2.4 critique of the maximising behaviour of consumers and producers

rational

economic agents are able to consider the outcome of their choices and recognise the net benefits of each one

system 1

human thinking that comes automatically with little effort and little to no control

system 2

human thinking that is conscious reasoned and deliberate

rules of thumb

when individuals make choices based on their default choice based on experience

anchoring heuristic

people rely too heavily on the first piece of information they receive when making decisions

framing heuristic

how the presentation or wording of information can significantly influence people’s choices or judgements

availability heuristic

when people rely on immediate examples or information that comes to mind easily when making judgements or decisions

bounded rationality

people make decisions without gathering all the necessary information to make a rational decision within a given time period

imperfect information

people make decisions based on limited information meaning they may not make the best choice

bounded self-control

leads to decision making based on emotions which may not result in the maximisation of consumer utility

bounded selfishness

individuals do things for others without a direct reward

default choice

where an option is automatically set for consumers which they can change if they wish. if consumers do not have a clear preference a choice is made for them that should maximise utility in most circumstances

restricted choice

a situation where consumer choices are limited

nudge theory

creating a choice environment where one option is made easier or more prominent, subtly guiding individuals toward it while maintaining their freedom to choose other options

business objectives

• profits maximisation

• alternative business objectives

• corporate social responsibility

• growth and market share

• satisficing

profit maximisation

the shareholders earn the largest possible return on their original investment, firms can use these profits to fund research and development innovating to find new markets and maintaining their competitive edge

corporate social responsibility

conducting business activity in an ethical way and balancing the interests of share holders with those of the wider community

market share

the percentage of the total market revenue that a single firm has

growth

firms focus on increasing their sales revenue or market share, in the short term firms may use this strategy to eliminate the competition as the price is lower than when focusing on profit maximisation

satisficing

the pursuit of satisfactory or acceptable outcomes rather than profit maximisation