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Micro year 2 > Individual Economic decision making > Flashcards

Individual Economic decision making Flashcards

1
Q

What is traditional behaviour?

A

assumes households/ consumers always act rationally

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2
Q

What is rational behaviour?

A

people try to make decisions in their self interest or to maximise their private benefit

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3
Q

What does a change in the price of any good and a change in the non- price factors alter?

A

the economic incentives facing a consumer

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4
Q

What is utility?

A

defined as the pleasure or satisfaction obtained from consumption

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5
Q

What is total utility?

A

total satisfaction from a given level of consumption

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6
Q

What is marginal utility?

A

to the change in satisfaction from consuming one extra unit

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7
Q

What is the hypothesis of diminishing marginal utility?

A

as a person increases consumption of a good, there is a decline in the marginal utility derived from consuming each additional unit

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8
Q

What is marginal utility curve showing?

A

relationship between quantity and marginal utility

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9
Q

What does a fall in marginal utility mean?

A

that a consumer is getting less extra satisfaction from each subsequent unit consumed

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10
Q

What relationship does a conventional demand curve for a normal good have with price charged and quantity demanded?q

A

inverse relationship

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11
Q

What is the marginal consumer surplus?

A

the excess of a persons total utility from the consumption of a good over the price paid

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12
Q

MCS formula?

A

MCS = MU / P

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13
Q

What is consumer surplus?

A

the excess of what a consumer would have been prepared to pay compared to what they actually pay

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14
Q

What does orthodox economic theory suggest?

A

economic agents decide their market plans to maximise a target objective or goal which is consistent with the pursuit of self interest

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15
Q

What does demand theory suggest about utility maximisation?

A

households are assumed to maximise the utility from the consumption of goods and services

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16
Q

How does a consumer maximise utility?

A

obtaining all the goods which yield utility up to the point of satisfaction

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17
Q

WHen does satisfaction occur?

A

when no more utility can be gained from consuming extra units of a good

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18
Q

What constraints do consumers face due to scarcity?

A
  • limited income (cant purchase all the goods and sevices they could possibly yeild)
  • a given set of prices ( consumers cant influence market prices)
  • budget constraints
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19
Q

How do you maximise utility when consuming one product?

A
  • marginal utility should be equal to price when total utility is maximised
  • marginal private benefit equals marginal private costs occured
  • MU = P
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20
Q

How do you maximise utility across different products?

A
  • consumer equalises the marginal utility per pound spent

- Value for money : marginal utility / price

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21
Q

What is perfect information?

A

consumers possess perfect information about the goods that are availbale to buy

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22
Q

What is imperfect information?

A

when people have inaccurate, incomplete, uncertain or misunderstood data

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23
Q

WHat are some causes of imperfect information?

A
  • asymmetric information: buyer or seller has info the other doesnt
  • misunderstanding the true costs and benefits
  • complexity
  • lack of information
  • addiction
24
Q

Give examples of information failure?

A
  • risk from tanning bed
  • addiction to drugs
  • knowledge of nutritional content
  • uncertain quality of seconf hand products
25
Q

Give examples of asymetric information?

A
  • landlords who know more then tennants
  • mortgages
  • car insurance companies
  • doctors with drugs and medicine
  • insider info on financial markets
26
Q

What is a moral hazard?

A
  • occurs when the party with superior information alters behaviour to benefit themselves while imposing cost on those with inferior information
27
Q

Example of moral hazard?

A
  • insured consumer likely to take more risks knowing their claim will be paid
28
Q

What is behavioural economics?

A

method of economic analysis that applies psychological insights into human behaviour to explain individuals choices and decisions

29
Q

What is traditional economics?

A
  • creates theory and uses it to explain actual behaviour
30
Q

what are the characterisistics of the standard economic theory?

A
  • everyone is consistantly rational
  • self- interested
  • utility maximisers
  • takes optimal route to achieve goals
31
Q

What are the characteristics of behavioural economics>

A
  • subject to biases
  • subject to irrationalities
  • use heuristics (short cuts) to make decisons
  • inconsistent
  • emotional
32
Q

What does altruistic mean/

A

selfless

33
Q

What three constraints to people face when making deciisons?

A
  • imperfect info
  • limited mental processing
  • time constraint
34
Q

What is bounded rationality?

A

when making decisions an individuals rationality is limited by the information they have, limit of their mind and their finite amount of time

35
Q

What is bounded self control/

A

limited self control where individuals lack the self-control to act with self interest

36
Q

What two ways dp humans think?

A
    • system 1 (thinking fast)

- system 2 (thinking slow)

37
Q

Explain system 1?

A
  • intuitive and instinctive
  • decisions made quickly, without analysis
  • uses heuristics
  • less subject to biases and errors
38
Q

Explain system 2?

A
  • reflective thinking
  • concentration and mental effort required to work through problem
  • bigger more important decisions
39
Q

What is heuristics?

A

mental shortcut that allows people to solve problems and make judgments quickly and efficiently

40
Q

What are the types of heuristic?

A
  • availability heuristic
  • representativeness heuristic
  • affect heuristic
41
Q

Explain availability heuristic?

A
  • making decisions based on how easy it is to bring somehting to mind
42
Q

Explain representativeness heuristic?

A

making a decision by comparing the present situation to the most representative mental prototype.

  • comparing to examples you may hold
43
Q

What is the effect heuristic?

A

making choices that are influenced by emotions you are currently experiencing

44
Q

What is cognitive bias?

A

a mental error which occurs as a result of using rules of thumb or holding onto ones preferances or beliefs

45
Q

What is the rule of thumb?

A

rough and practical method that can be easily applied when making decisions

46
Q

What is the purpose of rule of thumb?

A

to encourage us to consider factors we otherwise would not

47
Q

What is a downside of the rule of thumb?

A

doesnt take into account differances in individual circumstances

48
Q

What is anchoring?

A

a cognitive bias describing when making decisions to rely too heaving on the first piece of information offered

49
Q

What is availability bias?

A

when individuals place too mach weight on the probability of an event happening because they can recall vivid examples of similar events

50
Q

What are social norms>

A

patterns of behaviour considered acceptable by society or group within that society

51
Q

What is altruism ?

A

when we act to promote someone elses wellbeing, even though we may suffer as a consequence

52
Q

What is the fairness motive?

A

some individuals have an aversion to inequality and are concerned about the wider distribution of income in a group or society

53
Q

What is the reciprocity motive?

A

view suggests that individuals are often likely to take others into account in the expectation that their consideration will be reciprocated

54
Q

What is the altruism motive?

A

view suggests that individuals may put others first and before themselves so that their actions benefit others more than themselves

55
Q

What are some criticisms of behavioural economics?

A
  • peoples observed behaviour in the labatory is not realistic
  • self selecting nature of volunteers
  • many experiments are rough and ready
56
Q

Many exp

A

Micro year 2 (10 decks)

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