Embedded Files
--THINK AHEAD--
“What do you call someone who can’t choose, changes their mind in circles, and refuses free stuff?"
"So if those are the characteristics of an irrational consumer, what would be the characteristics of a rational consumer?"
RATIONAL CONSUMER CHOICE
RATIONAL CONSUMER CHOICE
--ASSUMPTIONS OF RATIONALITY--
--1️⃣ CONSUMER RATIONALITY--
"Are you are capable of making a choice?"
--THE 'COMPLETENESS' ASSUMPTION--
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"
"Are you consistent with your choices?"
--THE 'TRANSITIVITY' ASSUMPTION--
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."
"Do you believe more is always better?"
--THE 'NON-SATIATION' ASSUMPTION--
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"
PORTFOLIO CHECKPOINT
--THINK AHEAD--
"In a perfect world, the price I am willing to pay for something is perfectly informed, as I am fully aware of the full costs and full benefits that it will give me, so I can make a really good judgement on its value and pay accordingly." "Sound realistic?"
--2️⃣ PERFECT INFORMATION--
In order to construct your individual demand curve it is assumed that you are able to base the price you are wilingness to pay for each unit, on your 'well-informed' idea of the benefit ('utility') that you will recieve from consuming it right!
"I know what a coke tastes like, I know what the price of alternatives are, I know the basic health implicatons of drinking it, and I am not influenced by any adverts, therefore, i'm happy to pay $10 for my first cup and so on..."
Therefore, for this to be true you would need to have PERFECT KNOWLEDGE about the benefits and satisfaction that they will receive from consuming the good or service and hence THE PRICE THEY CONSUMERS ARE PREPARED TO PAY IS FULLY REFLECTIVE OF THEIR PRECISE EXPECTED STREAM OF BENEFITS, WHICH THEY ALWAYS SEEK TO MAXIMISE.
--THINK AHEAD--
--THINK AHEAD--
"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!"
"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!"
--3️⃣ UTILITY MAXIMISATION--
“When I consume a good or service, I not only know the full costs and the full benefits, but also know exactly when my satisfaction is maximised, so I always buy the precise quantity that makes me the happiest."
In addition to being PERFECTLY INFORMED rational individuals will always SEEK TO MAXIMISE THEIR OWN 'SELFISH' SATISFACTION ('UTILITY'), and consume up to the point where their marginal benefit = marginal cost.
Is this realistic? If you’re buying for someone else, how do you know their level of benefit accurately? Do people never overeat at a buffet, drink more than they should, or buy extra things they don’t really need? In theory, the demand curve is perfectly accurate in every way. In reality… maybe not so much.
--REALITY OF RATIONLITY--
--HEURISTICS EXISTS--
"When you see two makeup items, one with Korean and one with Russian, which do you buy?" "Why?"
"We regularly take mental shortcuts based on experience and common sense (these are called 'RULES OF THUMB' or heuristics') because we like to 'speed up' and 'simplify' complicated decisions."
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--TASK--
"Look at the infographic above and explain the rule-of-thumb that this customer is using when deciding to buy goods. Then decide whether choosing a product that contains the word "international" over others would be considered a rule of thumb?'
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--COGNITIVE BIAS EXISTS--
--COGNITIVE BIAS EXISTS--
'Now the rule-of thumb itself is the "tool", but when it is used extensively and results in outcomes that would go against the rational outcome, say for example, due to limited knowledge, we say that there has been some sort of cognitive bias impacting the outcome. There are many biases, and here are just a few for the IBDP.
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--TASK--
"Look at the infographic above and explain the bias that this customer is using when deciding to buy goods. Then explain how your decision to study IBDP, could be considered 'irrational.'
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--BOUNDED SELF-CONTROL--
"BOUNDED SELF-CONTROL is the idea that people have a limited capacity to resist temptations and delay gratification, leading them to make decisions that prioritize immediate desires over long-term benefits. This concept explains why people might overeat, overspend, or continue gambling even when they know it's not in their best interest, as their good intentions are overcome by the power of impulse and short-term rewards."
