Choice In Economic Theory Flashcards
(32 cards)
Sovereign definition (3 p)
- One possessing or held to possess supreme political power or sovereignty
- One that exercises supreme authority within limited sphere
- Acknowledged leader: arbiter
Explain how consumer sovereignty sees the consumer
Consumer as supreme decider of what goods and services are produced
Define consumer sovereignty
Conventional economic theory argues that society is consumer-driven where the consumers are the ultimate determinate of their needs, wants and desires
> marketplace should be designed to serve their needs and satisfy their desires (which are freely chosen by consumers themselves)
According to consumer sovereignty, the consumer is the… (1 subpoint)
“Ultimate sovereign” of the economy because they determine what goods and services will be produced
- if no one buys -> go out of business
Under the view of consumer sovereignty, consumer culture is…
Empowering and improves the overall well-being of the members of society
- self-interested actions as a positive force
- dollars as “votes”
Sumptuary laws define
Laws that regulated who could consume what
- regulated and reinforced social hierarchies and morals through restrictions, often depending upon a person’s social rank, permitted clothing, food, and luxury expenditures
What effects did sumptuary laws have
- Prevented commoners from imitating the appearance of aristocrats
- Sometimes also to stigmatize disfavored groups
In the past: mostly no choice & sumptuary laws, vs the “sovereign consumer” nowadays: how did consumerism change things (1 main thesis and 3 subpoints)
New kind of individual and way of thinking under consumerism
- free of all obligations or restrictions
> wholly free to purchase what they please
> can potentially purchase anything
> gain their main pleasure in life from consuming
Limits to consumer sovereignty
To be truly “sovereign” consumers would…(5 p)
- Have a wide range of options
- Unlimited amount of information
- Good education
- Sound understanding of own needs and wants
- Be immune to temptation
“[U]nless the wants of consumers exist
… of the products created by … it is not correct to speak of the market as
acting to … the given resources of the economy
to …. the material requirements of society. In
fact, not only do producers … the range of
market goods from which consumers must take
their choice, they also seek continuously to
… consumers to choose what is being
produced today and to ‘unchoose’ that which was
being produced yesterday. Therefore to continue to
regard the market…as primarily a …
mechanism is to close one’s eyes to the more
important fact, that it has become a …
mechanism”
“[U]nless the wants of consumers exist
independently of the products created by industrial
concerns it is not correct to speak of the market as
acting to adapt the given resources of the economy
to meet the material requirements of society. In
fact, not only do producers determine the range of
market goods from which consumers must take
their choice, they also seek continuously to
persuade consumers to choose what is being
produced today and to ‘unchoose’ that which was
being produced yesterday. Therefore to continue to
regard the market…as primarily a ‘want-satisfying’
mechanism is to close one’s eyes to the more
important fact, that it has become a want-creating
mechanism”
According to Mishan, the market is..
More of a want-creating mechanism than a want-satisfying one
Choice in Economic Theory starts with the assumption of
Rational choice and explore implications
Basic tenant of modern economics is that
People on the whole act rationally in pursuit of self-interests
In economic theory, they rather than speaking of needs and desires, they prefer to speak of… (and explain what that is)
Preferences - are formed independently of options available to them (exogenous to the economy)
Consumption can be seen as “Utility Maximization”. In economics, utility is defined as…
Utility is a measure of preferences over some set of goods and services
Utility is an important underpinning of the…
Rational choice theory
Consumption as “Constrained Optimization” ( 2 points)
- Resources are finite, but wants are infinite
- choices must be made between competing alternatives - Based on best available info, people choose optimal course to maximise welfare
- after careful considerations of ALL options
- under existing budget constraints
Classic theories of choice in economics are criticised, since they aren’t a reflection of reality in the sense that
classic theories assumes ideal world
- individuals have perfect information
- know exactly what needs are
- act consistently and rationally
As an adjustment for the “ideal reality” assumption of many economic theories regarding choice, bounded rationality states that…
Even “rational” actors will come to a decision when they find and alternative deemed “good enough” instead of endlessly seeking perfect option
People are NOT rational.
The prospect theory states that… (2 points)j
People’s judgment of risk are fundamentallly and systematically biased
- exaggerated tendency to avoid risk where gains are concerned
- seek risk where potentially losses are concerned (generally prefer certain outcomes over uncertain ones, even when uncertain ones offer better rewards)
Generaly,
In what way do purchase conditions show that people are NOT rational
make different choices when buying useful things vs goods that give pleasure
Economic models of choice often focus on preferences, However there are other factors that aren’t reflectedd in models, such as… (4 p)
Budgets, Availability, information, uncertainty
Galbraith was a institutional economist and Galbraith’s Theory
challenge assumption that preference formation is unrelated to actual goods and services produced by an economy, especially in society dominated by mass advertising
