1The idea in one paragraph

Everything you have drawn so far assumes a particular buyer: one who knows all the prices, works out what makes them happiest, and does it. Firms get the same treatment, with one aim, the largest possible profit. Both assumptions make the model workable, and both are wrong in ways that matter. Real buyers use shortcuts, run out of willpower, care about other people and never have all the information. Real firms answer to managers, customers, staff and the public, and often settle for an outcome that is good enough. This subtopic asks what breaks when you drop the assumptions, and what a government can do with what is left.

2The buyer the model assumes

Three assumptions sit under the standard treatment of the consumer, and the guide names all three.

Consumer rationality means buyers act in their own self-interest and their choices hang together. Offered A, B and C, someone who prefers A to B and B to C will prefer A to C. Preferences do not flip because the same choice was described differently on Tuesday.

Utility maximisation means that out of everything a buyer can afford, they choose the combination that gives them the greatest total satisfaction. Utility is the economist's word for that satisfaction. The buyer is assumed to be able to rank outcomes and then take the top one.

Perfect information means buyers know every price, every alternative, the quality of each and the consequences of choosing it. No searching, no guessing, no regret.

Figure 1 shows why the three matter together. They are what make demand predictable enough to draw. Take away perfect information and the buyer can no longer identify the best option; take away consistency and there is no stable curve to draw at all.

The fair way to evaluate them is not "true or false". It is: how far wrong does the prediction go, and where? For a shopper buying rice every week, in a market with clear prices and plenty of practice, the model does well. For a household choosing a mortgage once in a lifetime, from forty products, with the costs falling thirty years away, it does badly. Hold that distinction; it is the backbone of every evaluation in this subtopic.

3Behavioural economics, and the biases

Behavioural economics studies how people actually make choices, and uses what it finds to explain where the standard assumptions fail. It does not claim buyers are foolish. It claims they are human, and that the ways they depart from the model are regular enough to predict.

Figure 2 lays the two side by side, and it is worth learning in that shape: an examiner rewards an answer that names the assumption before naming what challenges it.

The first group of challenges is the biases, the guide's word for the regular patterns in how people decide. Four are named.

Rule of thumb. A shortcut rule applied instead of working the choice out: buy the same brand as last time, take the middle-priced option, round the tip to the nearest note. Shortcuts are not a defect. They save time that is worth more than the improvement a full comparison would bring. They become a problem when the setting changes and the old rule no longer fits.

Anchoring. The first number a buyer sees becomes the yardstick for everything after it. A jacket labelled "was 900 TL, now 450 TL" feels cheap because 900 is doing the work, whether or not anything ever sold at 900.

Framing. The same information, worded two ways, produces two different choices. A tub of yoghurt sells better as "90% fat free" than as "10% fat", though the yoghurt is identical. A rational consumer would be indifferent, since nothing about the good has changed.

Availability. People judge how likely something is by how easily an example comes to mind. One bike theft on the street, reported and retold, and the whole street buys expensive locks, while the same households leave their savings uninsured against far likelier losses.

Anchoring and framing sit together in the guide, and they belong together in an answer: both are about the way an option is presented rather than what the option is. That is exactly why section 6 follows. If presentation changes choices, then whoever controls the presentation has power, and that power can be used well or badly.

4Three bounds: rationality, self-control, selfishness

The guide names three limits on the model's buyer, and each one is worth a separate paragraph in an answer.

Bounded rationality. People are rational within limits. Time, information and attention all run out, so buyers stop searching once they have found something good enough rather than pressing on to the best. Elif takes the first flat she views that is near the tram and inside her budget. She has not failed at anything. Viewing another twenty would cost her three weekends to save perhaps a small amount of rent.

Bounded self-control. People know what is best for them and do not do it, because what happens now weighs more heavily than what happens later. Baran renews the gym card every January and goes twice. This is the bound with the sharpest policy consequence: the buyer already agrees with you about the goal, which is why a small change to the setting can work where an argument cannot.

