2.4 Critique of the maximising behaviour of consumers and producers (HL) Flashcards
What are some assumptions of traditional economics?
- Non-Satiation assumption:
- Never satisfied with what you have
- –> Always a good which they prefer over their current one - Perfection information
- Completeness assumption:
- We are weighing up all the different information, we can rank up the information according to the preferences
Give a “transitivity” example:
“Mats prefers apples to oranges, and oranges to bananas”
–> So we can assume that mats prefers apples to bananas
What are some limitations of rational consumers (behavioural economics)?
Biases, there are 4 categories of biases
- Rule of thumb
- Anchoring
- Framing
- Availability bias
What are “biases”?
Irrational assumption or belief that affects the ability to make a decision based on facts and evidence”
When making decisions people influenced by biases such as common sense, intuition, emotions, personal and social norms. Biases can be categorised as:
- Rule of thumb
- Anchoring
- Framing
- Availability
What are the 4 categories of biases?
- Rule of thumb
- Anchoring
- Framing
- Availability bias
What is the “rule of thumb”?
Referring to making decisions in a practical and approximate way without having to be exact. This makes it difficult to make rational and instantaneous decisions
–> Sticking to the same food in restaurants
What is “anchoring”?
Relying on the first piece of evidence given to influence decision making
What is “framing”?
Refers to how choices are described and presented creating a bias in favour of a particular decision
–> “- 70% - off sign in a shop window
What is “availability bias”?
Availability bias occurs when people overestimate the likelihood of an event, or the frequency of its occurrence either because something similar occurred recently OR because they are very emotional about a similar event.
EG.
–> Shark attack in Australia
–> 911 Terrorist attack
What did the presence of bias influencing consumer behaviour lead to?
alternative concepts of consumer behaviour
What are the 4 alternative concepts of consumer behaviour?
- Bounded rationality
- Bounded self-control
- Bounded selfishness
- Imperfect information (asymmetric information)
What is “bounded rationality”?
Theory states that rationality is limited (eg. due to time constraint OR asymmetric information).
Furthermore, people do not particularly like choice, especially when there are too many. So, people tend to behave automatically.
What is “bounded self-control”?
Is a limitation of the assumptions of rational behaviour. As people may lack self-control to think for themselves and make a rational choice.
–> Peer pressure
What is “bounded selfishness”?
The traditional economics assumes that people are rational and behave to maximise their utility.
But in reality, not necessarily, not necessarily selfish individuals but altruists and behave without reciprocity.
What is “imperfect information”?
–> eg. in certain industries, trade secrets exist