Eco chap 2

• Economics


  A social science that studies how individuals make decisions about the allocation of scarce resources with the use of economic models based on assumptions about the behavior of individuals
• When making decisions, individuals are usually faced with limitations and ideally are expected to make only rational decisions (based on clear thought/reasons i.e. cost-benefit)

  
• Rational Decision-Making


  Individuals aim to maximise their own welfare or benefit, have a limited income and allocate money in a way that improves and gives them the highest total satisfaction
• In reality, when making day-to-day decisions, consumers rarely behave in a well-informed and rational way

  
• Often decisions are based on incomplete information which causes a loss of welfare not only for people themselves but affects others and society as a whole
• Behavioural Economics


  Challenging the assumption of rationality
• Consumers/Businesses aim to


  • Maximise benefit/profit
• Consumers


  • When same products from 3 different suppliers, will choose the one with the cheapest price
  • When same price from 3 different suppliers, will choose the one with highest quality
• Businesses


  • When buying raw materials will choose the cheapest option as long as the quality does not suffer
  • When setting a price will choose the highest price possible to maximize revenue
• Availability Bias


  People often judge the likelihood of an event by instances that come to their mind
• After an air crash, more people take the train
• Bounded (Limited) Rationality


  Most consumers do not have sufficient information to make fully-informed judgements when making decisions

  
• The increasing complexity of products also makes life difficult
• Decision making also has associated costs in terms of acquiring information (time and effort)
• Default Bias in Choices (Habitual Behaviour)


  People prefer to carry on behaving as they have always done even when other brands offer better value (brand loyalty)
• Repeat choices often become automatic because default choices don't involve any mental effort
• Habit leads to inertia (i.e. choices remain unchanged)
• Herd Behaviour


  We often make decisions based in part on who is around us and the choices they make
• 59% of people (18-24) open their first account at the same banks of their parents
• Why Producers May Not Maximise Their Profit

  • Influenced by behaviour of other people in the organisation
  • Alternative business objectives (focus on customer care to exceed customer expectations by providing high-quality services)
  • Enterprises operating as charities
  • Social enterprises (organisations that operate commercially but aim to maximise improvements in human or environmental well-being)
• Social Enterprise


  A business with mainly social objectives that reinvests most of its profits into benefiting society rather than maximizing returns to owners
• Consumers/producers will be prevented from maximising benefits/profits if they do not have access to all available information
• In recent years, access to internet and developments in social media, mean that the flow of information around the world has decreased helping to maximise benefits/profits