Behavioural Economics | 4.1.2 | AQA A-Level Economics Notes

4.1.2.1 Consumer Behaviour

• Economic agents respond to incentives. For entrepreneurs, the incentive is profit, whilst buyers respond to price signals as they aim to maximise utility. These factors can affect behaviour.
• Total utility is the total satisfaction derived from consuming a good or service.
• Marginal utility is the extra satisfaction derived from consuming one extra unit of the good or service.
• Law of diminishing marginal utility: as quantity consumed increases, the marginal utility derived from each additional unit falls.
• The law of diminishing marginal utility supports a downward sloping demand curve.
• Utility is maximised where marginal utility equals zero.
• Thinking at the margin is important for consumers and producers when making choices. It allows consumers to keep thinking ahead, and also helps firms minimise costs.

4.1.2.2 Imperfect Information

• Symmetric information means that consumers and producers have equal market information. This allows for sound decision making and a more efficient allocation of resources.
• Imperfect information makes it difficult for economic agents to make rational decisions and is a potential source of market failure.
• Asymmetric information can be seen with second hand car dealers; it is where consumers and producers have different knowledge of a product.

4.1.2.3 Aspects of Behavioural Economic Theory

• Behavioural economists question the assumption of traditional economic theory that individuals are rational decision makers who aim to maximise their utility.
• Behavioural Economics disputes rationality and utility maximisation theory, arguing that emotional, social and psychological factors can influence decision making.
• Bounded rationality theory suggests that when making decisions, an individual’s rationality is limited by the information they have, the limitations of their mind, and the finite amount of time available in which to make decisions.
• Bounded self-control theory suggests that individuals lack the self-control to be able to always maximise their utility (long term and short term e.g. when eating chocolate).
• Biases affect decisions every day. The rational consumer (Homo Economicus) does not exist.
• Rule of thumb is a rough and practical method that can be easily applied when making decisions. Often they involve heuristics (mental shortcuts) to lead to satisficing decisions. This means decisions are satisfying in relation to real life context, but often utility is sacrificed.
• Anchoring is a tendency for consumers to rely on the first piece of information available to them,
• Availability bias occurs when individuals make judgements about the likelihood of future events based heavily on the recall of past, personal or memorable events.
• Social norms are patterns of behaviour considered acceptable by groups or societies. These can influence decision making.
• Herd behaviour suggests that other peoples’ actions create bias.
• Traditional economic theory also ignores the concept of altruism, whereby consumers show concern for the welfare of others.
• Different consumers have different perceptions of fairness.

4.1.2.4 Behavioural Economics and Economic Policy

• Insights provided by behavioural economics can help governments and other agencies influence decision-making.
• Choice architecture is a framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on their decision making.
• Framing tells us that how something is presented influences the choices people make.
• Nudges are factors that encourage people to think and act in particular ways.
• Nudges try to shift group and individual behaviour in ways which comply with desirable social norms.
• Default choices are options that are automatically selected unless an alternative is specified (e.g. organ donation).
• Restricted choices aim to offer people a limited number of options so that they are not overwhelmed by the complexity of the situation (e.g. people can only smoke in certain places).
• Behavioural economists believe that if there are too many choices, people may make a poorly thought out decision or not make any decision (e.g. recycle bins).
• Mandated choice is when people are required by law to make a decision.
• In evaluation, behavioural economic policy can be seen as too paternalistic, unpredictable, costly or unreliable.
• Perhaps shove policy is better suited to certain market failures (e.g. taxing demerit goods).