7 - Decision Making In Economics Flashcards
What assumptions must be made to create economic models?
Assumptions about the behaviour of economic goods
What two approaches can be taken to make assumptions?
Deduction
Induction
What is deduction?
Starting with a hypothesis then making an assumption
What is induction?
Collecting evidence then making an assumption
What is assumed about decision makers in classical and neoclassical economics?
Decision makers are assumed to be rational
This means they buy products that maximise utility
What is utility for consumers?
The satisfaction or benefit derived from consuming a good
What is utility for firms.
Maximising profit by producing as efficiently as possible and making sure that consumers both want and can afford the product
What do economic agents need to make rational decisions?
Time
Information
The ability to process information
What is behavioural economics?
A school of economic thought based on evidence and observations
Inductive approach
What approach do classical and neoclassical economics use (deductive or inductive)?
Deductive
What does behavioural economics assume?
Assumes that individuals have bounded rationality
This is when people wish to maximise utility but can’t due to lack of time, information and ability to process information
What prevents rational decision making in humans?
Habitual Behaviour / Consumer Inertia
Influence of Others
Weakness at computation
