Behavioural economics Flashcards
What s individual economic decision making influenced by
- Rationality
- Incentives
- Marginal utility
What is rationality
Economic agents are able to consider the outcomes of their choice and recognise the benefits and costs rather than act on emotion
Rational agents are incentivised to select the the choice with the highest benefits
How do consumers act rationally
by maximising their utility
How do producers act rationally
by selling goods and services in a way that maximises their profits
What do traditional economists believe
Consumers are always rational and aims to maximise their utility
Utility theory
The satisfaction gained from consumption
Marginal utility
The additional satisfaction gained from the consumption of an additional unit
Total utility
The total utility from consuming all units
Eg: the total satisfaction someone gains from all the ice cream they’ve eaten so far
As more units are consumed the marginal utltity decreases, the total utility increases
explain the utility theory
The utility gained from consuming the first unit is usually higher than the utility gained from consuming he next unit
EG: a hungry consumer gains high utility from eating the first burger, they are still hungry and buy another one but gain less satisfaction from eating it than they did from the first hamburger
The Law of Diminishing Marginal Utility
As additional products are consumed, the marginal utility you get from the additional unit will increase
When does a consumer achieve utility maximisation
when they spend their limited income in such a way that they will achieve the most satisfaction from their money
How do consumers decide at the margin
This involves considering the additional happiness or utility gained from each extra (marginal benefit) and the extra money spent (marginal cost)
Importance of thinking at the margin
It guides decisions on how to allocate scarce resources by evaluating the marginal benefit and marginal cost of the additional unit.
By comparing the best decisions to their cost, the aim is to achieve optimal choices.
It allows consumer to keep thinking ahead and how to maximise their utility i the future
What do behavioural economists believe
That consumers aren’t always rational and don’t always look to maximise their utility
It might be bounded
Symmetric information
producers have perfect market information to make their decisions. The efficient allocation of resources
What is bounded rationality
Consumers make decisions based on the knowledge they have
What is bounded self control
Assumes consumers are able to exercise self control…humans will follow heuristics
Examples of biases in decision making
- Rule of thumb
- Anchoring
- Availability
- Social norms
What is the rational and selfish consumer called
- Homo economicus, a utility maximiser and makes rational decisions
What are heuristics
A rule of thumb
Short cuts to avoid taking too long to make a decision, they avoid having imperfect information or limited time.
- satisficing decision
What is anchoring
A bias created by human tendency to rely on first piece of information they are given.
So consumers are biased towards it when subsequent info is given.
