IB DP Economics: Critique of maximising behaviour (HL) – Revision Notes

These revision notes follow the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. They condense sub-topic 2.4, Critique of the maximizing behaviour of consumers and producers, which is HL only. For full explanations and worked examples, read the study guide, then test yourself with the practice questions. The course hub, the checklist and the free diagnostics help you plan. All figures here are invented.

The one-page map

Heading	Items the guide lists
Rational consumer choice	Rationality, utility maximisation, perfect information; biases (rule of thumb, anchoring and framing, availability); bounded rationality; bounded self-control; bounded selfishness; imperfect information
Behavioural economics in action	Choice architecture (default, restricted, mandated); nudge theory
Business objectives	Profit maximisation; CSR; market share; satisficing; growth

The guide sets this at AO3 depth. Your answers should weigh strengths and limitations and reach a judgement.

Definitions to know cold

Term	Short definition
Rational consumer	Compares costs and benefits, chooses consistently, maximises utility
Utility	Satisfaction gained from consuming
Perfect information	Full knowledge of prices, quality and outcomes
Rule of thumb	A simple shortcut for deciding quickly
Anchoring	A first number or reference point sways later judgements
Framing	The wording or presentation changes the choice made
Availability	Judging likelihood by how easily examples come to mind
Bounded rationality	Limited information, time and thinking power restrict decisions
Bounded self-control	Knowing the better long-run choice but not acting on it
Bounded selfishness	Caring about fairness and others, not only own gain
Imperfect information	Missing, wrong or uneven knowledge about a choice
Choice architecture	How options are arranged and described
Nudge	A change in presentation that steers choice without banning or repricing
Satisficing	Aiming for a satisfactory outcome, not the best possible

Biases: what each one breaks

• Rule of thumb breaks full comparison of options. Quick and often fine.
• Anchoring and framing break consistency: identical facts give different choices.
• Availability breaks accurate probability judgement: vivid events feel likely.

Must-know distinctions

Pair	Difference
Bounded rationality vs bounded self-control	The first is about limits on working out the best choice; the second is about failing to follow a choice already known to be best
Bounded selfishness vs bounded self-control	The first is about caring for others; the second is about patience with oneself
Anchoring vs framing	Anchoring uses a reference number; framing uses the wording of the same facts
Imperfect information vs bounded rationality	The first is missing facts; the second is limited ability to use the facts available
Nudge vs ban or legal requirement	A nudge leaves every option open; a ban or legal requirement removes the option to do otherwise
Default vs restricted choice	A default keeps all options but starts you on one; restricted choice cuts the list

Method in steps: explain how a behaviour departs from rational choice

1. Name the assumption of rational choice involved (rationality, utility maximisation or perfect information).
2. Name the specific behaviour (for example availability).
3. Link the behaviour to the context given in the question.
4. State the outcome: the person chooses something other than the utility-maximising option.
5. Add a judgement if the command term needs it.

Worked reminders

Anchoring (invented). “Was 90, now 54” feels like a cut of (90 - 54) / 90 = 40%. If the usual price was 60, the real saving is 6 / 60 = 10%.

Availability (invented). Perceived risk 3% a year against a true 1 in 10,000, loss 40,000. Perceived expected loss = 0.03 x 40,000 = 1,200. True expected loss = 0.0001 x 40,000 = 4. Cover costing 90 is over-bought.

Bounded self-control (invented). Choosing 50 today over 60 in 4 weeks, yet 60 in 56 weeks over 50 in 52 weeks, is a reversal. The rational model predicts one pattern in both pairs.

Default (invented). 10,000 members: opt-in 20% = 2,000, opt-out 75% = 7,500, so the default adds 5,500 participants.

Nudge theory and choice architecture

• A good nudge is easy and cheap to avoid.
• Three forms: default (opt-out), restricted (fewer options) and mandated (you must make an active choice before going on).
• The guide also lists consumer nudges in sub-topic 2.7 (HL only), where they are weighed against other government tools.

Strengths: low cost, keeps freedom, targets bias. Limitations: may fade, hard to measure, ethical doubts about influence, may not change strong preferences. Evaluate by comparing with a tax, a ban or an information campaign.

