Individual economic decision making

Question 1

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

Answer 1

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

Question 2

What is rational economic decision making?

Answer 2

-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.

Question 3

What is marginal utility ?

Answer 3

The satisfaction or pleasure derived from consuming one more good

Question 4

What is total utility

Answer 4

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

Question 5

What is the theory of diminishing marginal utility

Answer 5

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

Question 6

Draw diminishing marginal utility on a graph

Answer 6

Question 7

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

Answer 7

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

Question 8

why marginal cost and marginal benefit are important in decision making

Answer 8

it identifies the most efficient use of resources

Question 9

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

Answer 9

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

Question 10

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

Answer 10

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

Question 11

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

Answer 11

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

Question 12

What is bounded self-control

Answer 12

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

Question 13

What is bounded rationality

Answer 13

when emotions and other prejudices influence decision making

Question 14

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

Answer 14

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

Question 15

What is the rule of thumb type of bias

Answer 15

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

Question 16

what is anchoring

Answer 16

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

Question 17

What is availability bias

Answer 17

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

Question 18

How do social norms affect economic decision making

Answer 18

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

Question 19

What is choice architecture

Answer 19

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

Question 20

what is framing

Answer 20

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

Question 21

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

Answer 21

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

Question 22

What is default choice

Answer 22

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

Question 23

What is restricted choice

Answer 23

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

Question 24

What is mandated choice

Answer 24

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

Question 25

What are nudges

Answer 25

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

Question 26

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

Answer 26

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

Question 27

What are Herbert Simon’s ideas

Answer 27

He is widely associated with the theory of bounded rationality

Question 28

What are Daniel Kahneman’s ideas

Answer 28

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

Question 29

What are Richard Thaler’s ideas

Answer 29

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.