Change in price means that quantity supplied falls to 0. Supply curve = a horizontal line.
  • Perfectly inelastic PES: PES = 0
    • Change in price has no effect on output. Supply curve = vertical line.

• Factors Affecting PES:

  • Time
  • Stocks
  • Spare capacity
  • Availability of factors of production
  • Ease of entry into the market
  • Availability of substitutes

• Factors Affecting PES Explained:

  • Time:
    • In the immediate term, no matter how high the price, a supplier can only sell the amount of product they have so supply is perfectly inelastic.
    • In the short term (when at least one factor of production is fixed), firms will be restricted by the factors of production, meaning supply will be relatively inelastic.
    • In the long term (when all factors of production are variable), firms can increase production and the supply curve will be elastic.
    • The longer the time period the supplier has to make a change and increase production, the more elastic the supply curve will be.
  • Stocks:
    • If a business has a stockpile of goods, when the price goes up, they can decide to use up some or all of their stockpiles, and therefore supply will be more elastic.
  • Spare Capacity:
    • If a business is working below full capacity (e.g., they are producing 50 BMW M3s per day but could produce 100) and there is an increase in price, they can easily respond by producing to their full capacity so the supply curve will be more elastic.
  • Availability of Factors of Production:
    • Labour may require particular skills/training so cannot be instantly increased.
      • e.g., If the wages of a doctor increase by a large amount, it would still take many years before there would be an increase in the number of doctors (thus inelastic PES).
  • Ease of Entry into the Market:
    • High start-up costs could make it difficult to increase supply (thus inelastic PES).
    • Trade unions/professional associations can also restrict supply.
  • Availability of Substitutes:
    • If a good has a lot of producer substitutes, it will have high elasticity.
      • One model of car of a substitute for another model of car (e.g., Ford Focus vs Ford Fiesta) as producers can easily switch between the two, meaning suppliers can alter the pattern of production if prices rises or falls so supply will change.

1.2.6. Price Determination

• Syllabus Checklist:

  • Equilibrium price and quantity and how they are determined
  • Use of supply and demand diagrams to depict excess supply and excess demand
  • Operation of market forces to eliminate excess demand and excess supply
  • Use of supply and demand diagrams to show how shifts in demand and supply curves cause the equilibrium price and quantity to change in real-world situations

• Price Determination:

  • Price equilibrium is where supply is equal to demand (where the supply/demand curves intersect).
  • This price is also known as the market clearing price because all products supplied to the market are cleared (bought), but no buyers are unable to buy the good.
    • If the price was higher, there would be unsold goods.
    • If the price was lower, there would be consumers who would want to buy the good but would be unable to do so.

• Excess Demand:

  • If price is set below equilibrium, then there is excess demand.
  • At a price below equilibrium, suppliers are willing to supply less than consumers demand, meaning there is a shortage in the market.
  • Firms know they can charge higher prices and still sell their goods, so this will cause an extension in supply and they will now charge the equilibrium price.
  • This higher price will lead to a contraction in demand, and prices are now in equilibrium.

• Excess Supply:

  • If the price is set higher than the equilibrium, then there is excess supply.
  • At a price above equilibrium, suppliers are willing to supply more than consumers demand, meaning there is excess supply.
  • As a result, firms have unsold goods. This would encourage them to sell the excess goods at a discount, causing prices to fall and supply to contract to P1.
  • Demand will extend to P1, and the market will now be in equilibrium.

• Shifts in Demand:

  • An increase in demand will lead to an increase in price and an increase in output.
  • A decrease in demand would decrease price and output.

• Shifts in Supply:

  • An increase in supply will increase output and decrease price.
  • A decrease in supply would increase price and decrease output.

1.2.7. Price Mechanism

• Syllabus Checklist:

  • Functions of the price mechanism to allocate resources:
    • Rationing
    • Incentive
    • Signalling
  • The price mechanism in the context of different types of markets, including local, national and global markets.

