2.4 HL behavior of consumers and producers Flashcards
Why consumers/producers are irratinal
Reasons: bounded ratinality= ratinality because people are confined
- lack of information
- risk
assumptions of rational consumer choices
Economists assume people are rational in decision-making
Rational choice thoery= when individuals use logic and sensible reason to determine the right choice connected to their best interest.
- Consumer rationality
- consumers use all info available to them to make rational calculations to make choices within their best interest. - utility maximization
- traditional econ belives that economic agents select choice to maximise utility to the highest level
e.g. if you enjoy swimming more then running then you will swim more. - Perfect information
- rational choice theory assumes information is easily accesdded about all goods/service on the market. Assumes individuals use this information to make the best choices.
Limitations of rational consumer theory
- biasis
- rule of thumb: individuals make choices based on their default choice based on experience.
- ancoring: individuals really to heavily on a piece of info when making decisions.
-framing: how the presentations/wording of info can influence peoples choices
-avalibility bias: happens when ppl make immediate examples or info that comes to mind easily when making deciosn
e.g. people use diff mode of transportation when a plane crashes even tho chances are very low. - bounded rationality theory: People don’t gather all info necessary to make rational decisions
-assumes rational decision making is limited because of individuals thinking capacity, availability of info, and lack of time avalivle to get all infro to make judgment. - bounded self control: people have limited capacity where they can control their behavior and make decisions in the face of conflict
- bounded selfishness: it belives ppl always act on self interest, ppl do things for others without direct reward.
- imperfect information: assume individual have all information accseable but this is incorrect due to factors such as:
- intellectual property rights
- costs of accessing information
- sheer amount of info and option available
asymmetric infroamtion= when one party has more info then other.
choice architect
refers to the internatinal design as to how choices are presented to influence decision making.
Types of choice architect:
1. default choice: occurs when individuals are automatically signed up to a particular choice.
- restricted choice: occurs when choice available are limited so people have to act more rationally
- mandated choices:requires ppl to make a specific decision by imposing a requirment.
advantages of choice architect
- influences behavior (can nudge ppl towards making choice aligned ith best intrestP
- simplifies decision making( provides clear and understandable options
- improves outcomes( improves outcomes such as encorging healthier eating habits)
enhances decision quality(provide guidance, reduce biases, and increase likelihood of ppl making choices they would consider to be better.)
disadvantage to choice architect
- manipulation(since it attempts to infleunce ppls ecisions without theier consent)
- ethical concerns (they are not aware their choices are being influenced or the consequences of their deciosn)
- potential for bias
-unintended consequences( change in choices can have unforeseen effects and outcomes with original goals)
Nudge theory
The practice of incleunceing choices that economic agents make, using small prompts to influence behaviour.
Nudges should be EAST:
- E easy- simplify and make it straign forward
- A attractive -gain people attention
- S socail- ppl are influenced by what toehrs are doing
- T timely- identify when ppl are most responsive
Advanatges of nudge theory
- Cost effective (relative low cost compared to other marketing measures)
- preserves freedom of choice( steers them towards certain choices whiels till allowing freedom of choice)
- improve public health( nudges can encourage healthier habits)
- better decision making( simplifies complex info, provides remainders or structuring choices)
- enviormetn sustanbiltiy( nudging people in certain ways it can benefit environment)
Disadvantages
- ehtical concersn( can be manpulative )
- lack of transparency( often operating behind the scences and people don’t know what is controling their decisons)
- unintended consequences(when ppl find the nudges they can start going against them)
-variabel success rates(not all nudges are effeictive due to cogentive biasis, cultural background ,etc.
profit maximisation (BO)
Most firms rational objective
Advantages of profit maximisation as business objective
- Financial stability and growth(allows businesses to get capital, reinvest in growth opportunites, etc)
- shareholder value creation( can enhance shareholder value, attractive new investors and maintain copetitivness)
-resourcce allovative efficiency( business need toa llocate resources efficiently which can lead to improve productivity)
disadvanategs of profit maximisation as business objective
- ethical and social concerns (can disregard well being of employees, communities,etc)
- risk of neglecting non financial matertics( employee satisfaction, customer loyalty, product quality, etc can be neglected)
- short term profit vs long tern value( extracting highest level of short term profits will often detract from future value creation through resource or innovation.)
Growth (BO)
Common business objective
- focused on increasing sales revenue in market share
Revenue maximisation as a sign of growth
firms will also maximise revenue to increase output and benefit from economics of scale
- short term plan to eliminate competition as the price is lower then focusing on profit maximisation.
- to achieve this frims produce uo the level of output where market share is equal to zero.
market share as a sign of growth
Bo of sales maximisation which further lowers prices and has the potential to increase market share.
- happens at level of output where Average cost- average revenue
- use this in the short term to clear stocks during a sale increase
