Micro Economics - critique of the maximising behaviour of consumers and producers

Question 1

consumer rationality (assumption)

Answer 1

consumers make purchasing decisions according to tastes and preferences which satisfy 3 assumptions:

1. consumer can rank goods according to preference
2. preferences of alternate goods are consistent
3. consumer always prefers more of a good than less

Question 2

perfect information (assumption)

Answer 2

assumption that consumers have perfect information of alternatives at their disposal, so there is no uncertainty

Question 3

utility maximisation (assumption)

Answer 3

assumption that consumers want to maximise their utility, by buying a combination of goods and services that results in the greatest amount of utility for money spent

Question 4

Rule of thumb (bias)

Answer 4

simple guidelines to simplify decisions based on common knowledge or past experiences
e.g. one salad serving is two handfuls

Question 5

Anchoring (bias)

Answer 5

use of irrelevant information as a reference point for estimating unknown information.
e.g. thinking $200 jeans is cheap because you first saw $250 jeans

Question 6

Framing (bias)

Answer 6

how choices are frames to decision makers

Question 7

Availability (bias)

Answer 7

people rely on recently available information and may not consider earlier information
e.g. overestimating risk of plane crash after a tragic event

Question 8

bounded rationality

Answer 8

consumers are rational within their limits. it is limited by insufficient information, costliness of obtaining information and the limitation of human mines to process information

Question 9

bounded self-control

Answer 9

people only exercise self control within limits, may not require self-control to make rational decisions

Question 10

bounded selfishness

Answer 10

selfish interested behaviour is the underlying assumption of the maximisation principle, does not account for selfless actions.

Question 11

imperfect information

Answer 11

consumers cannot always have access to all the information to make a fully informed decision or may not understand available information

Question 12

behavioural economics

Answer 12

studies how individuals make decisions instead of relying on assumptions about human behaviour

Question 13

nudge theory

Answer 13

method used to influence consumers choices in a predictable way WITHOUT using financial incentives or imposing sanctions or limiting choice

Question 14

choice architecture

Answer 14

design of particular ways or environments in which people make decisions. Based on the idea that choices are influenced by how options are presented

Question 15

default choice

Answer 15

a choice made by default, instead of agreeing to do something, you opt out of doing it

Question 16

restricted choice

Answer 16

choice is limited by the government or other authority to encourage socially desirable decisions. This is because there are so many choices, people may make bad choices

Question 17

mandated choice

Answer 17

choice between alternatives is made mandatory by the government or other organisation.
free, required choice

Question 18

profit maximisation

Answer 18

rational priced behaviour according to which firms are guided by the goal to maximise profit. The objective is to make the largest difference in value between production and revenue

Question 19

corporate social responsibility (CSR)

Answer 19

practice of corporations to avoid socially undesirable activities such as polluting activities, employing children, employing workers under unhealthy conditions, etc.
Instead firms take part in socially desirable activities like supporting human rights and donating to charities

Question 20

market share

Answer 20

percentage of total sales in a market that is earned by a single from. A large market share gives firms a competitive advantage.

Question 21

growth maximisation

Answer 21

increasing the size and scale of the operations of a firm because learner firms have created market power, diversify so they are not reliant on one product

Question 22

satisficing

Answer 22

the goal for firms to achieve satisfactory results for many objectives rather that pursuing a single maximising objective. Based off argument modern firms have many objectives that may partially overlap. This may force them to compromise and reconcile conflicts rather than pursue optimal results.