Chapter 2 Flashcards
What is assumed for households
Act rationally in self interest or to maximise private benefit
Define utility
Satisfaction or economic welfare an individual gains from consuming a good or service
Define marginal utility
Additional welfare gained from consuming an additional unit of a good or service
Explain the law of diminishing returns
Marginal utility from a good or service diminishes for each additional unit consumed
Draw the law of diminishing returns (TU, MU)
…
What is ‘utility maximisation’
Maximising behaviour
Why is having perfect information important
Because allows us to make correct economic choices
Define asymmetric information
When one party to a market transaction possess less information relevant to the exchange than the other
What is behavioural economics
Economical analysis through psychological insight to human behaviour
2 types of ‘bounded’ reasons why people may make incorrect decisions
Bounded rationality: individuals rationality is limited by the information that they have (limitations of their mind)
Bounded self control: limited self control where individuals it to act in their self interest
Difference between thinking fast and thinking slow
Thinking fast: less rational
Thinking slow: more thought through
Biases in decision making (private)
Cognitive bias: systematic error in thinking
Availability bias: Making judgements about likelihood of future events according to how easy it is to recall similar events
Anchoring: Humans relying too heavy on first info given
Biases in decision making (social)
Social norms: what is considered normal in a society or group
Nudges: factors that affect a way of thinking
Define altruism
Concern for welfare of others
Define fairness
Quality of being impartial or free of favouritism
