L7 - Decision Making in Economics Flashcards
What is the problem with making economic models?
Assumptions about the economy must be made to create the models
How can assumptions of an economy be made?
Deduction (start with a hypothesis)
Induction (collect evidence)
What is classical/neoclassical economics?
Known as the deductive approach where decision makers are assumed to be rational
(Consumers buy products which maximise utility)
What is utility?
Satisfaction or benefit derived from consuming a good
How do firms make decisions?
Make rational decisions that maximise utility (utility here is profit)
How do firms maximising utility (profit)?
Producing things that consumers want and can afford as efficiently as possible
What 3 things do economic agents need to make rational decisions?
Time
Information
Ability to process that information
What is behavioural economics?
An inductive approach of economics that is based on evidence and observations to develop assumptions of economic decision making
What does behavioural economics assume?
People have bounded rationality (can’t make rational decisions)
What is bounded rationality?
People want to maximise utility but can’t
Why are the 3 reasons why people can’t maximise utility (make rational decisions)?
Lack of time
Lack of information
Inability to process the information given
What aspects of human behaviour prevent rational decision making?
Habitual behaviour
Consumer inertia
People are influenced by the behaviour of others
Consumer weakness at computation
What is consumer inertia?
Fear of the unknown
