Individual Economic Decision Making Part 1 Flashcards
When making economic decisions what do the firms and what do the consumers think about?
Firms - maximise profits
Consumers - maximise utility
What is a consumers utility?
The total satisfaction received from consuming a good or service
What is marginal utility?
The extra satisfaction derived from consuming one extra unit of the good
Why are demand curves downwards sloping?
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
What do we generally assume in most situations?
Will this always be true?
Economic agents only act in their own interests
No, some firms may be owned by philanthropic owners
What is the incentive for entrepreneurs?
Profit
What is another way to express the term “positive reward”
Incentive
What may happen when incentives aren’t given properly?
Resources will be misallocated
How does demand effect supply and demand?
When there is high demand there is an incentive to allocate more resources to that market as there is profit to be made
What does maximisation for consumers normally mean?
Consumers generally aim to maximise their utility of their money
What is one use of a price of a good?
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
What could a high price and high demand signal to the producer?
That they should allocate more resources to production of that good
Why do entrepreneurs try to innovate?
So that they can reduce their production costs, improve the quality of their product or to get a USP or to make profit
Why does a lack of competition lead to inefficiency?
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
What are the 2 ways a firm can make decisions?
Intuition or rationality
Explain how and when a business uses intuition to make their decisions?
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
What does the rational decision making model do?
Explains how a firm makes a rational decision
What are the 8 steps of the rational decision making model?
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
Explain step 1 of the rational decision making model?
Identify the problem
For a firm this may be falling profits
Explain step 2 of the rational decision making model?
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
Explain step 3 of the rational decision making model?
Weigh the criteria
They decide which criteria(s) are the most important
Explain step 4 of the rational decision making model?
Generate alternatives
The firm considers alternate options
Explain step 5 of the rational decision making model?
Evaluate alternative options
Now the firm chooses the alternatives that they think meets their criteria
Explain step 6 of the rational decision making model?
Choose the best alternative
Now the firm chooses the best option
Explain step 7 of the rational decision making model?
Carry out the decision
After this is done the firm can now see the positives and negatives of the decision in the real world
Explain step 8 of the rational decision making model?
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
What are the limitations of the rational decision making model?
This isn’t always the best or most realistic way to make a decision
It can take a long time
What does thinking at the margin mean?
You think about what one additional action would do to the plan (would it make it better to add 1 more worker for example)
Why is thinking at the margin important?
It could lead to increased productivity of the firm or make the good plan better
Give an example of asymmetric information
In the 2023 UK councils elections a lot of voters didn’t know that they heeded a voter registration card to vote
