Individual Economic Decision Making Part 1

Question 1

When making economic decisions what do the firms and what do the consumers think about?

Answer 1

Firms - maximise profits
Consumers - maximise utility

Question 2

What is a consumers utility?

Answer 2

The total satisfaction received from consuming a good or service

Question 3

What is marginal utility?

Answer 3

The extra satisfaction derived from consuming one extra unit of the good

Question 4

Why are demand curves downwards sloping?

Answer 4

Diminishing marginal utility. The law of diminishing marginal utility suggests that consumers surplus generally declines with extra units consumed. This is because each extra unit generally causes less utility and therefore we are willing to pay less for an extra unit

Question 5

What do we generally assume in most situations?

Will this always be true?

Answer 5

Economic agents only act in their own interests

No, some firms may be owned by philanthropic owners

Question 6

What is the incentive for entrepreneurs?

Answer 6

Profit

Question 7

What is another way to express the term “positive reward”

Answer 7

Incentive

Question 8

What may happen when incentives aren’t given properly?

Answer 8

Resources will be misallocated

Question 9

How does demand effect supply and demand?

Answer 9

When there is high demand there is an incentive to allocate more resources to that market as there is profit to be made

Question 10

What does maximisation for consumers normally mean?

Answer 10

Consumers generally aim to maximise their utility of their money

Question 11

What is one use of a price of a good?

Answer 11

It gives signals to buyers and sellers which is an incentive to purchase or sell the good. This may change the behaviour of the consumer and seller

Question 12

What could a high price and high demand signal to the producer?

Answer 12

That they should allocate more resources to production of that good

Question 13

Why do entrepreneurs try to innovate?

Answer 13

So that they can reduce their production costs, improve the quality of their product or to get a USP or to make profit

Question 14

Why does a lack of competition lead to inefficiency?

Answer 14

Firms don’t have a real incentive to innovate and take risks so dynamic efficiency won’t happen, production costs will increase so you have production inefficiency and there will be allocative inefficiency as resources are therefore not allocated correctly

Question 15

What are the 2 ways a firm can make decisions?

Answer 15

Intuition or rationality

Question 16

Explain how and when a business uses intuition to make their decisions?

Answer 16

When they don’t have facts or when decision making is difficult

This involves using the feelings or instincts of consumers an doesn’t use facts

Question 17

What does the rational decision making model do?

Answer 17

Explains how a firm makes a rational decision

Question 18

What are the 8 steps of the rational decision making model?

Answer 18

Identify the problem
Find and identify the decision criteria
Weigh the criteria
Generate alternatives
Evaluate alternate options
Choose the best alternative
Carry of the decision
Evaluate the decision

Question 19

Explain step 1 of the rational decision making model?

Answer 19

Identify the problem

For a firm this may be falling profits

Question 20

Explain step 2 of the rational decision making model?

Answer 20

Find and identify the decision criteria

The firm may need to find information or criteria that will help increase their profit
This may include how the criteria may effect the stakeholders or the quality of the product

Question 21

Explain step 3 of the rational decision making model?

Answer 21

Weigh the criteria

They decide which criteria(s) are the most important

Question 22

Explain step 4 of the rational decision making model?

Answer 22

Generate alternatives

The firm considers alternate options

Question 23

Explain step 5 of the rational decision making model?

Answer 23

Evaluate alternative options

Now the firm chooses the alternatives that they think meets their criteria

Question 24

Explain step 6 of the rational decision making model?

Answer 24

Choose the best alternative

Now the firm chooses the best option

Question 25

Explain step 7 of the rational decision making model?

Answer 25

Carry out the decision

After this is done the firm can now see the positives and negatives of the decision in the real world

Question 26

Explain step 8 of the rational decision making model?

Answer 26

Evaluate the decision

After seeing the real world effects the firm can decide weather this is the best option or of they should try a different one

Question 27

What are the limitations of the rational decision making model?

Answer 27

This isn’t always the best or most realistic way to make a decision
It can take a long time

Question 28

What does thinking at the margin mean?

Answer 28

You think about what one additional action would do to the plan (would it make it better to add 1 more worker for example)

Question 29

Why is thinking at the margin important?

Answer 29

It could lead to increased productivity of the firm or make the good plan better

Question 30

Give an example of asymmetric information

Answer 30

In the 2023 UK councils elections a lot of voters didn’t know that they heeded a voter registration card to vote