Bounded selfishness. Own gain is not the only thing that counts. People tip in a café they will never visit again, split a bill fairly, give blood, and refuse a deal they consider unfair even when accepting it would leave them better off. Self-interest predicts none of that.

Note the difference in what each bound does to the model, because students blur them. Bounded rationality says the buyer cannot find the best option. Bounded self-control says the buyer finds it and does not take it. Bounded selfishness says the buyer's "best" was never only about them.

5Imperfect information

The last of the limitations gets its own name in the guide because it is the assumption furthest from ordinary life. Imperfect information means the buyer does not know everything relevant to the choice.

It has three faces, and Figure 5 puts them together.

Too little. The price of the repair is not published, the quality of the used phone cannot be seen, and the cost of finding out is high enough that the buyer guesses instead.

Too much. A tariff comparison page with forty options and eleven columns is not more informative than one with four. Past a point, extra information is another barrier, and the reader gives up, takes whatever is already ticked, or puts the choice off entirely.

Signals instead. Where knowledge is missing, buyers use whatever stands in for it: price, brand, packaging, the shop it is sold in. A dearer bottle is assumed to be better. Sometimes that guess is right, which is what makes the habit stick.

A related case is where one side of the transaction knows more than the other, and the better-informed side has a reason not to share. Say plainly which one you mean, because an answer that describes a seller's advantage while the question asks about a buyer's confusion will be marked as off the point.

The evaluation to hold on to: more information is not automatically better. A policy that "gives consumers more information" only helps if the information is small enough to read, clear enough to compare, and arrives before the decision.

6Choice architecture

Choice architecture is the design of the setting in which a choice is made: the order of the options, the wording, what is already ticked, what sits at eye level. There is no neutral setting. Some arrangement has to exist, so somebody has already made these decisions, whether they thought about it or not. That is the strongest argument in favour of doing it deliberately.

The guide names three settings an architect can change.

Default choice. The option that applies if the chooser does nothing. Staff at our fictional firm, Yalı Tekstil, are enrolled in the pension scheme automatically and stay in unless they tick "opt out". Participation climbs, and nobody has lost an option: opting out takes one tick.

Restricted choice. The list is cut to a smaller set that the architect has selected. The school canteen offers three set meals instead of forty separate items. Decisions get faster and easier, and something real has been taken away, since the fortieth item is now unavailable to the person who genuinely wanted it.

Mandated choice. No default at all. The chooser must answer before anything can proceed: the online form will not submit until organ donation is answered yes or no. Nobody is steered towards an answer, and nobody drifts into one either.

Figure 6 orders them by how far the architect steps in, and the middle one is the odd one out. A default and a mandate both leave every option available. Restricted choice does not. If a question asks which is least intrusive, that distinction is the whole answer.

7Nudge theory, and how to judge it

Nudge theory says that a small, cheap change to the choice architecture can change behaviour in a predictable direction, without banning anything and without changing prices in any serious way. A nudge works with the biases from section 3 rather than against them: it uses inertia, framing and the pull of the default to push in a direction the chooser would probably endorse.

A nudge changes the setting, not the price and not the law. If the barrier is money, a nudge will not move it.

Three worked examples of ours, so you have something concrete to write about.

• A city puts the walking route to school on a printed map through every letterbox, with the stairs at the station marked. Nothing is forbidden and nothing is priced differently.
• A council switches the recycling form so that the food-waste caddy arrives unless a household opts out, instead of arriving only if a household applies.
• An electricity supplier prints the household's use beside the average for their street, which turns an abstract number into a comparison people react to.

Now evaluate, because AO3 is the whole of this subtopic. The arguments in favour are real. Nudges are cheap next to a subsidy or an inspectorate. They keep the final choice with the chooser, which answers part of the objection that government should not decide what people want. They can be trialled in one district and measured against another before being rolled out. And they leave prices alone, so they do not distort the market signals that the rest of your course depends on.

