Chapter 2 Utility n behavioural Econ Flashcards
What do economists assume about consumers n utility?
People act rationally in order to best maximise utility.
What does marginal utility mean?
The satisfaction a consumer recieves from consuming one additional unit unit of a service or good.
What does total utility mean?
The complete satisfaction of consumer gets from consuming a specific good or service.
What is the law of diminishing marginal utility?
Utility gained from consuming an additional unit is less than the utility gained from consuming the previous unit.
Herd behaviour
Consumers copy the buying behaviour of others without doing their own research into product.
(E.g buyin n sellin shares)
Social norms
Consumers change their economic behaviour to fit in with the rest of society.
(Peer pressure to drink alcohol)
Present bias (bias towards thee present)
Consumers under-estimating the benefits of consuming a good because the benefit is delayed. (E.g uni, pension)
Sme w delayed costs - (health problems from smoking)
Promotion and sales campaigns
Consumers are swayed by promotion and sale campaigns to buy goods and services they don’t really want. (e.g buy 1 get 1 free)
Yes utility as they have less money is used on goods and service they actually want.
Inertia/habit
When consumers continue to consume a certain good even the better alternatives.
Why consumers may not make most utility maximising decision
1) Sometimes consumers lack information required to make the best decision
2) Products can be too complex (e.g financial products
3) Can seem the same as another product but a slightly different.
4) Time-scarce world so even with the knowledge ppl constrained by time.
Even if consumers had time why might they not make utility maximisng decision?
1) Consumers may lack numeracy skills to choose products that gives them most consumer surplus n choose wrong products = lower welfare.
2) Might lack technical information 2 make judgment (e.g legal n health info) n consume good or service they dnt rlly need.
Even if consumers had time why might they not make utility maximisng decision?
1) Consumers may lack numeracy skills to choose products that gives them most consumer surplus n choose wrong products = lower welfare.
2) Might lack technical information 2 make judgment (e.g legal n health info) n consume good or service they dnt rlly need.
Reasons behavioural economists dispute consumer rationality
1) Gamblers - Dnt quit and repeat actions knowing it’s not the optimal decision.
2) Over-eaters - Consume the same food items even though it no longer gives them consumer enjoyment.
3) Alcoholists - kno consuming constantly will lead to fall in welfare (health,depression ect) but still do.
Altruism
When a person acts in a selfless way that maximises utility of others at their own expense.
Delayed cost/delayed gratification
The benefit or cost of an economic activity is only fully years after consuming.
