Behavioural Economics in 21st Century

Assignment
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Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
Demand analysis..........................................................................................................................3
Supply analysis............................................................................................................................6
Equilibrium analysis....................................................................................................................7
Task 2...............................................................................................................................................8
Emerging theories and models of behavioural economics in 21st century in contrast with 20th
century theories............................................................................................................................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................12
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Introduction
Economics is concerned with production, distribution and consumption of resources, which
is also basic for business. A business activity is concerned with producing goods and services to
be distributed among consumers. A business organisation operates under various types of forces
which influences its activities, one of which is economic environment (Mirica, 2019). It is
concerned with interaction of market forces. For the sake of easy and coherent presentation of
this report, ice cream business is taken as context. First of all, demand and supply analysis has
been made for the business. Both of them are market forces that are fundamentally important for
any business to understand their course of action. An equilibrium analysis has also been drawn
for the business with regard to the demand and supply. In the next part, behavioural economics
has been discussed. Comparison has been drawn between theories related to behavioural
economics propounded in 20th century with 21st century applications.
Task 1
Microeconomics assumes that in a market economy, decisions about production and
consumption are made by individual producers and consumers and their decisions are taken with
equilibrium attained with the help of free interactions of market forces of demand and supply.
Aggregate demand of all customers of commodities and services in microeconomic environment
forms the total demand in the macroeconomic environment, so is supply.
Demand analysis
Demand, in economics, refers to desire of a customer to buy a product or service at a
specific price backed by willingness and ability to purchase. It is very important for businesses to
understand the factors that induce customers to spend their money on some product or service, so
that they can predict volume of their sale. Incorrect estimations of demand and consumer
spending on the part of business organisations can lead to loss in opportunities and profits
(Browning and Zupan, 2020). It is demand, that fuels economic environment and pumps
producers to bring their products on table.
As per law of demand, with other factors being constant, an increase in price of goods or
services results in reduction in quantity demanded of that commodity. This means that quantity
demanded and price has an inverse relationship. This inverse relationship is characterised by a
negative slope in demand curve. Demand curve is a graphical representation of demand schedule
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which is nothing but various demands of a single product at different prices. For example, let’s
take demand of ice cream. At £1.00, there are 1000 quantities demanded of chocolate ice-cream
stick. Looking at demand, seller increased the price to, suppose £2.00. Now, people will be less
willing to buy same value product at higher price and this will reduce quantity demanded of that
ice-cream.
There are various factors that influence change in price of a product and with every change
in price, quantity demanded reacts (Pindyck and Rubinfeld, 2018). When quantity demanded
changes because of change in price, it is known as movement of demand along the demand curve
while when demand changes because of factors other than change in price, it is known as a shift
in demand curve. Reaction of change in demand is not same with every change in its
determinants therefore, movement along the curve and shift in demand curve varies.
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