The arguments against are just as real. The effect is often small and it can fade once the novelty goes. Firms have their own architects, and a default that a government sets can be undone by a firm's design the following week. There is a fairness objection: someone decided which direction counted as better, and the chooser was never asked. There is a transparency objection, since a nudge that works because it is unnoticed is hard to consent to. Most of all, a nudge treats the barrier as inertia. Where the barrier is the price, or the household's income, or a genuine disagreement about what is good, changing the form will not touch it.

Figure 7 is the shape of a good part (b). Ask why the behaviour is not happening, then match the tool to the answer, then say which case you think the question describes and why. A conclusion that says "nudges are useful but not always" earns very little. A conclusion that says "in this case the barrier is the cost of insulation, not inertia, so a nudge will move few households and a subsidy is likelier to work, though it costs the government far more" is an answer.

8Profit maximisation, and why a firm might not chase it

The producer half of this subtopic works the same way. Profit is total revenue minus total costs. Profit maximisation means the firm sets its price and its output so that the gap between the two is as large as it can be.

The assumption earns its place. Owners want a return. A firm making losses eventually closes, so profit is also survival. Retained profit is where investment money comes from, and a profitable firm can raise more. Assume profit maximisation and a firm's behaviour becomes as predictable as the rational consumer's.

Three reasons it fails as a description, and they are the ones to name in an answer.

Owners are not the managers. In any firm larger than a shop, the people running it are not the people who own it. Managers are paid for growth, for size, for a quiet year, and those are not the same target as the owner's return.

Information is incomplete. Maximising profit requires knowing how buyers will respond to every price and how costs behave at every output. No firm has that. The same bounded rationality that limits a shopper limits a board.

Other groups have a say. Staff, customers, suppliers, regulators and the surrounding public can all impose a cost on a firm that ignores them, and none of them appears in the profit calculation directly.

9The four alternative objectives

The guide names four. Learn each with what it chases, what it gives up, and the counter-argument that it might raise profit in the long run anyway. That last point is what turns description into evaluation.

Corporate social responsibility. The firm takes responsibility for its effect on people and the environment beyond what the law requires: paying suppliers above the going rate, cutting waste, funding something local. Our fictional coffee chain Demlik pays its growers a guaranteed floor price and prints it on the cup. Costs rise now. Against that: customers who care may pay more and stay longer, good staff are easier to keep, and regulation that is coming anyway is cheaper to meet early. The sharpest criticism is that the label is easy to claim and hard to check, so a firm can buy the reputation without the substance.

Market share. The firm chases a bigger slice of the market's sales, using low introductory prices and heavy advertising, and accepts thin or negative profit while it does. A larger share brings the ability to raise prices later and spreads fixed costs over more units. Against that: a price war can outlast the firm's cash, and a share won by discounting can be lost the moment the discount stops.

Satisficing. The firm aims at an outcome that is good enough for everyone with a stake in it, rather than the best possible on any single measure: enough profit to keep owners quiet, pay that keeps staff, prices that keep customers. It is the direct application of bounded rationality to a boardroom, and it follows naturally from the first two reasons in section 8. Against it: "good enough" has no clear level, which makes it weak as a prediction, and a satisficing firm in a competitive market may be picked off by one that is not satisficing.

Growth. The firm aims to get bigger: more outlets, more output, more assets, whether or not the return per unit improves. Managers gain status, pay and security from size, and a bigger firm has more weight with suppliers and lenders. Against it: growth can be bought with debt that a downturn makes unpayable, and expansion into something the firm does not understand destroys the profit it already had.

The judgement an examiner is looking for is not "firms do not maximise profit". It is closer to this: profit maximisation is a good prediction over the long run and in competitive markets where survival depends on it, and a poor one in the short run, in large firms where ownership and control are separated, and wherever reputation is worth more than this year's margin.