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
Define choice architecture
Framework setting out different ways in which choices can be presented to consumers
Define default choice
An option that is selected automatically unless opt out like organ donor card
Define framing
How something is presented to influence people’s choices
Define mandated choice
Choice required by law
Define restricted choose
offering people a limited number of options so they are not overwhelmed by complexity of situation
