Individual Economic Decision Making Flashcards
what 3 things is individual economic decision-making influenced by ?
- rationality
- incentives
- marginal utility
what are rational agents incentivized to do ?
select the choice which presents the highest benefits
how are consumers assumed to act rationally ?
by maximizing their utility
how are producers assumed to act rationally ?
by selling goods and services in a way that maximizes their profits
how are workers assumed to act rationally ?
by balancing welfare at work
how are the government assumed to act rationally ?
by attempting to maximize society’s welfare
what is the definition of utility ?
the satisfaction gained from consumption
what is marginal utility ?
the additional satisfaction gained from the consumption of an additional product
what is the law of diminishing marginal utility ?
as additional products are consumed, the utility gained from the next unit is lower than the unit gained from the previous unit
why does the law of diminishing marginal utility help explain why the demand curve is downward shaping ?
the more additional units consumed the less marginal utility is gained so the price consumers are willing and able to pay for falls as consumption increases
how does a consumer achieve utility maximization ?
getting the most satisfaction out of their limited income
what do rational consumers also attempt to achieve other than maximizing their utility ?
balance between benefits and costs
(mpb=mpc)
what is imperfect/ asymmetric information ?
the distortion of socially optimal prices and quantities, resulting in over or under provision of goods and services
what is perfect/ symmetric information ?
in the market buyers and sellers have exactly the same level of information about the good or service
what do behavioral economists question/ challenge ?
the assumption of traditional economic theory that individuals are rational decision-makers who endeavor to maximize their utility
what do behavioral economists argue ?
that many economic decisions made by an individual are biased
what do behavioral economists assume about humans ?
- give into cravings
- care about others opinions
- procrastinate
- have short attention spans
what 3 limitations mean individuals are unlikely to always make rational decisions ?
. bounded rationality
. bounded self control
. biases
what is bounded rationality ?
argues that people make irrational decisions due to an information failure
i.e. technology
what is bounded self- control ?
people make decisions in the face of conflicting desires or impulses
our emotions take over
what are biases ?
they influence how we process information when making decisions
what are 4 types of biases ?
rule of thumb
anchoring
availability bias
social norms
what is the rule of thumb bias ?
when individuals make decisions based on their default choice based on past experiences
what is anchoring ?
when individuals rely too heavily on an initial piece of information when making a decision
