Decision Making In Economics (L7) Flashcards

1
Q

Problem: assumptions about the behaviour of economic agents must be made to create economic models. What assumptions should economists make?

A

Solution: assumptions can be made following two approaches deduction (classical, neoclassical school start with hypothesis) or induction (behavioural,Keynesian school collect evidence).

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2
Q

Model on housing market when devising assumptions about house buyers. What type of approach is this?

A

Inductive

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3
Q

Classical and neoclassical economics, decision makers are assumed to be…

A

Rational

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4
Q

For consumers being rational means buying products, what does this do?

A

Maximises utility

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5
Q

Utility

A

Satisfaction or benefit derived from consuming a good

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6
Q

How do firms maximise profit and increase utility?

A

Through producing as efficiently as possible and making things that the consumers both want and afford.

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7
Q

What do economic agents require to make rational decisions?

A

Time
Information
The ability to process information

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8
Q

Behavioural economics

A

School of economic thought based on evidence and observations to develop assumptions of economic decision making. Inductive approach.

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9
Q

Behavioural economics assumes that individuals have bounded rationality. What does this mean?

A

Individuals wish to maximise utility but are unable to do so because of lack of time, information and ability to process information.

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10
Q

Aspects that prevent rational decision making

A

Habitual behaviour/consumer inertia
People are influenced by the behaviour of others
Consumer weakness at computation

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