Key Terms Flashcards

1
Q

Rational economics decision making

A

Acting in pursuit of self-interest. Attempting to maximize their welfare, satisfaction or utility gained

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2
Q

Economic incentives

A

A benefit or cost that motivates an economic action

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3
Q

Utility theory

A

The total satisfaction gained from consuming a good or a service

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4
Q

Total utility

A

The complete welfare and satisfaction gained from consuming a certain amount of a good

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5
Q

Marginal utility

A

The additional welfare and satisfaction gained from consuming one extra unit of good

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6
Q

Hypothesis of diminishing marginal utility

A

For a single consumer, the marginal utility derived from a good/services diminishes for each additional unit consumed

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7
Q

What is diminishing marginal utility hypothesis support?

A

A downwards sloping demand curve

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8
Q

Utility maximization

A

The maximum point of utility reached on the utility curve

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9
Q

why is the margin important when consumers make choices?

A

Assuming that consumers are rational (Homo Economicus), the margin helps to maximize their utility

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10
Q

Bounded rationality

A

Restrictions on economic agents making rational decision

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11
Q

Three examples of bounded rationality

A

Limited time available
Imperfect information
Computation weakness

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12
Q

Bounded self-control

A

A behavioral economist argument that individuals have limits on their self-control

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13
Q

An example of bounded self-control

A

Smoking - limited ability to stop, despite it not maximizing utility

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14
Q

Rule of thumb

A

A set of guidelines to give advice to economic agents in order to make decisions

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15
Q

Rule of thumb

A

A set of guidelines to give advice to economic agents in order to make decisions

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16
Q

Anchoring

A

Placing too much emphasis on one piece of information

17
Q

Availability bias

A

Giving information and events that are recent or observed personally, more preference when making decisions. This often triggers an emotional reaction

18
Q

Social norms

A

An individual’s behavior is influenced by the behavior of their social group

19
Q

Altruism

A

Selfless concern for the well being of others

20
Q

Why altruism is important?

A

Behavioural economists argue that economic agents don’t just act out of self interest, and may choose to act fairly/altruisticly

21
Q

Give an example of altruistic behavior

A

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

22
Q

Choice architecture

A

Where an individual’s choice is influenced by adapting the way the choice is presented

23
Q

Choice framing

A

Where an individual’s choice is influenced by adapting the way the choice is presented

24
Q

Nudge

A

When one choice is easier than others, yet an individual still needs to make an active choice

25
Q

Default choice

A

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.

26
Q

Restricted choice

A

Giving individuals limited choices

27
Q

Mandated choice

A

Where people have to make a decision

28
Q

Imperfect information

A

When an economic agent does not have all the information surrounding a transaction

29
Q

Why is information important in decision making?

A

As economic agents need all the information in order to make rational decision

30
Q

Asymmetric information

A

Where one party in a transaction has more information than the other

31
Q

Why asymmetric information is a problem for economic agents?

A

It makes it difficult for economic agents to make rational decisions
And it is a potential source of market failure