3. Development of Behavioral Economics

Plans:
1. The theory of consumer choice
2. Behavioral economics

3. Development of Behavioral Economics

The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their preferences subject to limitations on their expenditures, by maximizing utility subject to a consumer budget constraint.[1] Factors influencing consumers' evaluation of the utility of goods: income level, cultural factors, product information and physio-psychological factors.

Consumption is separated from production, logically, because two different economic agents are involved. In the first case consumption is by the primary individual, individual tastes or preferences determine the amount of pleasure people derive from the goods and services they consume.; in the second case, a producer might make something that he would not consume himself. Therefore, different motivations and abilities are involved. The models that make up consumer theory are used to represent prospectively observable demand patterns for an individual buyer on the hypothesis of constrained optimization. Prominent variables used to explain the rate at which the good is purchased (demanded) are the price per unit of that good, prices of related goods, and wealth of the consumer.
The law of demand states that the rate of consumption falls as the price of the good rises, even when the consumer is monetarily compensated for the effect of the higher price; this is called the substitution effect. As the price of a good rises, consumers will substitute away from that good, choosing more of other alternatives. If no compensation for the price rise occurs, as is usual, then the decline in overall purchasing power due to the price rise leads, for most goods, to a further decline in the quantity demanded; this is called the income effect. As the wealth of the individual rises, demand for most products increases, shifting the demand curve higher at all possible prices.
In addition, people's judgments and decisions are often influenced by systemic biases or heuristics and are strongly dependent on the context in which the decisions are made, small or even unexpected changes in the decision-making environment can greatly affect their decisions.
The basic problem of consumer theory takes the following inputs:

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  The consumption set C – the set of all bundles that the consumer could conceivably consume.
  
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  A preference relation over the bundles of C. This preference relation can be described as an ordinal utility function, describing the utility that the consumer derives from each bundle.
  
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  A price system, which is a function assigning a price to each bundle.
  
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  An initial endowment, which is a bundle from C that the consumer initially holds. The consumer can sell all or some of his initial bundle in the given prices, and can buy another bundle in the given prices. He has to decide which bundle to buy, under the given prices and budget, in order to maximize his utility.
  

Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics focuses on the study of individual markets, sectors and e.t.h
In economics and other social sciences, preference refers to the order in which an agent ranks alternatives based on their relative utility. The process results in an "optimal choice" (whether real or theoretical). Preferences are evaluations and concern matters of value, typically in relation to practical reasoning.[1] An individual's preferences are determined purely by a person's tastes instead of the good's prices, personal income, and the availability of goods. However, people are still expected to act in their best (rational) interest. In this context, rationality would dictate that an individual will select the option that maximizes self-interest when given a choice. Moreover, in every set of alternatives, preferences arise.
The belief of preference plays a key role in many disciplines, including moral philosophy and decision theory. The logical properties that preferences possess also have major effects on rational choice theory, which in turn affects all modern economic topics.
Using the scientific method, social scientists aim to model how people make practical decisions in order to explain the causal underpinnings of human behavior or to predict future behaviors. Although economists not typically interested in the specific causes of person's preferences, they are interested in the theory of choice because it gives a background to empirical demand analysis.
Stability of preference is a deep assumption behind most economic models. Gary Becker drew attention to this with his remark that the combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach as I see it. More complex conditions of adaptive preference were explored by Carl Christian von Weizsäcker in his paper "The Welfare Economics of Adaptive Preferences, while remarking that. Traditional neoclassical economics has worked with the assumption that the preferences of agents in the economy are fixed. This assumption has always been disputed outside neoclassical economics

Behavioral economics, which contends that reality is more complex than classical consumer choice theory, has criticized neoclassical consumer choice theory.

Firstly, Consumers use heuristics, which means they do not scrutinize decisions too closely but rather make broad generalizations. It is not worthwhile to attempt to determine the value of specific behavior. Heuristics are techniques for simplifying the decision-making process by omitting or disregarding certain information and focusing exclusively on particular elements of alternatives. While some heuristics must be utilized purposefully and deliberately, others can be used relatively effort lessly, even without our conscious awareness. Consumptions typically impacted by advertising and consumer habits. It is a mental shortcut that helps us make judgments and solve problems faster. They allow us to save time by reducing the need to constantly think about the next step.
Secondly, customers struggle to give standard utils and instead rank distinct options in order of preference, which he termed an ordinal utility.
Thirdly, it is less likely a consumer would stay rational and make the choice which maximize his/her utility. Sometime, they can be irrational and may make impulsive purchases. Consumption behavior has traditionally been heavily influenced by the act of buying on the spur of the moment. The rise of the internet and social networks may cause changes in consumer behavior, resulting in more planned and sensible purchase processes.
Fourthly, humans can be reluctant to spend cash on particular things because they have preconceived boundaries on how much they can afford to spend on 'luxuries,' according to their mental accounting.
Lastly, it is not easy to separate products in the market. Some items, such as an electronic car or a refrigerator, are only purchased occasionally and cannot be mathematically divided.

If you choose to spend more money on one good, then you cannot buy as much of another good. If you want to enjoy more leisure time, you give up the time you could be working and making more money for the future. If a consumer decides to spend more of their income now, they will have less money to spend in the future. If they receive a raise at work, their budget will change.

The idea of consumer choice relies on the fact that people will make rational decisions to satisfy their wants. People want to make the choice that best fits their budget, their preferences, and optimizes the amount of pleasure they will get from their choices.
Of course, to make these choices, consumers need some bits of information. The price of a good is an important factor in a consumer's decision-making about how they can gain the most satisfaction based on their budget and their preferences. If the price of a good is too high then the consumer will buy less of it, or they will buy another lower-priced good if they are unwilling to make the trade-off.
Consumer choice theory helps us understand a consumer's behavior that results from the combination of their income and preferences. Having a clear understanding of this behavior is necessary to be able to construct the demand curve and set the price of a good appropriately.