Individual Economic Decision Making/ behavioural economics

Question 1

What does an individuals demand curve show

Answer 1

How much of a good or service the consumer is willing to demand at different prices

Question 2

Define rational behaviour

Answer 2

Acting in pursuit of self interest, maximising welfare satisfaction or utility gained from consuming

Question 3

Define utility

Answer 3

The satisfaction or economic welfare gains from comsuming

Question 4

Define marginal utility

Answer 4

Additional welfare gained from one extra unit of a good

Question 5

Diminishing marginal utility

Answer 5

The marginal utility derived from a good diminishing/decreasing after each additional unity

Question 6

Example of utility and scarcity

Answer 6

Adam smiths diamond and water paradox
Price of water is low but sustains life
Diamonds expensive but purely ornamental

Question 7

Constraints on maximising utility

Answer 7

Limited income
A given set of prices (price takers)
Budget constraint limit freedom of action
Limited time available

Question 8

Explain the concept of the margin

Answer 8

Rational consumers choose between goods to try max utility/welfare.
The marginal utilities gained determines combination of goods consumer must choose to maximise utility

Question 9

When is utility maximised

Answer 9

MU=P

Question 10

Link to imperfect information in decision making

Answer 10

The underconsumption of merit goods

Question 11

Define asymmetric information

Answer 11

When one party of an economic transaction possesses less information than the other

Question 12

Define behavioural economics

Answer 12

A method of economic analysis that applies psychological insights into human behaviour to explain decisions and choices made by individuals

Question 13

Define rule of thumb

Answer 13

A rough and practical method or procedure that can be applied when making decisions (social norms)

Question 14

Bounded rationality

Answer 14

An individuals rationality is limited by the info they have

Question 15

Bounded self control

Answer 15

Limited self control in which lack self control to act in self interest

Question 16

Cognitive bias

Answer 16

A mistake in reasoning occurring as a result of holding onto preferences, dislikes and past experiences

Question 17

Anchoring

Answer 17

Comparing and contrasting limited options to make decision
Relying heavily on the first piece of info given

Question 18

Economic sanctions

Answer 18

Restrictions I,posed by regulations which limit economic freedom
Breaking sanction would lead to punishment

Question 19

Example of social norms

Answer 19

Negative attitudes towards drinking alcohol

Question 20

Altruism

Answer 20

Acting to promote someone’s wellbeing,even if we suffer consequences

Question 21

Factors effecting decision making

Answer 21

Choice architecture - how or where info is given
Framing - how info is presented
Restructured choice- reduces complexity

Question 22

Explain nudges

Answer 22

Provide info to respond to
Opt out schemes rather than opt in
Active choosing

Question 23

positive statement

Answer 23

based on factual evidence

Question 24

normative statement

Answer 24

based on judgment or opinion

Question 25

central purpose of economic activitity

Answer 25

to satisfy and produce needs and provide for wnats

Question 26

what are economic resources

Answer 26

land labour capital enterprise

Question 27

fundamental economic problem

Answer 27

scarcity and unlimited wants and needs with limited resources

Question 28

what do PPFs demonstrate

Answer 28

scarce resources, trade offs, and opportunity costs productive potential of the economy

Question 29

maximising utility

Answer 29

utility is the satisfaction derived from consumption of a good or service