• Price Mechanism:

  • In a free market economy, the price mechanism allocates resources. Price is determined by the interactions of demand and supply, which also determines how much is bought and sold and by whom.
    • Prices rise when buyers want to purchase more than suppliers want to sell, encouraging suppliers to sell more as they will be able to make a higher profit.
    • The price mechanism was captured by Adam Smith when he described the 'invisible hand' of the market.

• Functions of the Price Mechanism:

  • Rationing function:
    • When prices increase, some people will no longer be able to afford to buy the product and others may no longer have the desire to buy the good. The limited resources can be rationed and allocated to the people who are able to afford them and those who value them most highly.
  • Signalling function:
    • When prices rise, producers move resources into the manufacture of that product. The change in price indicates to suppliers and consumers that market conditions have changed so they should change the quantity bought and sold.
  • Incentive function:
    • Buyers realise that the more money they have, the more products they can buy. Suppliers realise that if they produce more of the goods, they will make more money.
    • Low prices act as an incentive for consumers to buy more of a good; high prices act as an incentive for suppliers to sell more of a good.

• Price Mechanism in the Context of Different Types of Markets:

  • Local:
    • e.g., Shortages in British supermarkets during the Covid-19 pandemic. Less imports from abroad means fewer goods on supermarket shelves. As demand for food is high but the supply is low, the price of food rises to ration off the excess demand.
  • National:
    • e.g., Differing house prices across the UK. Due to high demand, house prices will rise through the rationing function. High house prices also serve as an incentive for firms to allocate resources to the production of more houses, as there is profit to be made in the industry.
  • Global:
    • e.g., In 1973 the Organisation for Petroleum Exporting Countries (OPEC) proclaimed an oil embargo, significantly restricting the supply of oil. Oil prices consequently increased by four times, leading to rationing of oil.

1.2.8. Consumer and Producer Surplus

• Syllabus Checklist:

  • Distinction between consumer and producer surplus.
  • Use of supply and demand diagrams to illustrate consumer and producer surplus.
  • How changes in supply and demand might affect consumer and producer surplus.

• Consumer and Producer Surplus:

  • Consumer surplus: the difference between the price the consumer is willing to pay and the price they actually pay, set by the price mechanism.
  • Producer surplus: the difference between the price the supplier is willing to produce their product at and the price they actually produce at, set by the price mechanism.
  • Community surplus = the total welfare to society (consumer surplus + producer surplus).

• How Elasticity Might Affect Consumer/Producer Surplus:

  • Perfectly elastic demand will mean that there is no consumer surplus.
  • Perfectly inelastic demand will mean that consumer surplus is infinite.
  • The more inelastic demand, the higher consumer surplus is likely to be.
  • The more inelastic supply, the higher producer surplus is likely to be.
    • When supply is perfectly elastic, producer surplus is 0.
    • When supply is perfectly inelastic, producer surplus is infinite.

• Shifts of Demand & Consumer/Producer Surplus:

  • Decrease in demand --> fall in consumer and producer surplus, as both price and output decrease.
  • Increase in demand --> increase in consumer and producer surplus.

• Shifts of Supply & Consumer/Producer Surplus:

  • Decrease in supply --> fall in consumer and producer surplus.
  • Increase in supply --> rise in consumer and producer surplus.

1.2.9. Indirect Taxes and Subsidies

• Syllabus Checklist:

  • Supply and demand analysis, elasticities, and:
    • The impact of indirect taxes on consumers, producers and government
    • The incidence of indirect taxes on consumers and producers
    • The impact of subsidies on consumers, producers and government
    • The area that represents the producer subsidy and consumer subsidy

• Indirect Taxes:

  • Indirect tax = a tax levied on expenditure of goods/services.
    • Vs. Direct tax (tax charged directly to an individual based on a component of income).
    • The business is required to pay the tax but the customer is charged instead.
  • Ad valorem tax: a percentage tax on a good/service.
    • The tax paid increases in proportion to the value of the good.
    • e.g., Value-added Tax (VAT)
  • Specific tax: a specific amount is added to the price.
    • The tax increases with the amount bought rather than the value of the good.
    • e.g., excise duties on alcohol, tobacco and petrol.

