2.4: Critique of maximising behaviour of consumers and producers.

What is rational economic decision making?

Assumption that individuals act in their best self-interest and maximise utility.

How do consumers act in their best self-interest?

Look for lower price goods/service; maximise utility.

How do firms act in their best self-interest?

Produce efficiently, reduce costs and maximise profit.

How do workers act in their best self-interest

Work for promotions and secure highest possible wage,

How do investors act in their best self-interest

Invest in profitable investments with best returns.

What are the assumptions of rational consumer choice? (3)

- Consumer rationality.

- Perfect information.

- Utility maximisation.

What is the assumption of consumer rationality?

Consumers rank goods based on preference, which are consistent. They also prefer more of a good compared to less.

What is the assumption of perfect information?

Consumers have perfect information about alternative products, qualities and prices; no doubts/uncertainties.

What is the assumption of utility maximisation?

Consumers buy goods/services that maximise utility at a given budget.

What is behavioural economics?

Study of psychological, social and emotional factors that influence economic decision making and human behaviour.

What are the limitations of rational behaviour?

- Biases.

- Bounded rationality.

- Bounded self-control.

- Bounded selfishness.

- Imperfect information.

What are biases?

Departures from normal thoughts/judgment that influence consumer choices.

What biases can influence consumer choices? (4)

- Rule of thumb.

- Anchoring.

- Framing.

- Availability.

What is the rules of thumb?

Guidelines based on experiences and common sense that simplify complex decisions.

What is anchoring?

Use of irrelevant information to make decisions; usually the first piece of information.

What is framing?

How choices are presented to decision maker.s

What is availability?

Information that is most recently available which people rely on, even if it is not reliable; consumers remember recent information.

What is bounded rationality?

Consumers are rational within limits; limited by lack of information, cost to obtain information and limitations of the human mind to process large amounts of infofmation.

What is bounded self-control?

People can only have limited self-control; do not have self-control to make rational decisions.

What is bounded selfishness?

People are only selfish within limits; selfless behaviour for the common good even at a personal cost.

What is imperfect information?

Consumers do not have access to all information required to make a rational choice; unable to maximise utility.

What is nudge theory?

A method to influence consumers to make a desirable choice without limiting choice.

What is choice architecture?

Design of environments in which people make choices in order to influence the choices made without restricting them.

What are the types of choice architecture? (3)

- Default choice.

- Restricted choice.

- Mandated choice.

What is a default choice?

Choice made by doing nothing due to lack of interest or comfortability of not making a choice.

What is a restricted choice?

Choice limited by authority; prevents poor choices and allows most socially desirable choices.

What is a mandated choice?

Choice between alternatives made compulsory by authority; must choose between free choices.