Microeconomics 200 Essay
Semester 3, 2012

Student’s Name: Lam Chung Him Michael

Student’s ID: 14634820

Unit Name: Microeconomics 200

Tutorial Day and Time: Thursday 5-6pm

Tutor’s Name: Lee Thiam Soon

Introduction
The reason of writing this essay is that nowadays people purchase real estate mainly for making money. Therefore, this essay will apply standard consumer theory to the housing market and clarify the differences of the decision-making process in purchasing a residential dwelling between standard consumer choice theory and behavioral economics. Moreover, the specific characteristics of speculative bubbles in the real estate market in Spain before and during 2008-2012 will be examined.

Part 1: Applications of Traditional vs. Behavioral Economics Explanations
Consumer choice is about maximizing their satisfaction by using the limited incomes to fulfill their preference (Silberberg and Suen 2001, 252). There are few general assumptions about consumer’s preferences. Firstly, consumer can rank and compare their choices according to their preference. For example, they can decide to prefer residential dwelling to holiday activity, holiday activity to residential dwelling or indifferent between both choices. This is the assumption called completeness (Isaac 1998, 9). Secondly, preferences are transitive. It means that if a consumer prefers residential dwelling to holiday activity and holiday activity to car, then the consumer also prefers residential dwelling to car. Therefore, consumer consistency is necessary for transitivity. Thirdly, consumers usually prefer more goods to less because they are never satisfied and think that more is always better (Pindyck and Rubinfeld 2009, 70). Utility shows the satisfaction of consumer, and it is represented by indifference curves (Silberberg and Suen 2001, 255). In addition, consumers can