<2.4 CRITIQUE OF CONSUMER & PRODUCER BEHAVIOUR>  

"So if those are the characteristics of an irrational consumer, what would be the characteristics of a rational consumer?"

• If you said "Yes" then you are being rational,  

• The COMPLETENESS ASSUMPTION states that a rational consumer should always be able to RANK THEIR PREFERENCES and say, 

• “I prefer A over B,” “I prefer B over A,” or “I’m indifferent.” 

• "Why is this assumption necessary?" Well, if someone can’t decide—e.g., “I have no idea if I prefer going to the gym or staying home,” or “I can’t compare apples to oranges at all”—then their preference system is incomplete, meaning they cannot fully construct a rational demand pattern because without clear preferences, you cannot optimise satisfaction (utility)—which is the whole point of rational choice theory.

• Real-world example: "I always prefer Coke to Pepsi"

• The TRANSIVITY ASSUMPTION states that a rational consumer should always be able to KEEP THEIR PREFERENCES CONSISTENT and say, "If I prefer A over B, and B over C — I should logically prefer A over C."

• "Why is this assumption necessary?" Well, how could a reliable demand curve exist if consumers kept changing their minds—preferring A over B one moment, B over C the next, and suddenly C over A?” 

• Real-world example: "I always prefer Coke to Pepsi, and I'd rather have a Pepsi over a Sprite, so I definitely prefer Coke to Sprite."

• The NON-SATIATION ASSUMPTION states that a rational consumer should always be able to say, "I prefer more of a good rather than less."

• "Why is this assumption necessary?" Well, how could a demand curve slope downwards if consumers actually preferred less of a product rather than more of it?”

• Real-world example: "If the price of Coke falls, I would prefer to buy more"

"When we consume a good or service, we not only know its full cost and benefit, but we also know when our satisfaction is maximized and will buy the exact quantity when that occurs, right?", "But what if you are buying for someone else?", "Are we fully rational and never overeat, drink too much, or buy more than we actually need.", "Our demand curve is perfectly accurate in every way right!" 

Can you think of anytime you did the following?

• Choose a restaurant with a line out the door over the empty one."

• Bought a product because it's a "#1 Bestseller."

• Bought a toothpaste because it's "recommended by 9 out of 10 dentists,"

• Believing a sleek, modern smartphone is more powerful and reliable than a clunkier-looking one.

• Bought something as there were "Only 5 left in stock!" or "Limited time offer!" as you perceived a sense of urgency and higher value.

• ⚠️STOP EVERYTHING!!!! Your mind is completely BIASED and manipulated! YOUR DEMAND DECISIONS ARE COMPLETELY OUT OF YOUR CONTROL and in no way based on PERFECT INFORMATION, you are INCAPABLE OF ESTIMATING the true level of SATISFACTION that you will receive from consuming a good or service. 

• Furthermore, we are under the influence of so many COGNITIVE BIASES that you LACK THE KNOWLEDGE, and PATIENCE to make a truly informed decision ('Bounded rationality'). You take mental shortcuts based on experience and common sense ('Rules of thumb') because you like to simplify complicated decisions. 

• When buying a product you always focus on how much discount is being offered, rather than on the justification for the original price  ('Anchoring bias').  You rely on the most recent information and reviews to influence your choices ('Availability bias') rather than look at the 'whole picture', and you allow yourself to be fooled by aesthetics and cosmetic appeal to make your choices. !!!YOU ARE COMPLETELY IRRATIONAL!!!

• DON'T AGREE? THEN WATCH THE VIDEO BELOW

• "Imagine you tell yourself you’ll only eat one slice of pizza because that’s surely the amount that gives you the most satisfaction; any more and you’ll just feel bloated and guilty. But then the second slice is just sitting there… looking warm… smelling amazing… Suddenly you're three slices in, feeling sick and regretting everything, that's irrational dude"

• How do you feel about deciding to study the IBDP economics course after hearing these two statements?

• "Unfortunately, 20% of all IBDP economics students fail!!!!"

• "A whopping 80% of IBDP econ students pass, whoop, whoop!"

• EXPLAIN HOW MR. BOUNOUS JUST USED ANCHORING TO INCREASE THE DEMAND FOR 15-MINUTE TESTS.

• CHOICE ARCHITECTURE refers to "the way in which choices are presented and structured to consumers in order to influence their decision-making while maintaining freedom of choice." In other words...

• "How you arrange choices to guide people’s decision-making without forcing them."

"Often students view uniforms and restrictive-ish dress codes as unnecessary and just a way for the school to 'restrict' your freedoms, but in fact these restrictive choices have a real psychological impact that actually helps your focus and study, but how?"

• A 'SLUDGE' refers to a way of INFLUENCING CONSUMER'S CHOICES with the aim of MAKING IT INTENTIONALLY HARDER FOR PEOPLE TO MAKE CHOICES THAT ARE IN THEIR OR SOCIETY'S BEST INTERESTS WITHOUT using the following:

• 1) FINANCIAL REWARDS for compliance.

• 2) SANCTIONS for non-compliance.

• 3) LIMITING CHOICES.

• READ EACH OF THE ARTICLES BELOW and write a brief explanation of how 'NUDGE-THEORY' has been used in each scenario to manipulate behavior. 

• Nudge theory in negotiations—Gale, A. (2020). Nudge theory in negotiations. Management Today. www.managementtoday.co.uk/nudge-theory-negotiations/food-for-thought/article/1689854/.

