2.4 critique of the maximising behaviour of consumers and producers

Question 1

assumptions about consumer behaviour (4)

Answer 1

1. Consumers have limited resources ie. There needs and wants are greater than their income.
2. Consumers seek to get maximum utility/satisfaction when buying goods.
3. Consumers will act rationally ie. If they see two identical goods in two different shops, they will buy the cheaper of the two goods.
4. They are subject to the Law of Diminishing Marginal Utility.

Question 2

imperfect information

Answer 2

A situation in which the parties to a transaction have different or limited information.

Question 3

bounded rationality

Answer 3

idea that human rationality is limited in predictable ways

Question 4

satisficing

Answer 4

to make choices that are satisfying, but not maximising
(sub-optimal decisions)

Question 5

hyperbolic discounting

Answer 5

the tendency for people to increasingly choose a smaller-sooner rewards than a larger-later reward as the delay occurs sooner rather than later in time

• causes preferences to be inconsistent over time

Question 6

result of -ve utility

Answer 6

additional consumption results in injury of damage = overcomsumption

Question 7

bounded self control

Answer 7

the idea that human beings have some self-control, but that s limited

Question 8

consumers aim to maximise total utility, when marginal utility =0,

Answer 8

additional consumption result in decline in total utility

Question 9

bounded selfishness

Answer 9

idea that human beings, while somewhat selfish, also act as conditional coorperators

Question 10

choice architecture (4)

Answer 10

default choice
restricted choice
mandated choice
nudge theory
(for policy)

Question 11

profit maximisation

Answer 11

profit maximisation: the process by which a firm determines the price input and output levels that result in the highest profit

= increase revenue, decrease cost as much as possible

Question 12

business objectives (3)

Answer 12

profit max
corporate social responsibility
growth and market share

Question 13

corporate social responsibility

Answer 13

the idea that all firms should and will take responsibility to look after a range of stakeholders, including the local community and the environment

Question 14

market share

Answer 14

the % of a market that a firm controls

inc. market share = can achieve economies of scale

Question 15

economies of scale

Answer 15

a firm’s ability to produce at lower average cost when they grow in size

Question 16

reasons for satisficing

Answer 16

• work life balance
• keeping multiple stakeholders happy(pay suppliers well to secure long term relationship, offer employees acceptable working hours etc.)