Decision Making In Economics (L7)

Question 1

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

Answer 1

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

Question 2

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

Answer 2

Inductive

Question 3

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

Answer 3

Rational

Question 4

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

Answer 4

Maximises utility

Question 5

Utility

Answer 5

Satisfaction or benefit derived from consuming a good

Question 6

How do firms maximise profit and increase utility?

Answer 6

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

Question 7

What do economic agents require to make rational decisions?

Answer 7

Time
Information
The ability to process information

Question 8

Behavioural economics

Answer 8

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

Question 9

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

Answer 9

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

Question 10

Aspects that prevent rational decision making

Answer 10

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