Individual Economic Decision Making/ behavioural economics Flashcards
What does an individuals demand curve show
How much of a good or service the consumer is willing to demand at different prices
Define rational behaviour
Acting in pursuit of self interest, maximising welfare satisfaction or utility gained from consuming
Define utility
The satisfaction or economic welfare gains from comsuming
Define marginal utility
Additional welfare gained from one extra unit of a good
Diminishing marginal utility
The marginal utility derived from a good diminishing/decreasing after each additional unity
Example of utility and scarcity
Adam smiths diamond and water paradox
Price of water is low but sustains life
Diamonds expensive but purely ornamental
Constraints on maximising utility
Limited income
A given set of prices (price takers)
Budget constraint limit freedom of action
Limited time available
Explain the concept of the margin
Rational consumers choose between goods to try max utility/welfare.
The marginal utilities gained determines combination of goods consumer must choose to maximise utility
When is utility maximised
MU=P
Link to imperfect information in decision making
The underconsumption of merit goods
Define asymmetric information
When one party of an economic transaction possesses less information than the other
Define behavioural economics
A method of economic analysis that applies psychological insights into human behaviour to explain decisions and choices made by individuals
Define rule of thumb
A rough and practical method or procedure that can be applied when making decisions (social norms)
Bounded rationality
An individuals rationality is limited by the info they have
Bounded self control
Limited self control in which lack self control to act in self interest
Cognitive bias
A mistake in reasoning occurring as a result of holding onto preferences, dislikes and past experiences
Anchoring
Comparing and contrasting limited options to make decision
Relying heavily on the first piece of info given
Economic sanctions
Restrictions I,posed by regulations which limit economic freedom
Breaking sanction would lead to punishment
Example of social norms
Negative attitudes towards drinking alcohol
Altruism
Acting to promote someone’s wellbeing,even if we suffer consequences
Factors effecting decision making
Choice architecture - how or where info is given
Framing - how info is presented
Restructured choice- reduces complexity
Explain nudges
Provide info to respond to
Opt out schemes rather than opt in
Active choosing
positive statement
based on factual evidence
normative statement
based on judgment or opinion
central purpose of economic activitity
to satisfy and produce needs and provide for wnats
what are economic resources
land labour capital enterprise
fundamental economic problem
scarcity and unlimited wants and needs with limited resources
what do PPFs demonstrate
scarce resources, trade offs, and opportunity costs
productive potential of the economy
maximising utility
utility is the satisfaction derived from consumption of a good or service
