D: Individual Economic Decision Making Flashcards
What does traditional, neoclassical economic theory assume about consumers?
It assumes consumers always act rationally, seeking to maximise satisfaction for every pound spent on each product they buy
What does traditional neoclassical economic theory assume about firms?
It assumes that firms aim to maximise profits
What is utility?
Utility is the amount of satisfaction gained from purchasing and consuming a product
What is marginal utility?
The satisfaction gained from consuming an ADDITIONAL unit of a good or service
What does the hypothesis of diminishing marginal utility suppose?
As individuals consume more units of a good or service, they additional units give successively smaller increases in total satisfaction.
What is the root cause of imperfect information in the market for elite degree courses?
There is imperfect information about gaining entry to elite degree causes, possibly caused by:
- complex or unfamiliar information
- lack of awareness
What is the root cause of imperfect information in the market for tanning salons?
There is imperfect info about the risks in the market for tanning salons, possibly because of:
- misunderstanding the true costs/benefits
- inaccurate or misleading information
What is the root cause of imperfect information in the market for pension schemes?
There is imperfect info in the market for pension schemes because:
- complex or unfamiliar info
- misunderstanding the true costs/benefits
What is asymmetric information?
Asymmetric information is when there is an imbalance in information between buyer and seller which can distort choices.
Why is asymmetric information a problem in markets?
One party (the one with more information) can exploit another, resulting in market failure. Uncertainty also leads to a lack of trust between agents, which may mean that a mutually beneficial exchange does not occur
Explain the idea of ‘moral hazard’ and provide an example
Moral hazard occurs when insured consumers are likely to take greater risks, knowing that a certain claim will be paid for by their cover. The consumer knows more about his/her intended actions that the producer (insurer).
A good example would be the impact of the bail out of the baking system after the 2007 crash, in which banks knew they could continue to take risks.
Explain the idea of ‘adverse selection’ in the context of the market for health insurance
The adverse selection problem is sene in health insurance. Those most likely to purchase health insurance are those who are most likely to use it, i.e. smokers/drinkers/those with chronic health conditions. The health insurance company knows this and so raises the average price of insurance cover. This may price some healthy low-risk consumers out of the market, meaning that mainly higher risk individuals gain insurance - this causes a market failure.
What are the parameters used to describe bounded rationality?
Bounded rationality is the idea that people may try to behave rationally, but their ability to do so is severely restricted for three main reasons:
- the human mind has limited processing ability
- the available information is incomplete and often unreliable (and rapidly out of date)
- the time available to make decisions is limited
What is anchoring?
Anchoring is the tendency of individuals to rely on particular pieces of information, especially in situations where they lack knowledge or experience.
What is availability bias?
Availability bias occurs when people make judgements about the probability of events by recalling instances.
