ECON UNIT 1 AOS 1: Traditional Economic Behaviour

Question 1

What are the key elements of traditional economic theory?

Answer 1

• Rationality, self interest and utility maximisation
• Informed decision making
• Diminishing marginal utility

Question 2

How is the traditional economic theory shown through business behaviour?

Answer 2

Maximising sales and minimising production costs as they are rational, driven by self interest and profit making businesses

Question 3

How is the traditional economic theory shown through government incentives/disincentives towards consumers?

Answer 3

• Payment of consumer subsidies and tax rebates: Encourage consumption of a certain good/service by incentivising cheaper goods/services > rational consumer would take the deal
• Imposing indirect taxes: Discourage the consumption of a good/service by making it more expensive > rational consumer would buy less as it is not in their self interest
• Enforce laws and government regulations: Discourage a certain good/service by making it illegal > rational consumer would prevent the good or service to prevent financial expense and to minimise pain

Question 4

How is the traditional economic theory shown through government incentives/disincentives towards businesses?

Answer 4

• Subsidies for the production of beneficial goods that are not necessarily profitable > rational businesses would take the deal as they can minimise costs and maximise profits
• Removing subsidies for the production of goods that are not bringing benefit to the economy and/or people > rational businesses would product less as it increases production costs and decreases profits
• Legislation combatting anti-competitive illegal behaviour (eg. predatory pricing and cartels) > rational businesses prevent action to prevent financial expense which decreases their profits