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Chapter 4

ECON-2086EL Chapter Notes - Chapter 4: False Advertising, Market Structure, Consumer Sovereignty

Economics / Science Èconomique
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Chapter 4 Is the cosuer soereig?
What is the poer of adertisig?
Copetitie Vie
Consumer Sovereignty
Consumer sovereignty is the idea tat consumers exert ultimate control over the economy. Consumers
preferences determine the composition of goods produced in the economy.
Consumers are seen as rational and will make decisions that benefit them. By doing so, they determine
the amount of goods and services produced and the price.
The Calculation Debate
It is assumed that the government should intervene and be the one who determines what amount of
goods and services are produced in an economy. By doing so, they create an equation that can be
calculated to benefit the masses as a whole. However, this calculation can not be made because the
market forms itself and is ever changing. Therefore, a single equation can not be made to determine the
composition of the economy.
Ignorance is Bliss
Sometimes the consumers behave irrationally and make decisions that make them worse off (such as
smoking). Consumers are ignorant to information and sometimes weigh the costs of obtaining
information with the harm of the consumption. If the government tried to intervene, increase prices of
cigarettes, and increase available knowledge for the consumer, they will ignore this and still consume
Corporate Control and the Need for Government
An argument is made that corporations control the information to the consumer and thus influence
their decisions. It is true that consumers do not always have all the information and some people call for
government intervention by informing the public. However, how can we be informed by the
government if they are not first informed by something else? That being the free-market.
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