--ADD 2025 P3 QUESTION: QUESTION...GYM MEMBERSHIP PEOPLE STRUGGLE TO MAINTYAIN SELF CIONTROL, EATING UNHELTHY TO GET A SHORT TERM HIT RATHEWR THAN THINK OF LONG TERM HEALTH GAINS BINGE EATING, PRICRASTINATION, ADDICTION
--THINK AHEAD--
--THINK AHEAD--
"In my opinion, buying an iPhone is like choosing a restaurant just because the sign outside looks fancy. You don’t check the menu, read the reviews, or ask how good the food actually is—you just assume that if the logo is shiny and the name is popular, it must be good. In reality, the no-brand alternative might last longer and have more functionality at half the price, but you’ll never know because your brain took the irrational shortcut."
--BOUNDED RATIONALITY--
"BOUNDED RATIONALITY refers to how in reality a person is either not able or not willing to seek information that would help them understand the true value and worth of a decision. This could be due to lack of access to the information, lack of mental capacity to comprehend it or simply lack of time available to gather, learn and process it."
--THINK AHEAD--
"I'm not swimming at the beach because of that dramatic shark attack video I just saw on YouTube. Never mind that shark attacks are insanely rare—I remember that one scary clip so clearly that it feels like it happens all the time."
--AVAILABILITY BIAS--
"AVAILABILITY BIAS refers to how we often BASE OUR DECISION-MAKING on RECENT INFORMATION or IMAGES rather than look at a choice in its entirety."
--TASK--
"EXPLAIN USING THE CONCEPT OF 'AVAILABILITY BIAS' HOW THE FOLLOWING THREE IMAGES INFLUENCE DECISION-MAKING REGARDING THE DEMAND FOR SWIMMING TRUNKS IN SPAIN, PLANE TICKETS, AND LOTTERY TICKETS."
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--THINK AHEAD--
"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!"
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"A whopping 80% of IBDP econ students pass, whoop, whoop!"
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"That's right, the way the statement is 'framed', can 'bias' or 'prejudice' your desire, and utimately, your demand for the good or service will be sub-optimal."
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--FRAMING BIAS--
"FRAMING BIAS refers to how our decision-making is highly influenced by the PRESENTATION of the choice."
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"For example which of the following would you choose?"
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--TASK--
Watch this clip and explain how it illustrates 'FRAMING BIAS'.
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--THINK AHEAD--
"Do you think she overpaid?"
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"Duh yes she overpaid, it's a classic sales technique, the $100 price is set high and the customer starts using it as a reference point when bargaining, without ever really appreciating the true value of the item and how much she should be willing to pay, instead focusing on getting a lower price than the 'anchor price'."
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--ANCHORING BIAS--
"ANCHORING BIAS is a cognitive bias whereby an individual's DECISIONS ARE INFLUENCED BY A PARTICULAR REFERENCE POINT or 'ANCHOR'."
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--THINK AHEAD--
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--BOUNDED SELFISHNESS--
"BOUNDED SELFISHNESS refers to a cognitive bias that counters the assumption that rational consumers will, out of self-interest, always choose the least cost/best value option, stating that in reality their level of 'selfishness' is bounded by their human desire for social approval, fairness, and moral purity, which often causes them to act against their own financial best interest."
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--Use the markscheme below to construct both 15-mark answers--
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--TASK--
--TASK--
"MY APPLE DUO STORY"
Identify the seven biases illustrated at each stage of this buying process." "Download HERE!"
--TASK--
--TASK--
"Now that you have correctly identified the biases, choose three and explain how the story illustrates this bias: For example:
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"The story illustrates the impact of anchoring bias as Alex was influenced by the initial price of $2,500, which became a reference point and made $1,999 appear to be good value, it also illustrates the impact of...."
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--BEHAVIOURAL--
--BEHAVIOURAL--
--CHOICE ARCHITECTURE--
--CHOICE ARCHITECTURE--
--DEFINITION--
--DEFINITION--
"CHOICE ARCHITECTURE refers to the way/method in which choices are presented (essentially the choice environment) to consumers in order to influence their decision-making while maintaining freedom of choice."
