critique of the maximising behaviour of consumers and producers

Question 1

rational consumer choice

Answer 1

consumers decide upon purchase of different baskets of goods and services based on their preferences
1. preferences are complete: consumer is able to rank any two baskets of goods and services
2. preferences are transitive: consumer makes choices that are consistent to each other

Question 2

utility maximisation

Answer 2

goal of rational consumer is to maximise utility while satisfying budget constraint.
optimal choice: each consumer will choose basket of goods and services that allows him or her to reach the highest utility (satisfaction) while being on their budget (income)

Question 3

perfect information

Answer 3

consumers have full awareness about alternative products and prices, which reduces uncertainty surrounding choices

Question 4

perfect information (according to standard economic theory)

Answer 4

rational consumers (based on preferences and all available information) will reach a consumption choice that maximises utility while allowing them to live within their budget constraints. this behaviour is a result of pure-self interest

Question 5

behavioural economics

Answer 5

argues that people are not the rational decision makers assumed by standard economic theory

Question 6

biases in behavioural economics

Answer 6

rules of thumb (heuristics), anchoring, framing, availability

Question 7

rule of thumb (heuristics) bias

Answer 7

decision making shortcuts, which enable individuals to make quick decisions. usually a result of common sense, practice and experience.

Question 8

anchoring bias

Answer 8

when people rely on a piece of information which is not necessarily relevant as a reference point when making a decision

Question 9

framing bias

Answer 9

refers to how options and opportunities are presented to people, which can significantly influence choices, also if people are presented with a negative or positive frame

Question 10

availability bias

Answer 10

relates information that is most recently available and on which people place most importance

Question 11

bounded rationality

Answer 11

people make choices with restricted information, time constraints and cognitive limitations they face. instead of considering all possible options, people limit their attention to a more-or-less subjective subset of possibilities.
hence, people may not make the optimal choice but they at least make a choice that will move then towards their goal

Question 12

bounded self-control

Answer 12

individuals make choices that do not maximise their utility due to lack of self control —> results in making choices that they prefer not to make or decisions they soon regret

Question 13

bounded selfishness

Answer 13

many people in many circumstances engage in non-selfish behaviour to contribute to the public even if their personal welfare is reduced

Question 14

imperfect information

Answer 14

in practice consumers cannot have access to full and perfect information, so their choices are not fully informed and thus no optimal

Question 15

choice architecture

Answer 15

how a particular choice is presented, which can have a significant effect on the choice made

Question 16

choice architect

Answer 16

individual or organisation that is responsible for organising the context in which people make decisions and that necessarily knows more more about what is the consumer’s best interest

Question 17

types of choice architecture

Answer 17

default choice, restricted choice, mandated choice

Question 18

default choice (choice architecture)

Answer 18

default choices are made automatically, nature of default option strongly affects consumer behaviour. to encourage particular behaviour which is welfare improving, choice architect can set desired outcome as default choice.

Question 19

restricted choices

Answer 19

way in which options are categorised and presented to decision-maker can also be used by choice architect to influence people’’s choices bc consumers find it increasingly difficult to make decisions when number of options is large. hence, restricting number of available choices may be more likely to cause consumers to make a decision resulting in a better outcome

Question 20

mandated choice

Answer 20

variation of default choice – people are required by law to make a decision