micro- consumer behaviour

Question 1

describe traditional economic theory

Answer 1

assumes rational agents who maximise utility through informed decision-making

Question 1

describe behavioural economics

Answer 1

acknowledges influence of social, emotional & psychological factors
= real individuals face constraints like limited time & information
= leading to bounded rationality & bounded self-control

Question 2

effect of irrelevant alternatives

Answer 2

• Individuals are assumed to be rational decision makers
• In theory, they choose only on the basis of the probability and desirability of separate outcomes
• But observed behaviour contradicts this
  = People sometimes change their preferences when common alternatives are added

Question 3

define bounded rationality

Answer 3

Economic actors have limited info, limited ability to process that info and don’t spend enough time making an optimal decision

Question 4

define bounded Self Control

Answer 4

Economic actors make decisions on feelings and emotions such as greed, fear or pleasure, rather than taking a rational view of what will be in their best interests e.g. smoking
= law of diminishing marginal utility suggests every extra unit consumed provides smaller benefit to consumer. Yet, the example of food , some consumers will still eat more than gives them optimal benefit

Question 5

define heuristics

Answer 5

simplify the decision making process… they act as shortcuts
= consumers use common sense or intuition to make a decision

Question 6

define anchoring

Answer 6

use anchoring to make decisions by relying on the first piece of information we are given
= causes a bias towards all other subsequent data
- e.g. charities, when asking for a donation, may offer some suggestions to influence people’s decision

Question 7

describe use of availability

Answer 7

use availability to make decisions by using recent, personal or memorable experiences
= causes emotional responses when making decisions

Question 8

describe social norms

Answer 8

Other people’s behaviours create a bias that we follow
= social pressure encourage us to behave in a way we might not normally do

Question 9

define Choice Architecture

Answer 9

refers to way choices are presented to consumers
= different designs affect the choice consumers make
= well-designed choice architectures can help consumers avoid making irrational decisions and poor choices
= could improve consumer welfare

e.g. healthy food at start of canteen line

Question 10

define choice framing

Answer 10

how info is presented including the way words & numbers are used
= the context made affects the choice consumers make
= e.g. 20% lean meat vs 80% fat meat

Question 11

define choice nudges

Answer 11

aim to change behaviour of consumers without taking away their freedom of choice
= sometimes argued that nudges are manipulative and consumers don’t get a free choice with them. However, due to imperfect information that exists between consumers and firms, nudges can help prevent consumers making irrational or poor choices, so their welfare is maximised.

Question 12

describe rational consumer

Answer 12

will consume a good only if the perceived utility is greater than or equal to the price

Question 13

define utility maximisation

Answer 13

idea that individuals aim to get the most utility from the goods and services they consume, given their budget & the prices of those goods
= involves making choices to allocate resources in a way that brings the greatest overall satisfaction

Question 14

define margin

Answer 14

Margin means looking at the extra benefit or cost of doing a little bit more of something

Question 15

define marginal cost

Answer 15

the change in cost from one extra unit

Question 16

define Homo Economicus

Answer 16

assumes people are rational, self-interested & make decisions based on maximising own utility = assumes people have complete info about their options &
possible consequences of their decisions
= make decisions without any irrationality, emotion or outside influences

Question 17

define altruism

Answer 17

being selfless & doing something to benefit others, without expecting anything in return

e.g. give to charity

Question 18

define Asymmetric information

Answer 18

there is an imbalance of power between the buyer & seller involved in a transaction
= can affect the outcome & lead to inefficient allocation of resources

e.g. Landlords who know more about their properties than tenants

Question 19

define imperfect info

Answer 19

information available to consumers when they make decisions about how to allocate their budget is unlikely to be complete

Question 20

define default choice

Answer 20

means influencing consumer behaviour by setting socially desirable choices as defaults options

Question 21

define mandated choice

Answer 21

Mandated choice occurs when people are legally required to make a choice

Question 22

define restricted choice

Answer 22

means giving people a limited number of options when making a choice as too much choice can prevent people from making an effective choice