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A Level Economics > 4.1.2 Individual Economic Decision Making > Flashcards

4.1.2 Individual Economic Decision Making Flashcards

1
Q

What is individual economic decision-making influenced by

A

Rationality, incentives and marginal utility

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2
Q

Marginal utility

A

The additional benefit a consumer gains from consuming one more unit of output

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3
Q

Economic agents

A

Producers, consumers, workers, governments, special interest groups

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4
Q

Rational

A

that economic agents are able to consider the outcome of their choices and recognise the net benefits of each one

Rational agents are incentivised to select the choice which presents the highest benefits

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5
Q

How do consumers act rationally

A

By maximising their utility (the satisfaction gained from a good/service)

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6
Q

How are producers assumed to act rationally

A

By selling goods and services in a way that maximises their profits

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7
Q

How are workers assumed to act rationally

A

by balancing welfare at work with consideration of both pay and benefits

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8
Q

How are government assumed to act rationally

A

placing the interests of the people they serve first in order to maximise their welfare

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9
Q

How is the assumption of rational decision making flawed

A

consumers are often more influenced by emotional purchasing decisions than a rational computation of net benefits

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10
Q

An example of how utility gained from consuming the first unit is usually higher than the utility gained from consuming the next uni

A

a hungry consumer gains high utility from eating their first hamburger. They are still hungry and purchase a second hamburger but gain less satisfaction from eating it than they did from the first hamburger

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11
Q

Total utility

A

the marginal utility of each unit consumed is added together
This means that total utility keeps increasing even while marginal utility is decreasing

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12
Q

Law of diminishing marginal utility

A

states that as additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit

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13
Q

How does law of diminishing marginal utility explain why the demand curve is downward sloping

A

When the first unit is purchased, the utility is high and consumers are willing to pay a high price
When subsequent units are purchased, each one offers less utility and the willingness of the consumer to pay the initial price decreases
Lowering the price makes it a more attractive proposition for the consumer to keep consuming additional units
This is one reason why firms offer discounts such as ‘50% off the second item’

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14
Q

How can a consumer achieve utility maximisation

A

when they spend their limited income in such a way that they will achieve the most satisfaction from their money

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15
Q

Influence of marginal analysis on choices

A

When deciding at the margin, they weigh whether to consume a little more or a little less of something
This involves considering the additional happiness or utility gained from each extra unit (marginal benefit) and the extra money spent (marginal cost)

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16
Q

What does every choice involve

A

Every choice involves a balance between benefits and costs, taking into account each additional unit consumed

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17
Q

Assumption of free market

A

that there is a perfect flow of information
This would include information on pricing, the availability of substitutes, the truthfulness of the product claims, etc

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18
Q

What do information gaps result in

A

Market failure

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19
Q

Market failure

A

When the price mechanism leads to an inefficient allocation of resources and a dead loss of economic welfare

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20
Q

4 parts of price mechanism

A

Rationing
Signalling
Allocate
Incentive

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21
Q

Symmetric information

A

Perfect information in the market means that buyers and sellers have exactly the same level of information about the good or service

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22
Q

Asymmetric information

A

In many markets, buyers and sellers have different levels of information

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23
Q

Example of asymmetric information

A

there is asymmetric information in the used car market: sellers know more about the vehicle than the buyers

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24
Q

What does asymmetric information do

A

distorts socially optimal prices and quantities in markets, resulting in over or under-provision of goods or services

