1.2.1 Rational decision making

Question 1

Behavioural economics

Answer 1

research that considers psychology and human decision making in order to better understand decision-
making by investors, consumers and other economic patricipants

Question 2

Incentives

Answer 2

For competitive markets to work efficiently economic agents must respond to price signals in the market

Question 3

Income

Answer 3

Represents a flaw of earnings from using factors of production to generate an output of goods and services

Question 4

Invisible hand

Answer 4

Adam Smith described how the invisible hand of the market operated in a competitive market through the pursuit of self interest to allocate resources in society’s best interest

Question 5

Market incentives

Answer 5

signals that motivate economic actors to change their behaviour perhaps in the direction of greater economic efficiency

Question 6

Profit maximisation

Answer 6

The assumption that produces wish to produce an output that will create maximum profit levels

Question 7

Rational choice

Answer 7

Involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs

Question 8

Utility

Answer 8

A measure of the satisfaction that we get from purchasing and consuming a good or service

Question 9

Utility maximisation

Answer 9

The assumption that consumers behave rationally in allocating their limited budget between different products so as to maximise to satisfaction from their purchases