2.6 - Competitive markets: Demand and Supply - Critique of the maximising behaviour of consumers and producers

Question 1

Rational consumer choice

Answer 1

The idea that consumers make purchasing decisions according to their tastes and preferences

Question 2

Rational economic decision making

Answer 2

Individuals are assumed to act in their self interest trying to maximise the satisfaction they expect to recieve from their economic decisions

Question 3

Assumptions of Rational consumer choice - Consumer rationality - Completeness assumption.

Answer 3

The consumer is able to rank goods according to her preferences

Question 4

Assumptions of Rational Consumer choice - Consumer Rationality - Transivity assumption

Answer 4

Preferences among alternative options are consistent

Question 5

Assumptions of Rational consumer choice - Consumer rationality - Non-satiation assumption

Answer 5

The consumer will always prefer more of a good to less

Question 6

Assumptions of Rational Consumer choice - Perfect information

Answer 6

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

Question 7

Assumptions of Rational consumer choice - Utility Maximisation

Answer 7

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

Question 8

Behavioural economics’ critique of consumer rationality - Biases

Answer 8

Biases are depatures from normal standards of thought or judgement

Question 9

Rule of thumb. An example?

Answer 9

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

Question 10

Anchoring. An example?

Answer 10

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.

Question 11

Framing. An example?

Answer 11

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

Question 12

Availability. An example?

Answer 12

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.

Question 13

Bounded rationality

Answer 13

The idea that consumers are only rational within limits as consumer rationslity is limited by cosumers’ insufficient information

Question 14

Bounded self control

Answer 14

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

Question 15

Bounded selfishness

Answer 15

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

Question 16

Imperfect information

Answer 16

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.

Question 17

Nudge

Answer 17

A method designed to influence consumer’s choices in a predictable way, without offering financial incentives or imposing sanctions, and without limiting choice.

Question 18

RWEs of nudges - tax, healthy foods

Answer 18

• 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.

Question 19

Choice architecture

Answer 19

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

Question 20

Default choice . An example?

Answer 20

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.

Question 21

Restricted choice.

Answer 21

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.

Question 22

Mandated choice

Answer 22

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.

Question 23

Behavioural economics - Potential advantages

Answer 23

• 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.

Question 24

Behavioural economics - Potential disadvantages

Answer 24

• 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