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Economics Yr2 Micro > Individual Economic Decision Making > Flashcards

Individual Economic Decision Making Flashcards

1
Q

Define Utility

A

The satisfaction or economic welfare an individual gains from consuming a good/service

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2
Q

Define Marginal Utility

A

Extra satisfaction derived from consuming 1 extra unit of a good

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3
Q

What is the law of diminishing marginal utility

A

For a single consumer, the marginal utility derived from a good/service diminishes for each additional unit consumed

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4
Q

What can the law of diminishing marginal utility be used to explain

A

Why consumers are willing to pay less for each extra unit due to less utility, hence why the demand curve is downward sloping

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5
Q

What is utility maximisation

A

When consumers aim to generate the greatest utility possible from an economic decision
When firms try to maximise profit

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6
Q

Define Satiation

A

Point at which no more utility can be gained from consuming extra units of a good
After this point, the only yield is disutility

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7
Q

What are the 4 constraints made by scarcity, restricting the choices consumers make

A

Limited income
A given set of prices
Limited time
Budget constraint

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8
Q

What is ‘Thinking at the Margin’ about

A

Thinking about the effect of an additional action

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9
Q

What happens when economic agents think at the margin

A

Consumers think about how thecan maximise their current and future utility
Productivity increases as the most important tasks that maximise utility are proirtised

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10
Q

What does traditional demand theory assume

A

That consumers act rationally

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11
Q

Define Rational Behaviour

A

Acting in pursuit of self-interest, which for a consumer means attempting to maximise their welfare, satisfaction or utility gained from the goods and services produced
So a change in price/conditions of supply and demand will change a consumers economic incentives

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12
Q

What is symmetric information

A

Consumers and producers have perfect market information to make their decision, which causes an efficient allocation of resources

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13
Q

What is asymmetric information

A

When 1 party to a market transaction possesses less information relevant to the exchange than the other
Thus leading to an inefficient allocation of resources, information failure and thus market failure

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14
Q

What is Behavioural Economic Theory

A

A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decions

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15
Q

What is the BIT

A

Behavioural Insights Team
Based in the cabinet office
Enables better designed policies/interventions to help people make better choices for themselves and society

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16
Q

Define Bounded Rationality

A

When making decisions, an individual’s rationality is limited by:
Imperfect information on alternatives/concequences
Limited mental processing ability
Time Constraints
So in complex situations, this causes satisficing, not maximising

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17
Q

Define Bounded Self Control

A

Individuals have a limited self control.

A lack of self control to act in what they see as their self interest

18
Q

What was Daniel Kahneman’s behavioural theory

A

Humans think in 2 different ways to make decisions
System 1 - Thinking Fast
Instinctive, little effort used to analyse situation, automatic
System 2 - Thinking Slow
Usually used for bigger, more important decisions
Needs focus/concentration
Can cause overthinking - bad decisions

19
Q

What is cognitive bias

A 
A mistake in reasoning as a result of
Rules of Thumb
Preferences
Contrary Info
Beliefs
20
Q

What is Confirmation Bias

A

Tendency to seek only info. that matches what you already believe
Ignoring/dismissing opinions that threaten our views

21
Q

What is availability Bias

A

When individuals make judgments about the likelihood of future events according to how easy it is to recall examples of future events

22
Q

Give an example of availabilty bias

A

It’s irrational to think it’s a good idea to buy a national lottery ticket, but from 2013-14 sales went up by £134 million
As stories of the winners are publicized nationally

23
Q

What is negativity Bias

A

People usually pay more attention to bad news than good, we perceive it as more important

24
Q

What is Anchoring

A

The tendency when making decisions to rely too heavily on the first piece of information offered

25
Q

How do restaurants use anchoring

A

They may have very expensive main courses, then alternatives that seem ‘more reasonably priced’
Even if these alternatives are actually expensive, we are used to choosing the opinion not too expensive and not too cheap

26
Q

What are Social Norms

A

Patterns of behaviour considered acceptable by society

From unconsciously learning from behaviour of other people

27
Q

What are Economic Sanctions

A

Restrictions imposed by regulators / laws that restrict an individual’s freedom to behave in certain ways

28
Q

What are Nudges

A

Factors that encourage people to think and act in particular ways
Try to shift group/individuals behaviour to comply with positive social norms

29
Q

Give an example of a Nudge

A

Showing you drinkers that the majority of young adults do not engage in regular drinking

30
Q

What is Alturism

A

When we act to promote someone else’s wellbeing, even if we suffer as a result
If one assumes one can gain satisfaction from giving, one can link this to maximisation

31
Q

What is fairness

A

Treating everyone the same, sharing, being reasonable

A normative term

32
Q

What does the governement use behavioural economics to do

A

Design better policy

More of complement and improve traditional economic theory used

33
Q

What is Choice Architecture

A

Term used to describe how government policy-makers can lead people into making certain choices
They use behavioural insights (by the BIT) to design choice architectures to nudge citizens

34
Q

What is default choice

Give an example of one

A

An option that is selected automatically unless an alternative is specified
Countries that require people to opt out of organ donations have a higher proportion of the population willing to donate

35
Q

What is framing

Give an example used in retail

A

The tendency for people to be influenced by the context in which the choice is presented when making a decision
Saying a product is 90% fat-free instead of 10% fat

36
Q

What are mandated choices

A

People are required by law to make a decision

37
Q

What is restricted choice

A

Offering people a limited number of options so they are not overwhelmed by the complexity of the situation
The BIT found that a well designed system makes it easier for people to pay for gov. services eg. with direct debits

38
Q

Give 3 examples of the government using choice architecture to influence decisions

A

Signs telling people to look left/right when crossing the road, reduces accidents
Allowing collaborative filtering - Providing an individual with information about the choices made by people in a similar situation
Monetary rewards giving an incentive for individuals to behave how they usually wouldn’t

39
Q

What are Nudges/non-enforced compliance

Give an example of its use

A

A technique used by choice architects to change someone’s behaviour in an easy/cheap way, without reducing the no. of choices
Rumble strips on motorways

40
Q

What is loss aversion about

A

People are biased in their real estimation of the probability of future events
Usually over-weight low and high probabilities
Usually underweigh medium proabilities
People feel losses more than they feel gains

41
Q

Give 2 examples of policies that take advantage of loss aversion

A

Marketing emphasises discounts instead of cost
‘Save more tomorrow’ pension scheme
Plan costs investors nothing till they get a pay rise
Then, the increase in income the get from the pay rise automatically becomes their pension fund.
So they never see a reduction in disposable income

42
Q

What is a shove

A

Instructing people to behave in certain ways

eg using fines/laws to ban certain practices

Economics Yr2 Micro (7 decks)

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