Edexcel IGCSE Economics Economic Assumptions PDF

Head to www.savemyexams.com for more awesome resources Edexcel IGCSE Economics Your notes Economic Assumptions Contents The Underlying Economic Assumptions Reasons why the Assumptions may be Flawed...

Head to www.savemyexams.com for more awesome resources Edexcel IGCSE Economics Your notes Economic Assumptions Contents The Underlying Economic Assumptions Reasons why the Assumptions may be Flawed Page 1 of 4 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources The Underlying Economic Assumptions Your notes Rational Decision Making When analysing markets, a range of assumptions are made about the rationality of economic agents involved in the transactions 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 will 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 Workers are assumed to act rationally. They do this by balancing welfare at work with consideration of both pay and benefits Governments are assumed to act rationally. They do this by placing the interests of the people they serve first in order to maximise their welfare In many ways, the assumption of rational decision making is flawed For example, consumers are often more influenced by emotional purchasing decisions than a rational computation of net benefits Page 2 of 4 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Reasons why the Assumptions may be Flawed Your notes 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 Reason Explanation Measuring The wider the range of choice, the harder it is for a consumer to gather satisfaction information and compute which one offers the highest net benefits Consumers often lack the time or ability to consider the relative prices of different products and sellers will frequently make it difficult for them to do so Habits Consumers make so many purchasing decisions that they often rely on habits to speed up the process Consumer inertia often develops as convenience is prioritised Consumers make purchasing decisions that directly harm them and are usually addictive, for e.g. alcohol Sellers recognise habitual patterns and exploit them. For example, products placed at the checkout till to benefit from impulse purchasing (chewing gum) Social norms Peer pressure often prompts consumers to make purchasing decisions that may go against a computation of net benefits Producers influence consumers choices through various forms of advertising, including lifestyle, celebrity endorsement and influencer culture Page 3 of 4 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Producers use advanced behavioural psychology techniques to influence consumer choices e.g. Neuro branding Your notes 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 Reason Explanation Influence of Managers may have a goal of growth which is focused on increasing sales managers revenue or market share Firms will also maximise revenue in order to increase output and benefit from economies of scale A growing firm is less likely to fail Customer care Some producers prioritise caring for their customers over maximising profit They may invest in customer service to improve brand loyalty, even if it involves additional costs that could impact profitability Charitable More firms than ever have a charitable objective activities These typically include a focus on climate action and addressing poverty or inequality They still require profit to survive, but will accept less than if they were profit maximising as long as they are meeting their social objective E.g Google has partnered with World Wildlife Fund and the Jane Goodall Institute to protect endangered species and habitats Page 4 of 4 © 2015-2025 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers