Individual economic decision making Flashcards
Explain the marginal utility theory
The extra satisfaction derived from consuming one extra good eg 5 cream eggs
Explain the theory for diminishing marginal utility
The consumer surplus declines with extra units consumed
Why would consumers be willing to pay less for extra units of a good/service
diminishing marginal utility
Why would an entrepreneur take a larger risk
For a larger reward
Give one reason for entrepreneurs trying for innovation
to produce goods for less and improve quality
Define symmetric information
consumers and producers have perfect market information
Why is asymmetric information significant
It leads to market failure
What is the principal-agent problem
where the agent makes a decision for the principal, but the agent is inclined to act in their own interest rather than those of the principal
How does asymmetric information affect allocation of resources
consumers may pay too much or too little and firms may produce the incorrect amount
Define bounded rationality and self control
Individuals are rational decision maakers who aim to maximise their utility
Give an example that goes against the bounded self-control theory with the use of the law of diminishing return.
Some people will still eat food after theyve received the optimal benefit
How do social norms affect decision making
If more people are using something, the individual is more likely to join them
How does anchoring affect decision making
If a price is shown at a lower price, the person is more inclined to purchase wihtout thought as its seen as a bargain
Define anchoring as a Econpsychological method
Bias is created by the human tendency to rely on the first piece of info given
Define availability bias
Bias towads events that were:
recent
personal
memorable
Because of overestimated and cause emotional responses
Apple availability bias to aeroplanes
Consumers are more likely to believe theyre going to crash if they or someone they know has been in one.
Why does availability bias happen
The consumer OVERESTIMATES THE PROBABILITY
Define altruism
The act of being selfless and considerate
Outline the ultimatum game as an explanation for altruism
-There are two players
-proposer and responder
-the proposer picks an offer
-the responder will accept/decline
-if accepted the sum of money is divided
-if declined no money is given
-proposers usually offer 40-50% of total
-responders accept offers over 25% usually
How does the ultimatum game highlight perceptions of fairness
Proposers will offer fair prices as they know if the responder doesnt accept they will miss out
Outline choice architecture
Refers to the way choices are presented to consumers.
Can choice architecture improve consumer welfare and avoid irrational decisions
YES
Give a real life example of choice architecture
Organ donors- opt out rather than opt in so people will stay in as it is seen as long to sign forms to opt out
