MICRO 2 - Individual Economic decision making Flashcards
What do consumers aim to do when making a decision?
maximise their utility
What do firms aim to do when making a decision?
maximise their profit
What is utility?
the total satisfaction a consumer receives from consuming a good or service
What is marginal utility?
the EXTRA satisfaction derived from consuming one extra unit of the good or service
What does the demand curve do when marginal utility is diminishing?
slopes downwards
When will consumers stop consuming a good or service?
when the marginal utility becomes negative
What is rational choice theory?
a theory that assumes that consumers will always aim to maximise their total utility, whilst behaving rationally (staying in budget)
What are examples of irrational behaviour?
- impulsive nature (buying then regretting)
- loyalty (Tescos clubcard)
- sense of morality (not drinking alcohol)
Why is the margin important?
- it thinks about the effect of additional action
- allows consumers to think ahead
- increases productivity
What is imperfect information?
when an economic agent does not know everything they need to make a fully informed decision
What is an example of imperfect information?
2nd hand cars
What is asymmetric information?
an information failure where one economic agent knows more than another, giving them the power in the transaction
What is an example of asymmetric information?
2nd hand cars - buyers v sellers
What does imp / asy information do?
makes uncertainty = lack of trust = mutually beneficial exchange does NOT occur
What is the bounded rationality model / administrative man theory?
individuals do not make perfectly rational decisions because of both cognitive limits (the difficulty in obtaining and processing all the information needed) and social limits (personal and social ties among individuals).
What does the bounded rationality model show?
it assumes that consumers are able to exercise self-control BUT in some decisions they cannot e.g. food = consumers will still eat more than gives them optimal benefit
What are economic social norms?
other behaviour that effects the consumers behaviour
Example of a social norm:
2 restaurants, 1 busy with a queue, 1 empty = consumers will choose the busy one
What is anchoring?
the human tendency to rely on the 1st piece of information given to you
Example of anchoring:
a car price sale means consumers will buy it
What is economic availibility?
bias towards events that are recent, personal or memorable
Example of economic availibility:
plane crashes = consumers overestimate the probability of it happening
What is altruism?
the act of being selfless and considerate towards other people
What is the purpose of the “Ultimatum Game”?
so that both proposers and consumers do not aim for the maximum amount of money, they aim to distribute the money according to what is considered fair