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--TASK--
--TASK--
"Can you think of the reason why a sticker of a fly is often stuck in a urinal?" "What type of behaviour is this trying to impact, and why?" "How is this related to choice?" "Does it involve being told what to do?"
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"The sticker is stuck in the urinal in an attempt to 'nudge' (persuade) the user to 'take better aim', which should reduce spillage and the associated cleaning costs. There is no one forcing the user to hit it (it's not mandated by law) nor rewarding them; the choice is completely optional; however, it undoubtedly impacts decision-making."
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--TASK--
"Explain how this is an example of choice architecture."
--TASK--
--TASK--
"Explain how choice architecture can solve this problem."
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"I know let's set the default printing settings to 'portrait', 'two-sided', and 'black & white'."
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"Hang on a minute!!!!"
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⚠️"Do you think this is manipulative behaviour?", "How does it make you feel that someone else is trying to alter your decision-making for you?" "Will you do the opposite, to 'rebel' against your manipulators", "Will the choice architecture have a 'boomerang effect'?"
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"Look at this image, below and describe what is happening."
"What do you think will happen when they realise?"
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"As a final note, this alternative rebellious behaviour will likely lead to even more wastage so it clearly backfired."
--DEFAULT CHOICES--
--DEFAULT CHOICES--
DEFAULT CHOICES refers to a type of choice architecture in which a choice has already been chosen 'by default', and the user still has the 'freedom of choice' to switch, but due to
FREEDOM TO CHOOSE ✅ Yes, people can change the default
ABILITY TO 'NOT CHOOSE' ✅ Yes, inaction means you choose the default
"The option that a consumer 'selects' if he/she DOES NOTHING."
"Does this work?" Yes, as when it comes to thinking, PEOPLE ARE LAZY. Studies have shown that people rarely change the default settings. Microsoft found that 95% of people kept all default settings, even for critical features like autosave.
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REAL-WORLD EXAMPLE: OPT-OUT ORGAN DONATION SYSTEM IN THE UK.
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--THINK AHEAD--
--THINK AHEAD--
"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?"
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--RESTRICTED CHOICES--
--RESTRICTED CHOICES--
RESTRICTED CHOICES refers to...
"The options that a consumer “selects” are limited."
"Does this work?" Yes, in this case it's about forcing customers to make a decision, rather than be overwhelmed with choice and walk away ('The Paradox of Choice')
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--THINK AHEAD--
--THINK AHEAD--
"When the government installed strict 'mask-wearing' rules for living in HK, such as access to the MRT, why did they call them 'mask mandates'?" "What was the option if you didn't comply?"
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"The option is 'go without'."
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--MANDATED CHOICES--
--MANDATED CHOICES--
MANDATED CHOICE refers to a situation when people are required to make a decision, rather than being allowed to ignore or skip the choice. It effectively removes the option of no action, unless you want to end up with nothing. e.g NO INSURANCE = NO CAR.
FREEDOM TO CHOOSE ✅ Yes, you can still change
ABILITY TO 'NOT CHOOSE' ✅ Yes, inaction means you choose the default
"You have the option to not choose, but by doing so you end up with consequences."
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--THINK AHEAD--
--THINK AHEAD--
"When you see this, what type of behaviour is it trying to impact? Is it beneficial to society?"
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"That's right, it's trying to subtly 'nudge' people to stand on the right-hand side of the escalator in order to make room for people that need to walk down at pace; this, of course, benefits society, as there are often times when we are in a rush, and also it avoids conflicts that can arise."
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"When you see this, what type of behaviour is it trying to impact? Is it beneficial to society?"
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"When you see this, what type of behaviour is it trying to impact? Is it beneficial to society?"
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"When you see this, what type of behaviour is it trying to impact? Is it beneficial to society?"
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"When you see this, what type of behaviour is it trying to impact? Is it beneficial to society?"
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"When you see this, what type of behaviour is it trying to impact? Is it beneficial to society?"
