HL content Flashcards
(9 cards)
rational consumer choice (HL)
Rationality means that economic agents are able to consider the outcome of their choice and will pick the one that presents the highest utility
Many economic theories assume that economic agents (individuals, firms and governments) make decisions that result in maximising their satisfaction
assumptions of rationality
(HL)
Consumer rationality
Individuals use rational calculations for their own best interest
Utility maximisation
Individuals select choices that maximise their utility to the highest level
Perfect information
Assumes information is easily accessible about all goods and services, and have the same information as producers do
limitations of rationality (HL)
Biases
Rule of thumb: default choice
Anchoring: reliance on initial information
Availability bias: recency bias
Bounded rationality
People make decisions without gathering all the necessary information to make a rational decision within a given time period
Bounded self-control
Influence of emotions and desires into decision making
Bounded selfishness
Consumers do not always make the choice that is in their own best interest
Imperfect (asymmetrical) information
People make decisions based on limited information meaning they may not make the best choice
behavioural economics in action (HL)
Choice architecture: an intentional design of choices to influence decision making
Nudge theory: designed to guide consumers toward particular choices
profit maximisation as a business objective (HL)
This is the rational producer decision; also benefits shareholders
Marginal Cost =MRevenue
growth/market share as a business objective (HL)
Increase market share
After a certain size it may not be profit maximising
satisficing as a business objective (HL)
Pursuing a satisfactory/acceptable outcome
Minimum threshold/standard, e.g. for a sole trader owner who wants a work-life balance
corporate social responsibility as a business objective (HL)
Enhance business image
Expensive
