2.4 Critique Of Maximizing Behaviour Of Consumers And Producers Flashcards
What is rational consumer choice
Consumers are assumed to act in their best self-interest, trying to maximize the satisfaction they receive from their economic decision
Assumptions of rational consumer choice
- consumer rationality
- utility maximization
- perfect information
Explain consumer rationality
Consumers make purchasing decision based on their tastes and preferences which satisfy three assumptions
- Ability to rank a good
- Preferences among alternative choices are consistent
- Consumers always prefers more of a good to less
Explain utility maximization
Consumers maximize 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
Explain perfect information
Assumed that consumers have at their disposal perfect information about all other alternatives so that there is no uncertainty - consumer has knowledge of all possible products n product qualities and prices
What are the limitations to these assumptions
- biases
- bounded rationality
- bounded self control
- bounded selfishness
- imperfect information
Explain biases and different types of biases
Bias refers to systemic errors in thinking. Ex;
- Rule of thumb — guidelines based on experience and common sense
- Anchoring — involves the use of irrelevant information to make decisions, due to it being the first piece of info consumers come across
- Framing — how choices are presented to decision makers
- Availability — refers to info that is most recently available which people tend to rely more heavily on
Explain bounded rationality
Idea that consumers are rational within limits, as consumer rationality is limited by consumers insufficient information, the costliness of obtaining information and the limitations of the human mind
Explain bounded self control
The idea that people in reality exercise self-control within limits - often do not have self-control required to make rational decisions
Explain bounded selfishness
The idea that people are selfish within limits
Explain imperfect information
Consumers do not and cannot possibly have such full access to information, meaning they are unable to maximize utility as they make choices based on incomplete information
What is the nudge theory
A method designed to influence consumers choices in a predictable way, without offering financial incentives or imposing sanctions and without limiting choice
What is choice architecture
The design of particular ways or environments in which people make choices; consumers make decisions in a particular context and that choices of decision makers are influenced by how options are presented to them
Default choice - choice made by default means doing the option that results when one does nothing e.x default choice in organ donation
Restricted choice - choice that is limited by the goverment e.x speed limit
Mandate choice — choice between alternatives that is made mandatory
What is rational produce behavior
Firms are guided by the goal to maximize profit
What is profit maximization
Involves determining the level of output that the firm should produce to make profits as large as possible
When MR = MC
Alternative business objectives
- corporate social responsibility
- market share
- satisficing
- growth
Explain corporate social responsibility
Socially irresponsible from behavior may lead to government regulation of the firm
Firms face incentives to display corporate social responsibility by engaging in socially beneficial activities such as avoidance of polluting activities, engaging in environmentally sound practices, supporting for human rights, donations to charities
Explain market share
Refers to the percentage of total sales in a market that is earned from a single firm
Large market shares means firm is more likely to achieve economies of scale - growing revenues
Firms increase market share by lowering prices, introduce new products or advertising
Explain growth maximsation
Can be attractive due to:
- can achieve economies of scale and lower production costs, increasing profitability
- greater market power
- diversity into production of different products
- reduces risks as will be less affected during economic down turn
Explain satisficing
Refers to idea that firms try to achieve a satisfactory level of profits together with satisfactory results for many more objects rather than then best results for any one objective