--'NUDGES'--
--'NUDGES'--
A 'NUDGE' refers to a way of INFLUENCING CHOICES through subtle changes in the choice environment with the aim of IMPROVING THE INDIVIDUAL'S or SOCIETY'S WELFARE WITHOUT using the following:
1) FINANCIAL REWARDS for compliance.
2) SANCTIONS for non-compliance.
3) LIMITING CHOICES.
--IS IT A NUDGE OR NOT?--
--IS IT A NUDGE OR NOT?--
--THINK AHEAD--
--THINK AHEAD--
"Why do some supermarkets put sugary treats at the checkout?, Who benefits?"
"When the online store says, 'Only 2 left, hurry!'" Is it always beneficial to you?"
"When you want to cancel your gym membership, do you think it's super easy or difficult?"
'SLUDGES'--
'SLUDGES'--
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.
"In the IBDP Economics course paper, question 1b, you are expected to use real-world examples to deepen analysis; hence, recall is vitally important. So in order to embed examples more deeply, you will occasionally be asked to research and present your own."
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--RWE PRESENTATION TASK--
--RWE PRESENTATION TASK--
"CHOOSE ONE OF THE ARTICLES BELOW (OR FIND ONE OF YOUR OWN) and create a brief explanation of how 'NUDGE-THEORY' has been utilised to manipulate behaviour for the benefit of society. Include text and data from the article as well as the correct terminology."
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"Nudge theory refers to..."
"The article titled... published in... details how... one particular..."
"...example that is discussed is the use of..."
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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/.
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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/.
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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.
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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/.
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--RATIONAL PRODUCER GOAL--
--RATIONAL PRODUCER GOAL--
--"Which of these is the only rational producer?"--
--"Which of these is the only rational producer?"--
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"That's right, it's Jeff Bezos, profit maximisation is considered the primary rational goal for producers."
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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 good 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?
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"Let's look at some 'HL ONLY' alternatives!"
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--ALTERNATIVE GOALS--
--ALTERNATIVE GOALS--
--"What do you think these companies are trying to do?"--
--"What do you think these companies are trying to do?"--
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"That's right, they are stressing how 'socially responsible' they are as a company and how their goals are 'aligned' with the well-being of society."
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"Whether or not this is a case of 'GREENWASHING' or not, this goal is called 'CORPORATE SOCIAL RESPONSIBILITY' (CSR) and is often motivated by the firm's desire to AVOID A NEGATIVE IMAGE that ultimately reduces sales, revenues and profits and PROMOTE A POSITIVE IMAGE to create the opposite as well as distinguish itself from its rivals."
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--PADLET RWE TASK--
"Find a real-world example of a firm that has faced criticism and boycotts for some perceived unethical behaviour AND has responded with some CSR, include images, dates, data etc..."
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"Are you 'GRADE-MAXXING'?", "Are you spending every spare minute reviewing and previewing, seeking out answers, extra consolidation tasks so you get a 7 in each subject?"
"Are you 'GRADE-MAXXING'?", "Are you spending every spare minute reviewing and previewing, seeking out answers, extra consolidation tasks so you get a 7 in each subject?"
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"Nah! You aren't a fool; you are likely making sure all the stakeholders involved in your educational performance are satisfied and 'off your back', namely your teacher, parents, and of course yourself, right?"
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"This goal is referred to as SATISFICING, referring to the idea that you/firms try to achieve satisfactory rather than optimal or ‘best’ results, which 'satisfies' all relevant stakeholders."
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--TASK--
"Look at the image below and apply it to the Nord Anglia School Group to explain why 'Growth is their main objective.?"
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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.
EDULASTIC
--MY SAMSUNG STORY ANSWER--
--MY SAMSUNG STORY ANSWER--
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.
The answer is 'Yes', some customers make a conscious mental decision to buy goods and services that appear more 'global' or 'internationally recognised' in the belief that it is of a higher 'quality' avoiding the need to research."
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"Do you only buy 'made in the US' products over 'made in China'?
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