Economic Assumptions Flashcards
What is the Ceteris Paribus assumption
The Ceteris Paribus assumption is a latin phrase used for “others things being equal”. This means that when the effect of a change in a variable is considered, we assume that all other variables remained constant
What is the Rationality assumption
The rationality assumption states that human beings are rational individuals which make decisions that maximize their own interests
Which interests does each rational economic agent seek to maximize
Consumers: Rational consumers seek to maximize their utility
Firms: Rational firms seek to maximize their profits
Workers: Rational workers seek to maximize their wages
What are the three reasons that make consumers not behave rationally
Weakness at computation
Habitual behavior
Herd behavior
Why does weakness at computation make consumers behave irrationally
Consumers are not always good at calculating which product maximizes their utility. They might not have the time or mathematical abilities to see which offers are best, and instead they buy a product that doesn’t maximize their utility as much
Why does habitual behavior make consumers behave irrationally
The current behavior of consumers is often based on past habits which have been engraved in their lifestyle. The decisions they make based on these habits involve little thought and consequently consumers might find themselves buying products that do not maximize their utility, just because it has become a habit to them
Why does herd behavior make consumers behave irrationally
The behavior of consumers is often affected by that of others. In an attempt to fit in, consumers buy goods that other people do, even if it doesn’t maximize their own utility. Thus, they buy products that might not be right for them, causing them to act irrationally
What are the three reasons that make producers not behave rationally
Separation of management and control
Produces may prioritize caring for customers
Producers may complete charitable work
Why does separation of management and control make producers behave irrationally
Businesses are often run by managers instead of their owners. These managers often have different aims than the owners, as they might prioritize maximizing sales instead of profit. Thus, because of these different aims, profit is not maximized and they don’t behave rationally
Why does caring for customers make producers behave irrationally
Some businesses care more about satisfying their customers than making profits, as it helps maintain a strong customer base. This means that they don’t make decisions based on what will bring them more money, making them act irrationally
Why does charitable work make producers behave irrationally
Some businesses are non-profit organisations which raise revenue for charitable purposes. These businesses don’t keep the revenue for themselves and instead give it out to those in need. Thus, their aim isn’t making profits and they are consequently irrational producers
