2.4 Critique of the maximising behaviour of consumers and producers (HL)

Question 1

What are some assumptions of traditional economics?

Answer 1

• 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

Question 2

Give a “transitivity” example:

Answer 2

“Mats prefers apples to oranges, and oranges to bananas”
–> So we can assume that mats prefers apples to bananas

Question 3

What are some limitations of rational consumers (behavioural economics)?

Answer 3

Biases, there are 4 categories of biases
- Rule of thumb
- Anchoring
- Framing
- Availability bias

Question 4

What are “biases”?

Answer 4

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

Question 5

What are the 4 categories of biases?

Answer 5

• Rule of thumb
• Anchoring
• Framing
• Availability bias

Question 6

What is the “rule of thumb”?

Answer 6

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

Question 7

What is “anchoring”?

Answer 7

Relying on the first piece of evidence given to influence decision making

Question 8

What is “framing”?

Answer 8

Refers to how choices are described and presented creating a bias in favour of a particular decision
–> “- 70% - off sign in a shop window

Question 9

What is “availability bias”?

Answer 9

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

Question 10

What did the presence of bias influencing consumer behaviour lead to?

Answer 10

alternative concepts of consumer behaviour

Question 11

What are the 4 alternative concepts of consumer behaviour?

Answer 11

• Bounded rationality
• Bounded self-control
• Bounded selfishness
• Imperfect information (asymmetric information)

Question 12

What is “bounded rationality”?

Answer 12

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.

Question 13

What is “bounded self-control”?

Answer 13

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

Question 14

What is “bounded selfishness”?

Answer 14

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.

Question 15

What is “imperfect information”?

Answer 15

–> eg. in certain industries, trade secrets exist

Question 16

How do we use behavioural economics in exams?

Answer 16

–> As an evaluation tool
–> Behavioural economics in action = policies to make people behave a certain way