Individual Economic Decision Making Flashcards
What does the neoclassical theory assume?
Consumers always act rationally, seeking to maximise satisfaction for every pound spent on each product they buy
Utility is the amount of…
Satisfaction a customer gains from consuming a good or service
Marginal utility is the..
Satisfaction gained from consuming an additional unit of a good or service
What is diminishing marginal utility
As individuals consumer one more unit of a good/service, the additional units give successively smaller increases in total satisfaction.
What is imperfect information
When economic agents do not possess all the information required to make a fully informed decision. This may be a potential source of market failure
What is asymmetric information?
A form of imperfect information where one party has more/ superior information than the other, giving them more power in a market transaction.
What are the 7 behavioural aspects influence economic decision making?
1) Bounded rationality
• when people try to behave rationally but are restricted to factors such as lack of time to make decisions.
2) Bounded self-control
• when individuals lack the self discipline to act on their good intentions
3) Rules of thumb
• shortcuts or informed guesses that individuals use to make decisions in order to save time and effort
4) Anchoring
• the tendency to rely on a particular piece of information when making choices between different foods/services e.g money
5) Availability
• when individuals make judgments about the probability of events by recalling recent incidents.
6) Social norms
• when individuals are influenced by others when making decisions
7) Altruism and fairness
• individuals are motivated to do the right thing even if this means paying more for a good or service.
What are the 3 types of choices?
Default choice
• socially desirable choices are the default option
Mandated choice
• required by law to make a choice
Restricted choice
• giving a limited amount of options when making a choice
