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