4.1.2

Question 1

Rational Economic decision making

Answer 1

Neoclassic economic theory assumes that customers always act rationally, seeking to maximise their satisfaction for every pound which they spend.

Question 2

Utility

Answer 2

utility is the amount of satisfaction or benefits that a consumer gains from consuming a good or a service.

Question 3

Rational Consumption

Answer 3

An assumption of traditional economic theory that consumers act in such a way that they maximise their utility when they spend money and will compare value of utility to the perceived ‘money’ value of the utility.

Question 4

Marginal Utility

Answer 4

the satisfaction gained from consuming an additional unit of a good or a service.

Question 5

Diminishing marginal utility

Answer 5

As individuals consume more until of a good or service the additional until five successively smaller increases of total satisfaction.

Question 6

Imperfect infomation

Answer 6

When economic agents no not know everything they need to know in order to make a fully informed decision. This is a potential source of market failure.

Question 7

Asymmetric information

Answer 7

The form of imperfect information where one Econ agent knows more than another giving them more control and power in the market.

Question 8

Examples of asymmetric information

Answer 8

• A loan applicant will know more about their creditworthiness than the lender
• A used car salesperson will know more about the quality of the car than the buyer

Question 9

Bounded rationality

Answer 9

Idea that people attempt to behave rationally but fail in this attempt.

Question 10

Aspects of behavioural economic theory

Answer 10

Behavioural economic theory recognises the social, moral, and psychological factors that determine the behaviour of economic agents.

Question 11

Factors leading to bounded rationality

Answer 11

• The human mind has limited ability to process and evaluate info
• The available info is incomplete and often unreliable and out of date
• The time available to make the decision is limited

Question 12

Bounded self control

Answer 12

When individuals have rational intentions but lack the self discipline to carry them through

IE- people failing to give up smoking

Question 13

What is a predictably irrational consumer

Answer 13

A consumer which through bounded rationality and bounded self control are predictably irrational and will always have a preconditioned bias in decision making

Question 13

Heuristics or Rules of Thumb

Answer 13

Thinking shortcuts and informed guesses. Made to save time and effort. Make make same coffee order as one before.

Question 14

Anchoring

Answer 14

This is the tendency of individuals to rely on particular pieces of knowledge or experience. Consumers could also only evaluate partially pieces of information.

Question 15

Availability bias

Answer 15

When people make judgements about the probability of events by recalling recent instances.

Question 16

Social Norms

Answer 16

The concept recognises that the influence of others on decision making. Social norms like strongly into economic policy and social norms can be used to increase charity donations IE British Royal legion.

Question 17

Altruism and fairness

Answer 17

This is where individuals are encouraged to do the right thing even if this means paying more for the good or service. This is seen as irrational in neoclassic economic theory.

A genuine increase in satisfaction could be caused via the positive impact of giving.

Question 18

Choice architecture

Answer 18

How choices may be made to influence consumer behaviour by altering how choices are presented.

Question 19

Framing

Answer 19

A form of choice architecture that influences choices by way numbers and words are used.

Question 20

Nudges

Answer 20

another form of choice architecture that aims to influence consumer behaviour via the use of gentle suggestions and positive reinforcement . 5 a day. This takes away no liberty of the consumer. More cost effective rather than laws or bans.

Question 21

Default choice

Answer 21

An additional form of choices which set socially desirable choices as the desirable option. In each case default choice has led to higher uptake of opt out rather than opt in schemes like organ donation.

Question 22

Restricted choice

Answer 22

Is another way of influencing peoples choices and recognising that too much choice can paralyse individuals making an effective choice with savings or pensions.

Question 23

Average Utility EQ

Answer 23

Total Utility // Quantity