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25
What do behavioural economists argue
It argues that many economic decisions made by an individual are biased
26
What does behavioural economics combine
elements of psychology and economics to understand how people make decisions and behave in economic contexts
27
Cognitive bias
Systematic errors in thinking that can affect decision-making. Examples include confirmation bias, loss aversion and anchoring bias
28
Anchoring
Contributes to how customers perceive the value of an item and how they compare to the alternatives
29
Loss aversion
phenomenon where a real or potential loss is perceived by individuals as psychologically or emotionally more severe than an equivalent gain
30
Bounded rationality theory
people make decisions without gathering all the necessary information to make a rational decision within a given time period
31
Why does bounded rationality theory assume rational decision-making is limited
An individual's thinking capacity Availability of information Lack of time available to gather all of the information and make a judgement
32
What can cause people to make irrational decisions
Too much choice E.g. When making choices about purchasing particular products in the supermarket, there may be too much choice, making it difficult to make a decision
33
Bounded self-control
suggests that individuals have a limited capacity to regulate their behaviour and make decisions in the face of conflicting desires or impulses It recognises that self-control is not an unlimited resource that can be exercised endlessly without consequences
34
Why do human often result conforming to social norms
Humans are social beings influenced by family, friends, and social settings
35
What does bounded self-control lead to
decision-making based on emotions, which may not yield the best outcome
36
Example of how businesses use marketing to capitalise on the lack of bounded self-control of individuals
Supermarkets place a range of items at the checkout register to encourage impulse purchases
37
Examples of bias
Common sense, intuition, emotions and personal and social norms
38
Rule of thumb
This is when individuals make choices based on their default choice based on experience
39
Anchoring bias
Anchoring bias occurs when individuals rely too heavily on an initial piece of information (the "anchor") when making subsequent judgements or decisions
40
Example of rule of thumb
Individuals may also order the same pizza anytime they order from Pizza Hut, However, the best choice may be to buy the new tasty option, which is available at 50% discount
41
Example of anchoring
When buying a used car, the seller may initially suggest a price of $10,000. Even if you know the market value is lower, the anchor of $10,000 might still influence your perception and as a result, the consumer ends up paying a higher price than intended
42
Framing
how the presentation or wording of information can significantly influence people's choices or judgements The same information can be framed in different ways, leading to different outcomes
43
Example of framing
E.g Consumers are more likely to purchase a product that states ‘80% fat free’ than ‘20% fat’
44
Availability bias
Occurs when people rely on immediate examples or information that comes to mind easily when making judgments or decisions
45
What does availability bias lad to
It leads individuals to overestimate the likelihood or importance of events or situations based on how readily available they are in their memory
46
What is availability bias influenced by
personal experiences, vividness of the information, media exposure, and emotional impact
47
Example of availability bias
People use alternative modes of transport when there is a plane crash, even though the probability of a crash happening is very low
48
Social norms
These are the informal rules that govern behaviour in groups and societies
49
Example of social norms
Consumers buy expensive goods to display wealth or social status rather than for practical reasons The perception is that owning luxury goods equates to success and status
50
Altruism
The idea that behaviour benefits a group at the expense of the person performing it
51
What can altruistic decision-making be influenced by
The pressure to conform to social norms E.g Following ethical and conscious shopping trends may nudge consumers towards sustainable options
52
Choice architecture
the intentional design of how choices are presented so as to to influence decision making
53
Example of choice architecture
Supermarkets place more profitable products at eye level on the shelves
54
Perception of fairness
what individuals and societies deem to be right or wrong Individuals may be more concerned with more equitable outcomes for society than their own self-interest
55
What does choice architecture aim to do
simplify the decision making process E.g. Restaurants present information about food options in a particular format to encourage individuals to make a particular choice - often bundling items together
56
Types of choice architecture
Default, restricted and mandated choice
57
Default choice
Occurs when an individual is automatically signed up to a particular choice This reduces choice as it means a decision is already made even if no action has been taken
58
Example of default choice architecture
Occurs when an individual is automatically signed up to a particular choice This reduces choice as it means a decision is already made even if no action has been taken
59
Restricted choice
It occurs when the choices available to individuals are limited, which helps individuals make more rational decisions
60
Example of restricted choice
In a canteen, if unhealthy food options like sugary drinks are removed and replaced with healthier choices like water, consumers will be more likely to purchase them
61
Mandated choices
require individuals to make a specific decision or take a particular action by imposing a requirement or obligation
62
Example of mandated choice
Some countries mandate car insurance, which requires all vehicle owners to make an active decision to choose and purchase car insurance rather than leaving it as an optional choice
63
Advantages of choice architecture
Influences behaviour, simplifies decision making, improved outcomes, enhance decision quality
64
Disadvantages of choice architecture
Manipulation, ethical concerns, potential for bias, unintended consequences
65
Nudge theory
the practice of influencing choices that economic agents make, using small prompts to influence their behaviour
66
What are consumer nudges designed to do
guide people towards certain decisions or actions while still allowing them to have freedom of choice
67
Advantages of budge theory
Cost effective, preserves freedom of choice, improved public health, better decision making, improved sustainability
68
Disadvantages
Ethical concerns, lack transparency, unintended consequences, variable success rates
69
Nudge theory being cost effective
Relatively low-cost compared to other marketing measures
70
How does nudge theory include freedom of choice
Steers individuals towards certain choices while still allowing them to retain their freedom of choice
71
How does nudge theory improve public health
Nudges can be used effectively to encourage healthier behaviours such as exercising, eating nutritious food, or quitting smoking
72
How does nudge theory improve better decision making
Helps individuals make better decisions by simplifying complex information, providing reminders, or structuring choices
73
How does nudge theory improve environmental sustainability
By influencing individual choices in a subtle way, firms/governments can contribute to broader environmental goals without imposing strict regulations
74
How does nudge theory raises ethical concerns
Some critics argue that nudges can be manipulative, as they rely on influencing behaviour without individuals being fully aware of the intervention This raises ethical concerns about autonomy, consent, and the potential for abuse by governments
75
How does nudge theory lead to a lack of transparency
Nudges often operate behind the scenes, making it difficult for individuals to understand or question the influences shaping their choices
76
How does nudge theory lead to unintended consequences
As citizens become used to firms and government's use of nudges, they may well begin looking for it and actively work against them
77
How does nudge theory have variable success rates
Nudges may not be equally effective for all individuals due to differences in cognitive biases, cultural backgrounds, or personal circumstances
78
Examples of uk gov using nudge theory
Workplace pension schemes Health checks Labels on food packaging

A Level Economics (3 decks)

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