Microeconomics (2.4)

Question 1

Define rational consumer choice

Answer 1

Rational consumer choice refers to how consumers aim to maximise overall satisfaction or utility in the buyer decision-making process. However, in reality, consumers are not completely rational.

Question 2

Biases that influence rational judgement

Answer 2

Rule of thumb: people normally make quick rule of thumb judgements rather than analysing every possible option to choose the best one.

Anchoring bias: Consumers use the first piece of information they see as a reference point to compare to other options. This can lead to incorrect judgements if they base their decisions mostly on the first piece of information.

Availability bias: Availability bias considers how individual decision-making is affected by information that comes easily into our minds. This information is often based on frequently mentioned information or recent experiences.

Question 3

Bounded rationality

Answer 3

Bounded rationality is the idea that individuals make a decision that offers them a ‘good enough’ outcome rather than a utility-maximising outcome.

Question 4

Bounded self-control

Answer 4

Bounded self-control refers to how individuals may consume beyond the point where they maximise their utility when consuming a good. For example, many people often consume too much junk food even though they know, at a point, the negative impact on health outweighs the satisfaction of the food.

Question 5

Bounded selfishness

Answer 5

Bounded selfishness refers to how individuals make buyer decisions which benefit others too.

Question 6

Imperfect information

Answer 6

Many buyer decisions are made with Imperfect information, which affects how the good is able to maximise utility for the consumer. This is particularly the case in markets where products are very technical and difficult for uninformed consumers to understand.

Question 7

Choice architecture

Answer 7

Choice architecture refers to how a business sets the layout, sequence, and range of choices available to a consumer in a particular way to encourage them to make a buying decision.

Question 8

Nudge theory

Answer 8

Nudge theory means using choice architecture (the way choices are presented to individuals) to encourage people to make decisions that improve their own welfare and society’s welfare.

Question 9

What are the 5 business objectives?

Answer 9

The 5 business objectives are: profit maximisation, corporate social responsibility, achieving market share, satisficing, and business growth.

Question 10

Corporate social responsibility

Answer 10

Corporate social responsibility refers to aims businesses make based on social, ethical, and environmental factors.

Question 11

Market Share

Answer 11

Market share is the percentage of total market revenue an individual firm’s revenue accounts for.

It is calculated by: individual firm’s total revenue/market’s total revenue x 100 = individual firm’s market share.

Question 12

Satisficing

Answer 12

Satisficing is where a business sets an aim that is satisfactory rather than optimal. The owner of a small business that makes computer games may, for example, aim for a comfortable living for themselves and their small team of game designers ahead of maximising profits. Satisficing might give them time to enjoy a good quality of life, although there will be an opportunity cost in terms of lower profits and wages.

Question 13

Business growth

Answer 13

Business growth, or growth of a business’s profits and market share is a key objective because it represents progress.