Economics HL ONLY: Maximising behaviour

critique of maximising behaviour of consumers and producers

Consumer rationality 3 assumptions of choice

• consumer is able to tank goods according to their preferences.

• preferences among alternative choices are consistent

• consumer always prefers more of a good to less.

Perfect Information

It’s assumed that consumers have at their disposal perfect information about all their alternatives.

Utility Maximisation

Consumers maximise their utility by buying the combination of goods and services that results in the greatest amount of utility for a given amount of money spent

Behavioural economics

Criticises consumer rationality and the idea of utility maximisation due to types of biases.

Rule of thumb

simple guidelines based on experience and common sense, simplifying complicated decisions that would have to be based on complex consideration of every possible choice.

Anchoring

Use of irrelevant information due to it being the first piece of information consumer comes across

Framing

How choices are presented to consumers

Availability

Refers to information that is most recently available, which people tend to rely on more heavily

Bounded rationality

People make decisions with limited information, cognitive ability, and time, so they often choose a "good enough" option rather than the absolute best one

Bounded self control

people have a limited capacity to resist temptation and act in their own long-term best interest, even when they know a different choice is bette

Imperfect information

consumers lack complete or accurate information to make fully rational decisions

nudge theory

you can influence people to make certain decisions by making that choice easier or more convenient, without forcing them

choice architecture

the design of the environment in which people make decisions, which subtly influences their choices without restricting them

Default choice

the pre-set option that a person receives if they take no action

Restricted choice

when the number of available options is intentionally limited to influence a decision