• Impacts of a Tax: Specific Tax:

  • Supply shifts left, due to an increase in the cost of production, leading to a rise in price and a fall in output.
  • Consumer pays higher prices, paying the tax burden.
  • Producer sees a rise in costs and a fall in output, paying the tax burden.
  • Government gains tax revenue.
  • Size of the tax = vertical distance between the two supply curves.

• Impacts of a Tax: Ad Valorem Tax:

  • As with the specific tax, the effects are the same although the new supply curve is not parallel with the old supply.
  • The gap between the two supply curves grows because the tax is a percentage of the value.
    • When the price is small, the tax will only be a small amount; when the price is high, the tax will be a large amount.
    • The vertical distance between the curve represents the size of the tax, so the distance grows as the tax grows.

• Incidence of Tax:

  • Incidence of tax = the tax burden on the taxpayer.
  • If the PED is perfectly elastic, or the supply curve is perfectly inelastic, the supplier will pay all of the tax.
  • If the demand curve is perfectly inelastic, or the supply curve is perfectly elastic, all the tax will be passed on to the consumer.
  • The more elastic the demand curve, or the more inelastic the supply curve, the lower the incidence of tax on the consumer and higher the incidence of tax on the producer.
  • All other things being equal, the more inelastic the demand curve, the higher the revenue of tax for the government because quantity demanded falls less and the more goods that are bought, the higher the tax revenue.

• Subsidies:

  • Subsidy: a grant given by the government to producers to encourage production of a good/service.
    • e.g., Agricultural subsidies such as the European Union's Common Agricultural Policy (CAP).

• Impacts of a Subsidy:

  • A subsidy causes an increase in supply, due to lower production costs.
  • Output rises and the price falls.

1.2.10. Alternative Views of Consumer Behaviour

• Syllabus Checklist:

  • The reasons why consumers may not behave rationally:
    • Consideration of the influence of other people's behaviour
    • The importance of habitual behaviour
    • Consumer weakness at computation

• Consumer Rationality:

  • The underlying assumption in microeconomics is that consumers are "rational utility maximisers", firms are "profit maximizers" and governments aim to maximise the welfare of its citizens.

• Why Consumers May Not Behave "Rationally":

  • Influence of other people's behaviour
  • Habitual behaviour/addiction
  • Consumer weakness at computation

• Why Consumers May Not Behave "Rationally" Explained:

  • Influence of Other People's Behaviour:
    • Whilst "rationality" assumes people act individually to maximise their own benefits, sometimes individuals are influenced by social norms/biases.
      • e.g., Someone may buy something to 'fit in'.
      • e.g., "Conspicuous consumption" of luxury goods to attain social status/economic power.
      • e.g., "Herding behaviour" & the stock market.
  • Influence of Habitual Behaviour/Addiction:
    • Most people have habits, and these habits reduce the amount of time it takes to do something, because consumers no longer have to consciously think about their actions.
    • Habits create a barrier to decision making since they limit/prevent consumers considering an alternative.
    • Habitual behaviour includes addictions.
      • e.g., Consumers buy more alcohol/cigarettes/drugs even though they know they shouldn't.
      • e.g., Supermarkets placing higher priced products near the top, and lower priced products at the bottom.
  • Consumer Weakness at Computation:
    • Many consumers aren't willing/able to make comparisons between prices and so they will buy more expensive goods than they need.
      • e.g., Many consumers buy multipack goods because they assume they are cheaper, but this is not always the case.
      • e.g., Consumers are often poor at self-control and buy goods/services they do not need.
      • e.g., Consumers will make decisions without looking at the long-term effects, and thus make irrational decisions.
        • e.g., Failure to save enough for their pensions.