2.6 - Competitive markets: Demand and Supply - Critique of the maximising behaviour of consumers and producers Flashcards
Rational consumer choice
The idea that consumers make purchasing decisions according to their tastes and preferences
Rational economic decision making
Individuals are assumed to act in their self interest trying to maximise the satisfaction they expect to recieve from their economic decisions
Assumptions of Rational consumer choice - Consumer rationality - Completeness assumption.
The consumer is able to rank goods according to her preferences
Assumptions of Rational Consumer choice - Consumer Rationality - Transivity assumption
Preferences among alternative options are consistent
Assumptions of Rational consumer choice - Consumer rationality - Non-satiation assumption
The consumer will always prefer more of a good to less
Assumptions of Rational Consumer choice - Perfect information
Consumers have at their disposal perfect information about all their alternatives so that there is no uncertainty. The conumer has knowledge of all possible products, product qualities and prices
Assumptions of Rational consumer choice - Utility Maximisation
Consumers try to make their utility as large as possible 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’ critique of consumer rationality - Biases
Biases are depatures from normal standards of thought or judgement
Rule of thumb. An example?
Simple guidelines based on experience and common sense, simplifying complicated decisions that would have to be based on the complex consideration of every possible choice.
ex one portion of salad is equal to two handfuls or one serving of fruit is the size of a fist
Anchoring. An example?
Use of irrelevant information to make decisions, often occurs due to it being the first piece of information that the consumer happens to come across
ex Find a pair of jeans that you like for 150 and see a similar one for 100 that you buy thinking its a bargain, then discover you could have gotten the same thing for 50 somewhere else.
Framing. An example?
How choices are presented to decision makers.
ex consumers prefer meat described as 80% lean rather than 20% fat. A rational consumer would be indifferent between the two because they are the same
Availability. An example?
Information that is most recently available which people tend to rely on more heavily. Perhaps due to partly the fact that consumers remember recent events and information more readily than older events or information.
ex if a consumer has recently recieved a lot of advertising about the superiority of one brand over other brands she may be more likely to select that brand.
Bounded rationality
The idea that consumers are only rational within limits as consumer rationslity is limited by cosumers’ insufficient information
Bounded self control
People excercise self control only within limits. This means they often do not have the self control that would be required of them to make rational decisions
Bounded selfishness
People are only selfish within limits. The assumption of self interested behaviors underlying the maximisation principle cannot explain the numerous accounts of selfless actions in order to contribute to the public good even at the cost of reduced personal welfare
Imperfect information
Where consumers do not have access to all the information that they need to make fullt informed decisions. They are thus unable to maximise utility as they make choices based on faulty and incomplete information.
Nudge
A method designed to influence consumer’s choices in a predictable way, without offering financial incentives or imposing sanctions, and without limiting choice.
RWEs of nudges - tax, healthy foods
- In the UK, tax payments of late taxpayers increased by 15% when they were told by the UK revenue service that most people in their area had already paid their taxes. Making late taxpyers feel as though they were the exception to what was the norm in their communtity.
Choice architecture
The desgin of particular ways or environments in which people make choices; it is based on the idea that consumers make decisions in a particular context and that choices of decision makers are influenced by how options are presented to them
Default choice . An example?
A choice that is made by default which means doing the option that results when one does not do anything. Perhaps due to habit, lack of interest. Organ donation where people become donors by default unless they opt out.
Restricted choice.
A choice that is limited by the government or other authority. It is argued that restrictions such as these are necessary because people have too many choices available to them. Choice architecture can take advantage of restrictions to encourage people to make choices with socially deirable outcomes.
Mandated choice
A choice between alternatives that is made mandatory by the government or other authority. It is a free choice, but it is compulsory to make that free choice.
Behavioural economics - Potential advantages
- Behavioural economics may be a relatively simple and low cost way to influence people’s behaviour to act in socially desirable ways
- It had been used successfully in a number of areas suggesting that the methods of Choice architercture and nugding may have numerous applications
- It may be able tp overcome the weaknesses in rational consumer theory, where it is difficult to explain the inconsistencies and seeming irrationality of actual consumer behaviour.
Behavioural economics - Potential disadvantages
- The body of knowledge being developed is not based on any understanding of human behaviour and is therefore unble to lead to a systematic and unifying theory of how consumers behave with general applicability
- The resulting unsystematic approach may not be valid over time or across different income groups or cultures