1.2.1 - Rational Decision Making Flashcards
1
Q
Why do we use assumptions?
A
assumptions used when making models/theory’s
2
Q
what are the 2 underlying assumptions of rational economic decision making?
A
- consumers aim to maximise utility
- firms aim to maximise profits
3
Q
consumers aim to maximise utility:
A
- when they make decisions, first gather all info - then evaluate that by weighing costs and benefits - and take time to consider in order to make a rational utility maximising decision
- however consumers are not always rational - therefore may not always look to max utility (time, choice, info) - bounded rationality - bounded self control (stops us doing something eg addiction)
- consumers are assumed to maximise their economic welfare, measured by utility or satisfaction from good/service
4
Q
firms aim to maximise profits:
A
assumption that firms what to maximise their reward for ownership - aim to max profits
5
Q
Give 3 reasons why consumers may not behave rationally:
A
- influence of other people’s behaviour
- habitual behaviour (its importance)
- consumer weakness at computation
6
Q
The reasons why consumers may not behave rationally:
consideration of the influence of other people’s
behaviour
A
- rationality assumes consumers act individually in a way which will maximise their own benefits
- however evidence shows individuals don’t make free independent choices - choices are influenced eg by social norms, group majority
7
Q
The reasons why consumers may not behave rationally:
the importance of habitual behaviour
A
- habits may represent shortcuts in decision making
- lack of self control eg addiction
- consumers don’t gather all info needed to make good decision - isn’t worth all the time and effort
8
Q
The reasons why consumers may not behave rationally:
consumer weakness at computation
A
- not willing to make comparisons between prices and goods on offer
- some firms exploit this by not giving enough info to make rational decisions
- eg supermarket - buying multipack vs individually
