Individual economic decision making Flashcards
What is neoclassical economic theory based on?
“Economic man”; making rational economic decisions to maximise personal net benefit
Utility is a measure of…
Happiness gained from the consumption of a good or service
What is marginal utility?
The happiness gained from the consumption of an extra single unit of a good or service
What does the law of diminishing marginal utility state?
Each additional unit adds less happiness than the previous unit
What is symmetric information?
When both the buyer and the seller have equal, well-informed knowledge on the market
Symmetric information is an assumption of…
Perfect competition
Asymmetric information is when…
Either the buyer or seller has superior knowledge, preventing rational decision making
In which situation would symmetric information prevent rational decision making?
When both the buyer and seller have poor information
Name 7 principals of behavioural economics
- Behaviour is influenced by others
- Each person has their own values which affect decisions
- People want to do the ‘right thing’
- People are averse to risk
- Decisions are based on habits
- Decisions are influenced by poor IT skills
- People have to believe their decisions will be effective
Behavioural economists believe that the principal factors lead to a limit on…
The willingness or ability to make a rational economic decision
Name 3 examples of the limitations caused by the principal factors of behavioural economics
- Bounded rationality
- Bounded self-control
- Biases in decision making
What is altruism and what can it affect?
The selfless concern for the well-being of others
It can affect rational decision making
How can economic policies be affected by behavioural economics?
- Choice architecture
- Framing
- Nudges
How can the choices given to an individual be influenced?
- Default choice
- Restricted choice
- Mandated choice
