Decision making 1B

Question 1

What are the 5 key considerations the 3 economic agents (Consumers, Producers, Government) when they make decisions?

Answer 1

Constraints
Costs
Benefits
Information
Perspectives

Question 2

What are intended consequences of economic decision?

Answer 2

Assuming rational behaviour & economic conditions unchanged ceteris paribus -> expected outcomes

Question 3

What are the unintended consequences of economic decision?

Answer 3

Happens becuz of 4 reasons
1. Imperfect, limited, unreliable information
2. Limited capacity to evaluate & process info available
3. Limited amount of time
4. High level of uncertainty regarding environment

Question 4

5 steps in decision making

Answer 4

1. Before decision is made:
   - Who is the decision maker?
   - What is the issue & goal?
2. Considerations:
   - Constraints
   - Costs & Benefits
   - Info
   - Benefits
3. Making the decision
   - Weighing costs & benefits
4. Impact of decision
   - Intended & Unintended consequences
5. Review of decision
   - Intended consq. not achieved
   - Adverse unintended consq,
   - Internal & External changes

Question 5

What is the marginalist principle?

Answer 5

To maximise satisfaction, profit, societal welfare until MB = MC
where an increase of 1 additional unit of x = 1 additional cost of x

Question 6

What is the law of diminishing marginal utility?
(Causes demand curve to be downward sloping)

Answer 6

As qty of good consumed increases, per period time,
each EXTRA unit provides less utility, marginal utility decreases
(each subsequent unit of good is valued less than the previous)

Question 7

Whats the rational DM by consumers

Answer 7

Objective: Allocating scarce resources to maximise satisfaction/utility

Conditions: Value private benefits from goods & services, allocate income until MPB=MPC

Question 8

Whats the rational DM by producers

Answer 8

Producers allocate limited resources to maximise profits

MPB from producing last unit of good would be the additional revenue producers from that unit of choc bar