1.4 Scarcity, Choice And Allocation Of Resources Flashcards
What is the fundamental economic problem?
How best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare
Scarcity
Results from the fact people have unlimited wants but resources to meet these wants are limited
What is the opportunity cost
The cost of giving up the next best alternative
When does the need for a choice arise?
When an economic agent has to choose between two options that are mutually exclusive
What do economists generally assume?
Everyone always acts rationally
What is being rational?
Making reactions to maximise utility and satisfaction
Describe the psychology behind the opportunity cost?
People will always choose the best option so the opportunity cost is giving up the next best alternative
What are the biases that stop people acting rationally?
-rules of thumb
-anchoring
-availability bias
-social norms
-habitual behaviour
What are rules of thumb?
Picking the middle proved option when faced with different prices for products
What is anchoring?
Placing too much emphasis on one piece of information
Availability bias?
Judgments made about probability
Social norms?
Individual’s behaviour is influenced by social group
Habitually behaviour?
Doing the same thing over and over agin
What does it mean to be rational in economics?
Individuals make decisions to give themselves the greatest utility possible
