Reasons why the Assumptions may be Flawed (Edexcel IGCSE Economics)
Revision Note
Written by: Lorraine
Reviewed by: Steve Vorster
Consumers may not Maximise Their Utility
In classical economic theory, the word 'rational' means that economic agents are able to consider the outcome of their choices and recognise the net benefits of each one. Rational agents are incentivised to select the choice which presents the highest benefits
Consumers are assumed to act rationally. They do this by maximising their utility
Producers are assumed to act rationally. They do this by selling goods and services in a way that maximises their profits
However, consumers and producers do not always act rationally and may make decisions that do not always aim to maximise benefits or profits
Reasons Consumers may not Always Maximise Their Utility
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Measuring satisfaction |
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Habits |
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Social norms |
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Producers may not Maximise Their Profit
The objectives of a firm are a reason for their existence or the desired focus of their owners
The main objective is profit maximisation
However, firms can pursue other objectives that include managerial objectives (growth of firm), customer care or charitable activities
Reasons why Producers may not seek to Profit Maximise
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Influence of managers |
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Customer care |
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Charitable activities |
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