2. Individual economic decision making - micro

Question 1

Rational behaviour

Answer 1

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.

Question 2

Utility

Answer 2

The satisfaction or economic welfare an individual gains from consuming a good or service

Question 3

Marginal utility

Answer 3

The additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good or service.

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

Adam Smiths water and diamond paradox

Answer 5

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.

Question 6

Asymmetric information

Answer 6

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

Question 7

Behavioural economics

Answer 7

A method of economic analysis that applies to the psychological insights into human behaviour and how individuals make choices and decisions.

Question 8

Bounded rationality

Answer 8

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.

Question 9

Bounded self-control

Answer 9

Limited self-control in which individuals lack the self-control to act in what they see as their self-interest.

Question 10

Thinking fast

Answer 10

Automatic thinking: decisions are made quickly and little effort is used to analyse the situation.

Question 11

Thinking slow

Answer 11

Reflective thinking: concentration and mental effort are required to to work through a problem befriend a decision is made.

Question 12

Cognitive bias

Answer 12

Is a systematic error in thinking that affects the decisions and judgements that people make

Question 13

Availability bias

Answer 13

Occurs when individuals make judgements about the likelihood of future events according to how easy it is to recall examples of similar events.

Question 14

Anchoring

Answer 14

Cognitive bias describing human tendency when making decisions to rely to heavily on the first piece of information offered.

Question 15

Social norms

Answer 15

Forms or patterns of behaviour considered acceptable by a society or group within a society.

Question 16

Nudges

Answer 16

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.

Question 17

Altruism

Answer 17

Concern for the welfare of others

Question 18

Fairness

Answer 18

The quality of being impartial, just or free of favouritism

Question 19

Choice architecture

Answer 19

A framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making.

Question 20

Default choices

Answer 20

An option that is selected automatically unless an alternative is specified

Question 21

Framing

Answer 21

How something is presented influences the choices people make

Question 22

Mandated choices

Answer 22

People who are required, often by law, to make a decision.

Question 23

Restricted choice

Answer 23

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.

Question 24

Nudge vs shove

Answer 24

Nudge policies seek to lead individuals into decisions whereas shove policies instruct using the power of the law