Business objectives: what to say about each

Objective	Meaning	Why a firm might choose it
Profit maximisation	Output where MR = MC	Owner pressure, survival
CSR	Accepting costs for social or environmental aims	Reputation, values, regulation risk
Market share	Priority on size of sales relative to rivals	Build a brand, deter entry, scale economies
Satisficing	Meet a target profit, not the maximum	Managers with limited information and effort
Growth	Expand sales or revenue	Managers’ status, long-run strength

Quick numbers (invented). For P = 100 - 2Q and TC = 200 + 20Q: profit is maximised at Q = 20 (profit 600); revenue peaks at Q = 25 (profit 550); a 400 profit target is met for Q between 10 and 30.

Evaluating the profit-maximisation assumption: it predicts well in tough competition, less well where managers have discretion, information is poor or other goals matter.

Judging the critique itself

For AO3 you need a view on how far behavioural economics weakens the rational model.

• Supports the critique: biases and bounded behaviour are systematic, so they predict real choices that the model misses, such as under-saving or over-insuring.
• Defends the model: it is a simplification that still predicts average behaviour in many markets, especially where choices are repeated and feedback is quick, so errors get corrected.
• Practical limits: behavioural findings come from particular settings, so a result in one group may not carry over to another. There is no single behavioural theory that replaces the rational model.
• Policy link: if biases cause harm, a nudge may improve outcomes at low cost, but it relies on a judgement about what is better for the chooser.

End with a short conclusion that takes a side and says when it would change.

Exam reminders

• The guide says HL Paper 1 is an extended response paper (1 hour 15 minutes, 20%), Paper 2 is a data response paper (1 hour 45 minutes, 30%) and Paper 3 is a policy paper (1 hour 45 minutes, 30%).
• Paper 3 has two compulsory questions, and evaluation features in part (b).
• Command terms to practise: define, distinguish, explain, discuss, evaluate, recommend.

Quick self-test

1. State the three assumptions of the rational consumer model.
2. Name the three biases the guide lists.
3. Distinguish anchoring from framing.
4. A shop says “Was 200, now 140; usually sold at 150”. Calculate the headline discount and the real saving as percentages.
5. Which bound explains a person who plans to save but does not?
6. A responder in a pot-splitting game refuses 8 out of 50 and gets nothing. Which behaviour is this?
7. State the three forms of choice architecture.
8. 5,000 customers; 10% join with opt-in and 60% with opt-out. How many extra join under the default?
9. Why is a ban not a nudge?
10. Name the four alternative business objectives the guide lists.
11. A firm needs 300 profit and has options giving 280, 310 and 420. Which would a satisficer accept first?
12. Give one limitation of nudges.

Answers

1. Rationality, utility maximisation, perfect information.
2. Rule of thumb, anchoring and framing, availability.
3. Anchoring: an initial number pulls judgement. Framing: wording of identical facts changes the choice.
4. Headline (200 - 140) / 200 = 30%. Real saving (150 - 140) / 150 = 6.67% (6.7%).
5. Bounded self-control.
6. Bounded selfishness (concern for fairness, at a personal cost).
7. Default, restricted, mandated.
8. 0.60 x 5,000 - 0.10 x 5,000 = 3,000 - 500 = 2,500.
9. It removes the option to choose otherwise; a nudge leaves all options open.
10. CSR, market share, satisficing, growth.
11. The 310 option (the first that meets the target).
12. Effects may fade (or: ethical concerns, hard to measure).

Where marks are usually lost

• Describing a bias without naming which assumption of rational choice it contradicts.
• Writing “people are irrational” with no link to the case in the question.
• Confusing the three “bounded” ideas.
• Calling a ban or a tax a nudge.
• Showing only one side when the command term is discuss or evaluate; advice for AO3 questions is to weigh strengths against limitations and then judge.
• Treating satisficing as laziness rather than a limited-information, target-based aim.
• Giving real-world claims you cannot support; use the example given or a clearly hypothetical one.
• Forgetting to show working in percentage and expected-value calculations.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published February 2020 by the International Baccalaureate Organization. Sub-topic 2.4 (HL only), Unit 2 Microeconomics.