Individual economic decision making Flashcards
What assumptions do traditional economists make about individual economic decision making?
-People are rational
-People make their decisions based on self interest
-People will change there thoughts and beliefs based on new information
What is rational economic decision making?
-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.
What is marginal utility ?
The satisfaction or pleasure derived from consuming one more good
What is total utility
the total amount of happiness a consumer derives from a good at any particular level of consumption
What is the theory of diminishing marginal utility
That the utility gained from consuming one more item decreases the more you consume
Draw diminishing marginal utility on a graph
why marginal utility theory helps explain the downward sloping demand curve.
the marginal utility of a commodity reduces when the quantity of goods is more
why marginal cost and marginal benefit are important in decision making
it identifies the most efficient use of resources
Explain why information is important in decision making e.g. in deciding whether or not to buy a new car.
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
Why does does imperfect information make it more difficult for consumers to make rational decisions and why would this lead to a market failure
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
Explain the concept of asymmetric information and explain why it may lead to market failure
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
What is bounded self-control
-Bounded self-control refers to behaviour where individuals lack the cognitive ‘strength’ (or willpower) to make a rational decision
What is bounded rationality
when emotions and other prejudices influence decision making
Explain why behavioural economists question the assumption of traditional economic theory that individuals are rational decision makers who endeavour to maximise their utility
they believe it is too narrow a view of human behaviour.
What is the rule of thumb type of bias
a practical principle or guideline that can be used as a rough basis for making decisions or solving problems.
what is anchoring
We tend to rely to heavily on the first piece of information seen when making decisions
What is availability bias
a cognitive error identified in behavioural economics whereby people incorrectly believe that recent events will occur again soon.
How do social norms affect economic decision making
a pattern of behaviour that is widely accepted in society, or in terms of the groups that individuals belong to
What is choice architecture
the design of different ways in which choices can be presented to decision makers, and the impact of that presentation on decision-making.
what is framing
the principle that information is not static, but fluid based on how, when and where it is communicated
why altruism and perceptions of fairness may be important in decision making
for humans to behave with more kindness and fairness than would be the case if they behaved rationally.
What is default choice
the option that a consumer “selects” if he or she does nothing
What is restricted choice
occurs when the government offers some alternative instead of providing a wide range of alternatives
What is mandated choice
A variation of default choice is mandated choice; this is where people are required by law to make a decision.
What are nudges
Nudge theory suggests consumer behaviour can be influenced by small suggestions and positive reinforcements.
why the insights provided by behavioural economists can help governments and other agencies influence economic decision making.
those insights could help governments come up with more efficient public policies
What are Herbert Simon’s ideas
He is widely associated with the theory of bounded rationality
What are Daniel Kahneman’s ideas
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
What are Richard Thaler’s ideas
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.
