Individual Economic Decision Making Flashcards
What two key assumptions are made in traditional economic theory
That consumers are rational
That consumers want to maximise utility
What is utility and marginal utility?
Utility- The amount of satisfaction gained from consuming a good or service
Marginal utility- the utility gained from consuming one extra unit
What is the concept of margin in economics?
The idea of one extra unit
E.g marginal revenue is the revenue gained from selling one extra unit
What is the law of diminishing marginal utility?
As individuals consume more units of a good or service, the additional units give successively smaller increases in total satisfaction
An increase in consumption leads to a decrease in marginal utility
Utility is maximised when marginal utility is zero
What is maximisation subject to constraints?
If all goods were free households would consume all goods until they have maximised utility
This is not possible due to constraints of scarcity
What is the effect of imperfect information?
Consumers act irrationally and rarely possess enough information to make fully informed decisions. This can lead to market failure
What is asymmetric information?
When one party in market transaction has more information than the other. Typically the seller has more information than the buyer.
What is behavioural economics?
A school of economics that challenges the idea of consumers working to maximise utility and being rational.
Instead the idea is that consumers make decisions based on social, psychological, and emotional factors.
What is a moral hazard?
When consumers take part in risky behaviour because they know that another party bears the consequences.
What is bounded rationality?
There are limits on human decision making ability, such as imperfect information and computational problems.
What is bounded self control?
Humans have limited self control and cannot stop themselves from doing certain things.
What are rules of thumb?
Thinking shortcuts and informed guesses that individuals use to save time and effort.
What is anchoring?
When an individual places too much value on one piece of information.
What is availability bias?
When judgements about probability are made based on how recently an event happened in the past.
e.g following a drought people will overestimate the probability of a drought occuring.
What is bias based on social norms?
An individuals actions can be affected by the behaviour of their social group.
