Many students interviewed by me said that they liked economics because it was related to daily life. In one situation, a student indicated preference for both management science and economics. She said management science was about a company but in daily life, as a student, she could not manage a company. In contrast, economics was related to her daily life, such as buying goods in market. As such, she was more interested in economics.
As many interviewed students mentioned "daily life", I learn that this is their impression of economics (at least in local high schools). To me, this is not expected (I am quite ignorant). I can understand that economics can be related to daily life (of students or common people). But I hardly can understand this is a major impression of the subject for many students. In fact, I did not have this impression when I was a high-school student. My impression was that economics was very principally macroeconomic (my impression is also wrong as it is NOT), mainly covering issues such as GDP, growth, unemployment, and inflation, etc. Nowadays it seems that not many students are impressed by the macro part of economics but only the micro part. Furthermore, the micro part is mainly about the "daily life" issues, not traditional topics such as market competition.
I have mentioned in the past that I am not particularly interested in using economics to explain daily-life issues although I won't hate this. But if so many students have the above impressions and really be amazed by this part of economics, perhaps I have to devote more time to this aspect.
Let me share with you one such daily-life economic analysis. In fact, this is also an example given by a student interviewed by me. She said her teacher told her how to use economics to analyze many daily-life issues, and she was interested by them. For example, why shops near the entrance of a shopping mall could charge higher prices for comparable products than shops in the inner part of the mall? This was because of customers' time cost. Going further inside the mall, prices of the products might be lower. But the customers also bore a higher time cost. She also gave another example, again, from her teacher. Why some goods were priced at $7.9, $9.9, etc, instead of $8 or $10? This was because of the popularity of electronic payment system, which enables these prices to be paid without needing to find some change.
Though these are interesting examples, I was not (as usual) immediately convinced. I asked her: well before electronic payment system became popular, we could already find a lot of retailers quoting prices in $7.9 or $9.9, etc. Why? She said electronic payment was only one explanation for this phenomenon, but not the only one. That's of course true. But then what are the other reasons? She said perhaps retailers simply wanted to attract customers. That's of course also true. But customers would immediately discover that the prices were effectively $8 or $10? Wouldn't it be futile to simply attract customers and then they all went away? At this point, the student could no longer give quick answer. I think this student is already good enough. During an interview it may not be easy to quickly think of some reasons that can explain things satisfactorily. Also, perhaps her teacher has a more satisfactory explanation for this phenomenon but she may not know.
Well, my quick answer to her is this. The answer is exactly the same logic involved in the case of shops near the entrance of a mall. You are attracted by a pseudo-low price $7.9 or $9.9 and will immediately discover that it is nothing but $8 or $10. But you are already in the shop. You don't bother going out and re-start the search of products again. Hence, you have a look of the products in that shop and eventually may (or may not) buy. But anyway the chance for you to buy at this shop is higher (than without the pseudo-low prices attracting you to come). The logic is the same as shops near the entrance of a mall. You don't bother going inside one step or several steps further to search for more (perhaps cheaper) products. Hence, even if goods are more expensive at the entrance, the chance of selling them is still higher. If you don't bother in this case, it is likely that you also don't bother in another case. If this is a pattern of how people will shop, this can explain both higher prices at entrance and the usefulness of quoting prices at $9.9.
Does this explanation convince you? To me, I am not entirely convinced in one aspect: time cost. Although we may say time cost will be increased by people's search of cheaper products (so they stop searching early), I will be more careful in using this reason. The danger is that we may simply use time cost as a convenient way to explain everything. Unless we can have an independent measurement (need not be exact measurement) of time cost, we can always say: well, someone sacrifice the chance of getting a better deal because of time cost. For example, suppose we cannot tell which one's time cost is higher and which one's is lower. Then, we simply say that the time cost must be higher for those who buy a comparable product at a higher price; otherwise they should have searched further for cheaper products. Doing so, our explanation has become not falsifiable. It is always true. Since we define "higher time cost" by "buying a comparable product at a higher price", we can never find, by definition, anyone with lower time cost to buy goods at higher price. However, this is not a scientific explanation. This is not an attempt to explain why something happens empirically. This is simply a way to make a sentence true by creating a new definition for the term in the sentence.
Of course, if we can measure time cost, the problem above will disappear. We can imagine: someone's time cost is low but he still sacrifice the chance of getting a better deal. If this imagined situation is actually observed, we find a case to refute the claim: higher prices due to higher time cost. If we have observed many cases but never find out such a counter-example, then the time cost explanation is confirmed by facts.
Is time cost measurable? I believe that it is, though not very accurately measurable. At least we can observe whether a person is busy or not. Busy people's time cost is higher while less busy one's is lower. Are shops near entrance of a mall mainly for busy people? I don't have a reliable data for that but my observation is: No. Many people buy at the entrance eventually still shop around the mall, and buy goods in the inner part of a mall. They are not in a hurry, as what we can observe. In fact, I find it not convincing to believe that the time cost of walking further inside a mall is high. Most people shopping around a mall have sufficient leisure time. But they are still often struck in the first few shops at entrance.
Yes, you may doubt that my casual observation as such is not reliable enough. I welcome any one doing more serious test. Before having more reliable observations, however, I tend to consider time cost is not a very good explanation for the phenomenon concerned.
Comparing to time cost, I would rather using another explanation: the default bias. People often stick to the first option that they encounter. Even though searching further does not cost much in time or in money, what is encountered first will be much more easily catching attention and keep people there. This finding is empirically well established in a new subfield of economics - behavioural economics (a subject combining psychology and economics). Hence, empirically this is a reliable fact. Using this alternative idea, we can still explain the phenomenon. The logic is again the same for the two cases above. The shop near the entrance can easily become the first encounter of customers and so can charge more for the same product. The shop creating a wrong impression of lower-price by $9.9 already attracts the customers to come, and they will then stick to this first shop encountered, even though they soon discover that the price is $10 effectively.
