chapter 2 micro: individual economic decision making Flashcards
what is rational economic behaviour
when people act and make decisions based on self-interest or to maximise their own benefit
what is utility
satisfaction or economic welfare an individual gains from consuming goods
what is marginal utility
the additional pleasure obtained from consuming one more unit of the good
what is the law of diminishing marginal utility
the marginal utility derived from a good or service diminished for each additional unit consumed
what are the four constraints to maximisation of utility
limited income-people can’t afford all goods
given set prices- can’t change or influence the market
budget constraint- opportunity costs
limited time- it’s impossible to consume more than one good at a time
why is imperfect information bad for consumers
when consumers posess imperfect information they can make ‘wrong’ decisions
what is asymmetric information
when one party (the buyer or the seller) knows less than the other party
what is bounded rationality
when making decisions, an individual’s rationality is limited by the information they have, the limitations on their mind and the time that is available
what is bounded self-control
where individuals have limited self control to act rationally and in their own interest
what are rules of thumb and when are they used
they are shorcuts used by humans to help them make sensible decisions
what are the two types of rules of thumb + explain
the availability bias:
- occurs when individuals place too much weight on the probability of one event happening because they recall similar events
- this often leads to decisions that aren’t based on logical reasoning
anchoring
- when people are made to compare and contrast a limited set of items
what are some biases based on social norms
negative social norms
- young adults may see people do things and think they should
positive social norms
- include the views towards smoking
- can be from economic sanctions like laws banning smoking changed
- restrictions that restrict an individual’s freedom to behave a certain way
nudges
- factors that encourage people to think and act in certain ways-that are in line with social norms
what is altruism
when we act to promote someone else’s wellbring even though we may suffer as a consequence
where does altruistic behaviour come from
it results from people’s perception of fairness
what is choice architecture
describes how government policy-makers can guide people into making better choices
how does the government use choice architecture
they use behavioural insights to design choice architectures so citizens are nudged to opt for choices deemed to be in their best interest
what is default choice
when one option is automatically selected, unless another alternative is specified
eg of default choice
opting out of organ donations
advantage and good eg of default choice
can improve social welfare by designing programmed that are considered in an individual’s best interest
eg : automatic pension enrollment
what is framing
the tendency for people to be influenced by the context in which the choice is presented
what are mandated choices
when people are by law required to make a decision
what is restricted choice + why is it used
offering people a limited number of choices because too many leads to poor decisions as they can’t be bothered to evaluate all
describe nudges and shoves + explain why they are different
- a nudge tries to alter people’s behaviour in a predictable way without forbidding opiniions, such as opt out schemes rather than opt in schemes
- shoves instruct people to behave in certain ways by responding to financial incentives, including taxation to punish or disincentivise
