4.1.2 Individual Economic Decison Making (including KW) Flashcards
What is the utility theory for consumers and firms?
Consumer aim to maximize their utility
Firms aim to maximise their profit
What is a consumer’s utility?
The total satisfaction received from consuming a good or service
What is marginal utility?
The extra satisfaction derives from consuming one extra unit of the good
Why is the demand curve downward sloping?
Because of the law of diminishing marginal utility
caused by an extra unit generating less utility than one already consumed
Which makes consumers want to pay less
What is utility maximization for firms and consumers?
When consumers aim to generate the greatest utility possible for an economic decision
When firms aim to generate the highest profits possible
Why is utility maximization not applicable for all firms?
Some firms may have philanthropic owners who seek to maximize the utility of others
What happens when incentives are not given properly?
Resources are misallocated
What do prices do?
Provide signals for buyers and sellers
Which is an incentive to purchase or sell the good
What does symmetric information mean?
It means that’s consumers and producers have perfect market information to make their decisions
Which leads to an efficient allocation of resources
What could imperfect information cause?
- consumers might pay too much or too little
- firms might ptoidce the incorrect amount
What does asymmetric information mean?
- There is unequal knowledge between the consumers and the producers
- which leads to market failure
How could information be made more widely available?
Through advertising
Through government intervention
What does bounded rationality and bounded self control mean?
Individuals are rational decision makers who endeavor to maximize their utility
What biases do consumers face when making decisions?
- anchoring - relying on the first piece of information they are given
- availability - basing decisions on events that were recent and memorable which cause overestimations due to emotions
- social norms
What is altruism?
The cat of being selfless and considerate towards other people
What is choice architecture?
The way choices are represented to consumers
What is choice framing?
The way by which consumers are influenced by the context of how a choice is presented
What do nudges do?
Aim to change the behavior of consumers without taking away their freedom of choice
What is a default choice?
When a consumer is automatically enrolled in a system
Eg. pension schem
What is a mandated choice?
When consumers are requires or state wether they wish to participate in an action
Eg. organ donation
What is a restricted choice?
When the consumer is offered some alternatives rather than a wide range
What is homo economicus?
A hypothetical person who behaves in exact accordance with their rational self-interest
What is risk aversion?
When individuals value losses more than commensurate gains
What are heuristics ?
Rules of thumb
