#2.6 Critiquing maximimising behavior Flashcards
(30 cards)
Rational Economic Decision-Making
Consumers and producers are assumed to act in their best self-interest, aiming to maximize satisfaction (utility) or profit.
Rational Consumer Choice
Consumers make decisions based on preferences, consistent rankings, and choosing more over less.
Assumptions of Rational Consumer Choice (3)
Completeness: Consumers can rank preferences.
Transitivity: Preferences are consistent.
Non-Satiation: More of a good is always better.
Perfect Information
: Consumers have complete and accurate information about all products, prices, and qualities, enabling optimal choices.
Utility Maximization
Consumers aim to achieve the greatest satisfaction (utility) given their income and product prices.
Behavioural Economics
A field of economics that studies how psychological, social, and emotional factors affect economic decisions.
Bounded Rationality
Consumers have limited ability to process information, leading them to settle for a satisfactory choice rather than the optimal one.
Bounded Self-Control
Consumers struggle to control their consumption decisions, such as overeating or overspending.
Bounded Selfishness
People often act altruistically, prioritizing others’ well-being over their own self-interest.
Imperfect Information
Consumers lack access to all necessary information, leading to suboptimal decisions.
Rule of Thumb
Simple guidelines or shortcuts used to make decisions, often ignoring detailed calculations.
Biases
Anchoring
Framing
Availibility
Framing
Decisions are influenced by how information is presented (e.g., “80% lean” sounds better than “20% fat”).
Availability Bias
Relying on recent or easily recalled information rather than objective data.
Anchoring
Relying on irrelevant initial information when making decisions (e.g., using an initial price as a reference).
Nudge Theory
A method to influence consumer behavior in predictable ways without restricting freedom of choice.
Choice Architecture
The way options are presented to consumers to influence their decisions.
Types of Choice Architecture (3)
Default Choice: Pre-set option unless consumers actively choose otherwise.
Restricted Choice: Limits on available options to guide decisions.
Mandated Choice: Consumers are required to make a decision
Advantages of Behavioural Economics
Influences socially desirable behavior (e.g., healthy eating).
Provides flexibility through trial-and-error policies.
Disadvantages of Behavioural Economics
Risks manipulation of consumers.
Lacks a unified theory of consumer behavior.
Profit Maximization
Firms aim to maximize the difference between revenue and costs.
Alternative Business Objectives
Growth Maximization: Expanding market share and economies of scale.
Revenue Maximization: Prioritizing sales over profits.
Satisficing: Achieving satisfactory results rather than maximizing.
Corporate Social Responsibility (CSR)
Firms act ethically to minimize negative externalities (e.g., pollution) and promote positive social outcomes.
Nudge Examples
Tax reminders with personalized messages.
Placing healthy food at eye level in stores.
Highlighting energy savings from solar panels.
