Objectives of Economic Agents

Question 1

What do firms maximise?

Answer 1

profit maximisaation
- decrease costs, increase price

Question 1

What do the government maximise?

Answer 1

welfare maximisation
- benefits, investing in SSP

Question 2

What do consumers maximise?

Answer 2

utility maximisation
- buy higher quality goods

Question 3

Why might households not act as utility maximisers?

Answer 3

1. Time
- don’t have the time to look for cheaper alternatives online
- act impulsively and don’t think about the long term impacts

2. Lack of information
- consumers aren’t aware of cheaper alternatives
- getting better due to technology

3. Emotion/Impulses
- consumers may buy things they wouldn’t usually buy when emotional

4. Sales events
- tend to buy things excessively when cheaper when only need one

5. Consumer inertia
- not bothered to change and buy from another brand
- may be loyal and think their option is the best

6. Loss aversion
- pick the safer option
- consumers may not like to take risk and buy new things

7. Social norms
- may do things that are liked in society such as tipping
- may buy more expensive goods to fit in

Question 4

Why might firms not act as profit maximisers?

Answer 4

1. Survival
- might not understand the market dynamics and consumer needs
- during a recession or low employment
- new firms cant compete against big firms as don’t benefit from EOS so focus on survival

2. Managerial Objectives
- sales volume maximisation = want to improve their own status
- sales revenue maximisation
- manager wants to maximise wages as earn commission/bonuses

3. Lack of information
- about suppliers, consumers, competitors etc

4. Lifestyle firms
- promoting preferences/lifestyle
- satisfaction from helping others

5. Social objectives
- firms operating in less developed countries to help poor people to improve corporate social responsibility

6. Loss aversion
- firms may not want to take risks and invest as may be scared to ruin brand image
- more loss averse in recessions

7. Increase brand loyalty
- if firms cut prices they will be more competitive and attract more consumers

Question 5

Why might the government not act as welfare maximisers?

Answer 5

1. Political cycle
- election every four years and so advertise for votes
- spend money on their personal gain and not welfare
- spend on isolated places for votes

2. Lack of information
- scarce tax revenue/gov budget so may not know where to spend money
- may waste money

3. Incentive problem
- people exploit public services and undervalue them as they are served for free