Key Terms Flashcards
Rational economics decision making
Acting in pursuit of self-interest. Attempting to maximize their welfare, satisfaction or utility gained
Economic incentives
A benefit or cost that motivates an economic action
Utility theory
The total satisfaction gained from consuming a good or a service
Total utility
The complete welfare and satisfaction gained from consuming a certain amount of a good
Marginal utility
The additional welfare and satisfaction gained from consuming one extra unit of good
Hypothesis of diminishing marginal utility
For a single consumer, the marginal utility derived from a good/services diminishes for each additional unit consumed
What is diminishing marginal utility hypothesis support?
A downwards sloping demand curve
Utility maximization
The maximum point of utility reached on the utility curve
why is the margin important when consumers make choices?
Assuming that consumers are rational (Homo Economicus), the margin helps to maximize their utility
Bounded rationality
Restrictions on economic agents making rational decision
Three examples of bounded rationality
Limited time available
Imperfect information
Computation weakness
Bounded self-control
A behavioral economist argument that individuals have limits on their self-control
An example of bounded self-control
Smoking - limited ability to stop, despite it not maximizing utility
Rule of thumb
A set of guidelines to give advice to economic agents in order to make decisions
Rule of thumb
A set of guidelines to give advice to economic agents in order to make decisions
Anchoring
Placing too much emphasis on one piece of information
Availability bias
Giving information and events that are recent or observed personally, more preference when making decisions. This often triggers an emotional reaction
Social norms
An individual’s behavior is influenced by the behavior of their social group
Altruism
Selfless concern for the well being of others
Why altruism is important?
Behavioural economists argue that economic agents don’t just act out of self interest, and may choose to act fairly/altruisticly
Give an example of altruistic behavior
A firm paying its employees above the minimum wage due to a perception of fairness,
Where there is no guarantee that they’ll receive any benefit
Choice architecture
Where an individual’s choice is influenced by adapting the way the choice is presented
Choice framing
Where an individual’s choice is influenced by adapting the way the choice is presented
Nudge
When one choice is easier than others, yet an individual still needs to make an active choice
Default choice
When a choice is automatically chosen for an individual (which a person is more likely to choose), and they must opt-out of it in order not to choose it.
Restricted choice
Giving individuals limited choices
Mandated choice
Where people have to make a decision
Imperfect information
When an economic agent does not have all the information surrounding a transaction
Why is information important in decision making?
As economic agents need all the information in order to make rational decision
Asymmetric information
Where one party in a transaction has more information than the other
Why asymmetric information is a problem for economic agents?
It makes it difficult for economic agents to make rational decisions
And it is a potential source of market failure
