2. Individual economic decision making - micro Flashcards
Rational behaviour
Acting in pursuit if self-interest, which for a consumer means attempting to maximise the welfare, satisfaction or utility gained from the goods and services consumed.
Utility
The satisfaction or economic welfare an individual gains from consuming a good or service
Marginal utility
The additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good or service.
Hypothesis of diminishing marginal utility
For a single consumer, the marginal utility derived from a good or service diminishes for each additional unit consumed
Adam Smiths water and diamond paradox
Water is not scarce in the world, so people can consume up to point of low level of marginal utility gained. People aren’t willing to pay a lot for water
Diamonds are scarce, so marginal utility of one extra diamond gained is much higher than with water.
BUT
If someone is dying of thirst, marginal utility gained from additional drink is higher than additional satisfaction of owning a diamond: paradox breaks down.
Asymmetric information
When one party to a market transaction possesses less information relevant to the exchange than the other.
Behavioural economics
A method of economic analysis that applies to the psychological insights into human behaviour and how individuals make choices and decisions.
Bounded rationality
When making decisions, individuals rationality is limited by the information they have, the limitations of their minds and the finite amount of time available in which to make decisions.
Bounded self-control
Limited self-control in which individuals lack the self-control to act in what they see as their self-interest.
Thinking fast
Automatic thinking: decisions are made quickly and little effort is used to analyse the situation.
Thinking slow
Reflective thinking: concentration and mental effort are required to to work through a problem befriend a decision is made.
Cognitive bias
Is a systematic error in thinking that affects the decisions and judgements that people make
Availability bias
Occurs when individuals make judgements about the likelihood of future events according to how easy it is to recall examples of similar events.
Anchoring
Cognitive bias describing human tendency when making decisions to rely to heavily on the first piece of information offered.
Social norms
Forms or patterns of behaviour considered acceptable by a society or group within a society.
Nudges
Factors which encourage people to think in a particular way.
Try to shift group and individual behaviour in ways which comply with desirable social norms.
Altruism
Concern for the welfare of others
Fairness
The quality of being impartial, just or free of favouritism
Choice architecture
A framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making.
Default choices
An option that is selected automatically unless an alternative is specified
Framing
How something is presented influences the choices people make
Mandated choices
People who are required, often by law, to make a decision.
Restricted choice
Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation.
If there are too many choices, people may make a poorly thought-out decision or not make any decision.
Nudge vs shove
Nudge policies seek to lead individuals into decisions whereas shove policies instruct using the power of the law