• Group 2: Nudge theory in workplaces—Agarwal, M. (2020). ‘Nudging’ to create a better workplace: Nudge theory in practice. Inc42. https://inc42.com/resources/nudging-to-create-a-better-workplace-nudge-theory-in-practice/.

• Group 3: Nudge theory as a public policy tool—Lokeshwarri, S. K. (2020). Is ‘nudge’ a desirable public policy tool? The Hindu Business Line. https://www.thehindubusinessline.com/opinion/columns/is-nudge-a-desirable-public-policy-tool/article33126549.ece.

• Group 4: Nudge theory to prevent vaccine hesitancy during Covid-19—Jain, S. (2020). Vaccine to vaccination: Using nudge theory to prevent vaccine hesitancy. Observer Research Foundation. www.orfonline.org/expert-speak/vaccine-to-vaccination-using-nudge-theory-to-prevent-vaccine-hesitancy/.

• To what extent can manipulation and deception ever be good for individuals and societies?”

• Should governments assume they know what’s best for us?

• Is it okay for companies to use nudges to increase profits?

• How can we judge whether a nudge is ethical or a sludge?

• PROFIT MAXIMISATION:- Standard economic theory of the firm assumes that RATIONAL FIRMS are solely geared towards maximising their profits, and that they will be willing to produce up to the last unit of a foot that yields even the smallest % profit (MC=MR). Do you think this is really the case? Do you think your school's main goal is profit maximisation? 

• CORPORATE SOCIAL RESPONSIBILITY (CSR):- The self-interested behaviour of firms often leads to negative consequences for society. It is often the case that the well-being of firms is not consistent with the welfare of society. A prime example is the self-interested firm that pollutes the environment. In addition, firms can engage in actions that most consumers would consider to be ethically unacceptable, such as the practice in many developing countries of employing children who are extremely poorly paid and forced to work long hours, or employing labour that is forced to work under unhealthy or dangerous conditions. However, many firms are increasingly recognising that the pursuit of self-interest need not necessarily conflict with ethical and environmentally responsible behaviour. A negative image of the firm held by workers and customers (buyers of the product) can cut deeply into the firm’s revenues and profits by lowering worker productivity and the firm’s sales. Further, socially irresponsible firm behaviour may lead to government regulation of the firm intended to minimise the negative consequences of the firm’s actions for society, whereas socially responsible behaviour could instead result in avoidance of government regulation. Therefore, firms face strong incentives to display corporate social responsibility by engaging in socially beneficial activities such as art and athletics sponsorships, donations to charities. Many of these practices are the result of increased consumer awareness of social and environmental issues, growing consumer concern over ethical and environmental aspects of business practices, and even consumer activism that results in boycotts of offending firms. One indication of the influence and concern of consumers is the rapidly growing interest in investments in companies (through stock markets) that meet certain social, ethical and ecological criteria. Economists used to think that ethical and environmentally responsible behaviour of firms would reduce their profits. This was based on considering only the cost aspect of profits; for example, firms using cheap child labour face lower costs, and hence will make higher profits than firms avoiding such practices. Yet profits depend not only on costs, but also on revenues. If consumers avoid buying the products responsibility of offending firms, revenues will decline and profits will go down in spite of the lower costs. The same arguments also apply to firms that may be pursuing some strategy other than profit maximisation, such as revenue maximisation. SUSTAINABLE INDEX LEGO, COKE-COLA, SAMSUNG, STARBUCKS, APPLE, MCDONALDS

• SATISFICING:- All of the above objectives assume that the firm tries to maximise some variable, whether it is profit, revenue, growth or managerial utility. H. Simon, a Nobel Prize-winning economist, has argued that the large modern enterprise cannot be looked upon as a single entity with a single maximising objective; instead it is composed of many separate groups within the firm, each with its own objectives which may overlap or may conflict. This multiplicity of objectives does not allow the firm to pursue any kind of maximising behaviour. Firms therefore try to establish processes through which they can make compromises and reconcile conflicts to arrive at agreements, the result of which is the pursuit of many objectives that are placed in a hierarchy. This behaviour was termed satisficing by Simon, referring to the idea that firms try to achieve satisfactory rather than optimal or ‘best’ results.

• GROWTH MAXIMISATION:- firms may be interested in maximising their growth rather than their profits as the larger they grow the more economies of scale they can achieve and the lower it's average costs. Also as a firm grows it can diversify into the production of different products and markets which reduces its dependence on a single product or market, and finally with a larger share, it can yield greater market power and will have more control over the prices it can charge.

• RULE OF THUMB BIAS: The habit of having two working phones was not a rule-based on anything other than habit, and a personal preference, in other words a rational consumer would not see any sense in buying two phones rather than one.

• BOUNDED SELF-CONTROL: The fact that I was unable to control myself and bought a third phone shows how irrational I am as a consumer as it is very unlikely that the cost of all three phones reflected my total utility.

• BOUNDED RATIONALITY: I lacked both the time and the mental capacity to do thorough research on the true worth of the phone and instead just settled for the opinion of a couple of review sites.

AVAILABILITY BIAS: I dismissed the i-phone, due to the news that one had recently exploded, despite the millions of i-phones that haven't exploded.

FRAMING BIAS: I was influenced by the actual design of the Samsung shop, which 'framed' the brand as very hi-tech and reliable.

ANCHOURING: The $2000 price tag of the phone influenced my idea about whether the 10% discount was actually a good or bad deal, I immediately ignored whether the phone was ever worth $2000 in the first place.