1.1.

2 Economic Assumptions

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Learning outcomes

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Starter

Watch: Economic Man vs Humanity: a Puppet Rap Battle

1. Outline the key characteristics of the Economic Man.

2. Outline the criticisms of the Economic Man.

3. Consider the similarities and differences between yourself and the Economic Man.

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Rational decision-making
Rational decision-making is a method for systematically selecting among possible
choices that is based on reason and facts. Traditional economic theories assume that
people are rational decision makers.

Examples of rational choices

• Consumers buy more of a product if the price falls.

• Businesses source their raw materials from the lowest cost supplier.

• The government wants to improve the economic and social well-being of citizens.

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Irrational decision-making
An irrational decision is a decision that goes against or counter to logic. For example, a
person may make a decision based on feelings, superstition, or intuition.

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Consumer behaviour
Assumption: Consumers aim to
maximise their benefit in purchasing
decisions.

Think about your own experiences with

buying goods and services.

How have you tried to maximise your

benefit in purchasing decisions?

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Consumer behaviour

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Why consumers may not maximise benefit
• Customers may find it difficult to calculate if the price of the product is worth the
benefits.
• Consumers may always buy the same brand out of habit and not comparing possibly
better alternatives.
• Consumers may be influenced by the actions of others such as trends and hype.

• Consumers may not have access to all the information they need to make an
informed decision.

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Business objectives
A major assumption of the economic models we use in this course is that firms carry
out profit maximization. Making these assumptions makes it easier to analyse their
behaviour. However, there are many instances when firms do not strive to maximise
profit.

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Profit maximisation
Advantages
• Provides financial reward for
entrepreneurs who take risks in
starting a business
• Profits are an important source of
finance
• Higher profits enable firms to pay
higher wages to their employees
• Owners or shareholders maximise
their return on their investments

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Caring for customers
Some businesses may prioritize the
objective of customer satisfaction and
caring for their customers.

For example, public hospitals in Hong

Kong provide high quality healthcare
services at low and affordable prices.
Meanwhile public schools in Hong Kong
aim to provide education for all children
up to Form 6, at a very low cost.

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Corporate social responsibility
Corporate social responsibility (CSR) refers to committing to ethical objectives and
doing what is deemed by society to be right, such as:
• reducing carbon footprints to combat the problems related to climate change

• making use of socially responsible marketing and advertising campaigns

• participating in charitable and volunteer work in local communities

• implementing green technologies in the workplace.

• improving the well-being of workers

• engaging in fair trade practices

• minimizing waste

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Market share
Market share refers to a firm’s portion
of the total value of sales revenue in a
particular industry. Firms may aim to
increase and protect their market
share. This is because having a large
market share can give the firm
competitive advantages, such as:

• Brand loyalty

• Economies of scale

• Higher profits

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Research and Presentation Task
Research 3 businesses with the following objectives:
1. A business that prioritizes caring for customers.

2. A business that prioritizes growth and increasing market share.

3. A business that completes charity work.

Produce a Google Slides presentation or poster to share your findings on the 3 businesses.
This should include:
• Mission statement/aims and objectives.
• Goods and services offered.
• A variety of evidence to support that the business activities are aligned with its objectives.
• A judgement which justifies whether you think these businesses are successful.

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Learning outcomes

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