2. Individual Economic Decision Making

Question 1

Rational behaviour

Answer 1

Acting in pursuit of self interest - for a consumer is to maximise satisfaction from goods or services consumed

Question 2

Utility

Answer 2

Satisfaction an individual gains from consumer a good or service

Question 3

Marginal utility

Answer 3

Additional welfare from consuming one extra unit

Question 4

Hypothesis of diminishing marginal utility

Answer 4

For a single consumer, the marginal utility derived from a good or service diminishes for each additional unit consumed

Question 5

Asymmetric information

Answer 5

When one party to a market transaction possesses less relevant information than the other

Question 6

Behavioural economics

Answer 6

A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices

Question 7

Bounded rationality

Answer 7

Individuals rationality is bounded by knowledge, time and limitations of the mind when making decisions

Question 8

Bounded self control

Answer 8

Limited self control in which individuals lack the self control to act in their self interets

Question 9

Cognitive bias

Answer 9

Systematic error that affects peoples decision occurring due to peoples preferences

Question 10

Availability bias

Answer 10

People make decisions about future events according to how easy it is to recall similar examples

Question 11

Anchoring

Answer 11

Cognitive bias that refers to how people rely too heavily on the first piece of information they receive

Question 12

Social norms

Answer 12

Patterns of behaviour considered acceptable in societh

Question 13

Nudges

Answer 13

Factors encouraging people to think and act in a certain way. Shift people’s behaviour to comply with desirable social norms

Question 14

Altruism

Answer 14

Concern for the welfare of others

Question 15

Fairness

Answer 15

Treating people equally

Question 16

Choice architecture

Answer 16

Framework setting out different ways choices can be presented to consumers

Question 17

Default choice

Answer 17

Option that is selected automatically unless an alternative is specified

Question 18

Framing

Answer 18

How something is presented influences the choices people make

Question 19

Mandated choice

Answer 19

People required by law to make a decisin

Question 20

Restricted choice

Answer 20

Offering people a limited number of choices so they aren’t overwhelmed by complexity of the situation