Individual economic decision making Flashcards

1
Q

What assumptions do traditional economists make about individual economic decision making?

A

-People are rational
-People make their decisions based on self interest
-People will change there thoughts and beliefs based on new information

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2
Q

What is rational economic decision making?

A

-They are always trying try to maximise their own self interest
-They are able to assess the economic costs and benefits to themselves of making alternative choices.

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3
Q

What is marginal utility ?

A

The satisfaction or pleasure derived from consuming one more good

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4
Q

What is total utility

A

the total amount of happiness a consumer derives from a good at any particular level of consumption

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5
Q

What is the theory of diminishing marginal utility

A

That the utility gained from consuming one more item decreases the more you consume

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6
Q

Draw diminishing marginal utility on a graph

A
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7
Q

why marginal utility theory helps explain the downward sloping demand curve.

A

the marginal utility of a commodity reduces when the quantity of goods is more

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8
Q

why marginal cost and marginal benefit are important in decision making

A

it identifies the most efficient use of resources

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9
Q

Explain why information is important in decision making e.g. in deciding whether or not to buy a new car.

A

Those who make economic decisions need information to achieve desired goals. Decisions made without adequate information result in the achievement of desired goals only by chance

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10
Q

Why does does imperfect information make it more difficult for consumers to make rational decisions and why would this lead to a market failure

A

lack of appropriate information among the buyers or sellers. This means that the price of demand or supply does not reflect all the benefits or opportunity cost of a good

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11
Q

Explain the concept of asymmetric information and explain why it may lead to market failure

A

Information asymmetry is an imbalance between two negotiating parties in their knowledge of relevant factors and details.
This can lead to a market failure as the good could be overconsumed or under consumed

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12
Q

What is bounded self-control

A

-Bounded self-control refers to behaviour where individuals lack the cognitive ‘strength’ (or willpower) to make a rational decision

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13
Q

What is bounded rationality

A

when emotions and other prejudices influence decision making

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14
Q

Explain why behavioural economists question the assumption of traditional economic theory that individuals are rational decision makers who endeavour to maximise their utility

A

they believe it is too narrow a view of human behaviour.

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15
Q

What is the rule of thumb type of bias

A

a practical principle or guideline that can be used as a rough basis for making decisions or solving problems.

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16
Q

what is anchoring

A

We tend to rely to heavily on the first piece of information seen when making decisions

17
Q

What is availability bias

A

a cognitive error identified in behavioural economics whereby people incorrectly believe that recent events will occur again soon.

18
Q

How do social norms affect economic decision making

A

a pattern of behaviour that is widely accepted in society, or in terms of the groups that individuals belong to

19
Q

What is choice architecture

A

the design of different ways in which choices can be presented to decision makers, and the impact of that presentation on decision-making.

20
Q

what is framing

A

the principle that information is not static, but fluid based on how, when and where it is communicated

21
Q

why altruism and perceptions of fairness may be important in decision making

A

for humans to behave with more kindness and fairness than would be the case if they behaved rationally.

22
Q

What is default choice

A

the option that a consumer “selects” if he or she does nothing

23
Q

What is restricted choice

A

occurs when the government offers some alternative instead of providing a wide range of alternatives

24
Q

What is mandated choice

A

A variation of default choice is mandated choice; this is where people are required by law to make a decision.

25
Q

What are nudges

A

Nudge theory suggests consumer behaviour can be influenced by small suggestions and positive reinforcements.

26
Q

why the insights provided by behavioural economists can help governments and other agencies influence economic decision making.

A

those insights could help governments come up with more efficient public policies

27
Q

What are Herbert Simon’s ideas

A

He is widely associated with the theory of bounded rationality

28
Q

What are Daniel Kahneman’s ideas

A

Prospect Theory- a behavioural model that shows how people decide between alternatives that involve risk and uncertainty People think in terms of expected utility relative to a reference point

29
Q

What are Richard Thaler’s ideas

A

libertarian paternalism, which describes public and private social policies that lead people to make good and better decisions through “nudges” without depriving them of the freedom to choose or significantly changing their economic incentives.