2.4 Critique of the Maximizing Behaviour of Consumers & Producers (DP IB Economics: HL): Flashcards
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Define rational choice theory.
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Define rational choice theory.
Rational choice theory states that individuals use logical and sensible reasons to determine the right choice connected to their best self-interest.
Which choice will a rational agent select?
A rational agent will select the choice that presents the highest benefits (utility).
Define utility maximisation.
Utility maximisation is the assumption that economic agents select choices that maximise their satisfaction to the highest level.
Rational choice theory assumes information, meaning individuals have access to all the information available to make the best decision.
Rational choice theory assumes perfect information, meaning individuals have access to all the information available to make the best decision.
True or False?
Behavioural economics assumes that economic agents always behave rationally.
False.
Behavioural economics challenges the view that agents behave rationally, recognising that decisions are influenced by cognitive biases, emotions and social factors.
Define behavioural economics.
Behavioural economics is a field of study that combines elements of psychology and economics to understand how people make decisions and behave in economic contexts.
Define bounded rationality.
Bounded rationality argues that people make decisions without gathering all the necessary information to make a rational decision within a given time period.
What is anchoring bias?
Anchoring bias occurs when individuals rely too heavily on an initial piece of information (the "anchor") when making subsequent judgments or decisions.
Define framing.
Framing refers to how the presentation or wording of information can significantly influence people's choices or judgments.
What is availability bias?
Availability bias occurs when people rely on immediate examples or information that comes to mind easily when making judgments or decisions.
Define bounded self-control.
Bounded self-control suggests that individuals have a limited capacity to regulate their behaviour in the face of conflicting desires or impulses.
Define altruism.
Altruism is the practice of acting selflessly to help others while expecting nothing in return.
selfishness recognises that individuals do things for others without a direct reward.
Bounded selfishness recognises that individuals do things for others without a direct reward.
True or False?
Under asymmetric information, the buyer always has more information than the seller.
False.
Asymmetric information means one party has more information than the other; for example, when buying a second-hand car the seller always has more information than the buyer.
Define choice architecture.
Choice architecture refers to the intentional design of how choices are presented so as to influence decision making.
Define default choice.
A default choice occurs when an individual is automatically signed up to a particular choice, so a decision is already made even if no action is taken.
What is a restricted choice?
A restricted choice occurs when the choices available to individuals are limited, which helps them make more rational decisions.
Research shows that individuals rarely change from the choice.
Research shows that individuals rarely change from the default choice.
Define mandated choice.
A mandated choice requires individuals to make a specific decision or take a particular action by imposing a requirement or obligation.
True or False?
A disadvantage of choice architecture is that it can be a form of manipulation.
True.
It can influence people's decisions without their explicit consent, which may infringe on the principle of free choice.
Define nudge theory.
Nudge theory is the practice of influencing the choices economic agents make, using small prompts to influence their behaviour.
Who coined the phrase 'nudge theory'?
Richard Thaler coined the phrase 'nudge theory' and argued that firms should use nudges in a responsible way.
What does the EAST framework stand for?
The EAST framework stands for Easy, Attractive, Social and Timely.
True or False?
Nudges remove an individual's freedom of choice.
False.
Nudges steer individuals towards certain choices while still allowing them to retain their freedom of choice.
Give one advantage of using nudges to influence behaviour.
Nudges are cost effective, being relatively low-cost compared to other marketing measures.
A key disadvantage of nudges is a lack of , as they often operate behind the scenes.
A key disadvantage of nudges is a lack of transparency, as they often operate behind the scenes.
Define profit maximisation.
Profit maximisation is the business objective of producing at the level of output where marginal cost equals marginal revenue (MC = MR).
At what level of output does a firm profit maximise?
A firm profit maximises at the level of output where marginal cost equals marginal revenue (MC = MR).
True or False?
When MC > MR, the firm is producing beyond the profit-maximising level of output.
True.
It is making a marginal loss on each unit produced beyond the point where MC = MR.
What do firms with a growth objective often focus on increasing?
Firms with a growth objective often focus on increasing their sales revenue or market share.
Define sales maximisation.
Sales maximisation occurs at the level of output where average cost equals average revenue (AC = AR), the break-even or normal-profit level.
To achieve revenue maximisation, firms produce up to the level of output where MR = .
To achieve revenue maximisation, firms produce up to the level of output where MR = 0.
Define satisficing.
Satisficing refers to the pursuit of satisfactory or acceptable outcomes rather than profit maximisation.
What is the principal-agent problem in relation to satisficing?
The principal-agent problem arises when managers (agents) pursue their own goals, such as maximising sales, rather than the shareholders' (principals') goal of profit maximisation.
Managers who control a business often settle for a level of output somewhere between profit and maximisation.
Managers who control a business often settle for a level of output somewhere between profit and sales maximisation.
Define corporate social responsibility (CSR).
Corporate social responsibility (CSR) involves conducting business activity in an ethical way and balancing the interests of shareholders with those of the wider community.
True or False?
Adopting CSR goals without genuine commitment can lead to accusations of greenwashing.
True.
Adopting CSR goals without genuine commitment and meaningful action can lead to accusations of greenwashing or socialwashing.
Give one advantage of pursuing CSR objectives.
CSR can enhance a business's image and reputation.
Why might firms find it difficult to produce at the profit-maximising level of output?
Firms may not know where that level is, and regular price changes in response to changing marginal costs would be disruptive to customers.
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