4.1.2 consumer behaviour Flashcards
marginal utility
extra satisfaction derived from consuming one extra unit of the
good.
total utility
the total satisfaction received from consuming a good or
service.
utility maximisation
when consumers aim to generate the greatest utility
possible from an economic decision. Firms aim to generate the highest profits
possible.
It is assumed that economic agents only act in their own interests.
Some firms might have philanthropic owners who seek to maximise the utility of
others.
rational decision making model
identify problem
find and identify decision criteria
weigh criteria
generate alternatives
evaluate alternatives
choose best alternative
carry out best decision
evaluate decision
symmetric information
consumers and producers have perfect market
information to make their decision. This leads to an efficient allocation of resources.
imperfect information
where information is missing, so an
informed decision cannot be made.
This leads to a misallocation of resources. Consumers might pay too much or too
little, and firms might produce the incorrect amount
assymetric information
This is when there is unequal
knowledge between consumers and producers.
Information could be made more widely available through advertising or
government intervention. For example, the harmful effects of smoking could be
made public through adverts and messages on cigarette boxes.
individuals are…
Individuals are rational decision makers who endeavour to maximise their utility.
homo economicus
The rational consumer is Homo Economicus, who is a utility maximiser and makes
rational decisions.
Consumers do not always act rationally. Acting rationally means making a decision
that results in the most optimal level of utility or benefit for the consumer.
heuristics
Heuristics simplify the decision making process to come to a reasonable decision.
They are shortcuts to avoid taking too long to make the decision, and they avoid the
problem of having imperfect information or limited time.
social norms
Assume there are two restaurants; one is empty whilst the other has a long queue.
Consumers are more likely to queue for their food than go straight into the other
restaurant. The behaviour of other people affects how the consumer acts.
Other people’s behaviour creates a bias within the consumer. This social pressure
encourages consumers to do things they would not otherwise do, or that they know
could be harmful. Consumers become unwilling to change, even if it is of benefit to
them, if it goes against the norms of their society.
anchoring
This is a type of bias created by the human tendency to rely on the first piece of
information they are given.
This first piece of information causes consumers to be biased towards it when
subsequent information is given.
altruism
the act of being selfless and considerate towards other people.
choice architecture
refers to the way choices are presented to consumers. The
different designs affect the choice consumers make. Well-designed choice
architectures can help consumers avoid making irrational decisions and poor
choices. This could improve consumer welfare.
framing
the way by which consumers are influenced by the context of how a
choice is presented. The context is made includes word choices and it affects the
choice consumers make.
nudges
Nudges aim to change the behaviour of consumers without taking away their
freedom of choice.
default choice
a consumer is automatically enrolled into a system, such as
a pension scheme. Consumers are more likely to participate when they areautomatically enrolled. It is the choice the consumer takes if they take no action.
restricted choice
a behavioral economics concept that limits options to encourage specific behaviors
mandated choice
when consumers are required to state whether they wish to
participate in an action. For example, in the UK everyone who applies or renews
their driving licence is asked if they wish to sign up for organ donation.
