LS 7 Flashcards
What is the problem with economic models?
Assumptions about the economic agents must be made
How can the problem about economic models be solved?
Through deduction- start with a hypothesis
Through Induction- start with evidence
In which schools of economics are consumers assumed to be rational?
- Classical
- Neo-classical
What does acting rational mean?
Maximising utility
What does utility mean?
It is the satisfaction or benefit of buying a product.
What is the utility for firms?
Profit
How do firms maximise profit?
Producing as efficiently as possible and by producing goods that consumers want and can afford.
What is required for economic agents to make rational decisions?
Time
Information
Ability to process information
What is the behavioural schools thoughts based on?
On evidence and observations to develop assumptions of economic decision making. Therefore it uses an inductive approach.
What approach does the classical and neo-classical school of economics use?
Deductive
What is bounded rationality?
Where consumers want to maximise utility but can’t always.
Behavioural school believe in this.
What prevents rational decision making?
- Habitual behaviour
- Consumer inertia (when they cba)
- Influenced by others behaviour
- Weakness at computation
