1.7 Decision Making In Economics Flashcards
What are the 2 approaches to make an assumption?
Deduction
Induction
What is deduction?
Deduction is when you start with a hypothesis
What is induction?
Induction is when you collect evidence
What is neoclassical economics?
Focuses on supply and demand as the driving forces behind the production, pricing and consumption of goods and service
What are decision makers assumed to be in classical and neoclassical economics ?
Assumed to be rational
What does being rational mean for consumers
Buying products that maximise utility
What is meant by a customers utility?
The satisfaction a customer gains from consuming a good or service
What do firms aim to maximise?
Maximise profits
How do firms maximise profits?
They maximise profits through producing as efficiently as possible and making things that consumers both want and can afford
What do economic agents require to make rational decisions?
-Time
-Information
-The ability to process information
What is behavioural economics
based on evidence and observations to develop assumptions of economic decision making
What does behavioural economics assume
It assumes individuals have bounded rationality
What is bounded rationality?
Individuals wish to maximise utility but are unable to do so due to a lack of:
-Time
-Information
-Ability to process information
Which aspects of human behaviour prevent rational decision making?
- Habitual behaviour - when the consumer is satisfied what what they have are are used to what they have so they don’t change anything
- Consumer weakness at computation - when the consumer doesn’t understand the data or info, preventing them from making a rational decision
