Individual Economic Decision Making Flashcards
When making economic decisions consumers aim to what?
Maximise their utility
When making economic decisions, firms aim to what?
Maximise their profits
A consumer’s utility is?
The total satisfaction received from consuming a good or service
Marginal utility?
The extra satisfaction derived from consuming one extra unit of the good
Diminishing marginal utility
Suggests that consumer surplus generally declines with extra units consumed. This is because the extra unity generates less utility than the one already consumed. So consumers willing to pay less for extra units.
Utility maximisation for consumers & firms is..
Maximisation for consumers is when they aim to generate the greatest utility possible from an economic decision.
Maximisation for firms is generating the highest profits possible.
It’s assumed that economic agents only act in?
Their self-interests
Thinking at the margin means?
Thinking about the effect of an additional action.
Thinking about the margin is important to consumers how?
It allows consumers to keep thinking ahead, allowing them to consider how to maximise their utility now or in the future.
Margins can increase productivity how?
Since the most important actions/tasks, which maximise utility, are being prioritised.
Symmetric information & what does it lead to:
Consumers and producers have perfect market information to make their decision. This leads to an efficient allocation of resources.
Asymmetric information & what does it lead to:
This is when there is unequal knowledge between consumers & producers, it leads to a misallocation of resources and market failure.
For example, a car dealer may know about a fault in a car that consumer is unaware of.
Or consumers may know more information than producer when purchasing insurance policies.
Asymmetric information & linked to the principal-agent problem. How?
This is where the agent makes decisions for the principal, but the agent is inclined to act in own interests, rather than those of the principal.
E.g, shareholders & managers have different objectives that might conflict. Managers may choose to make a personal gain, rather than to maximise the dividends of shareholders.
How can information be made more widely available>
Through advertising or government intervention.
E.g harmful effects of smoking are in adverts & on cigarette boxes.
Bounded rationality & key characteristics
The idea that individuals have cognitive limitation that restrict ability to process & analyse when making decisions
- Information constraints - cannot gather & process all information
- Satisficing - aim to find satisfactory solution rather than optimal one
- Heuristics - individuals rely on heuristics
Bounded self-control & key characteristics
Individuals have limitation in their ability to resist immediate gratification or make decisions that align with their long-term goals.
- Temporal discounting: prioritise short term pleasure over long term benefits
- Impulsivity: give in to impulsive behaviours
- Need for self-regulation
What do heuristics do?
They simplify the decision making process to help consumer come to a reasonable decision.
They are shortcuts to avoid taking too long to decide & they avoid the problem of having imperfect information or limited time
Social norms:
The behaviour of other people affects how the consumer acts - herd behaviour. Other people’s behaviour creates a bias within the consumer. This social pressure encourages consumers to do things they would not otherwise do.
Anchoring:
This is a type of bias created by the human tendency to rely on the first piece of information they are given.
This first piece of information causes consumers to be biased towards it when subsequent information is given.
Availability bias:
This is a form of bias towards events that were recent, personal or memorable. This is because they are overestimated and cause emotional responses. This then influences how the consumer behaves.
Altruism & fairness:
People want to do the ‘right thing’ even if it costs more.
Rules of thumb:
Thinking shortcuts when time is limited
Choice architecture is:
Changing the way choices are presented to influence consumers
