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Economics > Micro: Individual Economic Decision Making > Flashcards

Micro: Individual Economic Decision Making Flashcards

1
Q

What does looking at the margin mean

A

It means looking at the effect of one more or less of something

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2
Q

What do economic agents make their decision based on

A

Economic agents make their decisions based on the margin

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3
Q

What are examples of decisions being made because of the margin

A 
Marginal cost
Marginal revenue
Marginal tax
Marginal product
Marginal utility
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4
Q

What is marginal cost

A

Marginal cost is the extra cost of production that a firm incurs when producing one more good or service

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5
Q

What does marginal cost include

A

This includes the cost of the extra materials, labour and capital required to make the good or service as well as any other costs the firm faces from producing the extra unit

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6
Q

What is marginal revenue

A

Marginal revenue is the change in total revenue from selling an extra good or service

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7
Q

What does marginal revenue being positive or negative depend on

A

This can be positive or negative (depending on price elasticity of demand)

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8
Q

What is marginal tax

A

Marginal tax is the extra tax firms, consumers and workers have to pay for each extra good or service produced, good or service bought or extra pound of income earned

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9
Q

What is marginal product

A

Marginal product is the amount of extra output produced by an extra unit of input

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10
Q

What is the marginal product of labour

A

The marginal product of labour is the amount of extra output produced by one more worker

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11
Q

What is the marginal product of capital

A

The marginal product of capital is the amount of extra output produced by an extra unit of capital

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12
Q

Draw a marginal utility graph

A

Seneca 2.1.1

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13
Q

What is marginal utility

A

Marginal utility is the extra benefit to an individual of consuming a good or service

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14
Q

How can marginal utility change

A

Marginal utility can change as you consume more of the same good or service

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15
Q

What is Diminishing marginal returns

A

Diminishing marginal returns is the concept that the more of something you add, the lower the impact of each additional unit, assuming all else is fixed

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16
Q

What are the two types of diminishing marginal returns

A

Diminishing marginal product

Diminishing marginal utility

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17
Q

What is utility

A

Utility is the satisfaction gained from the consumption of goods and services

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18
Q

Draw Law of diminishing marginal utility graph

A

Seneca 2.1.2

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19
Q

What is the law of diminishing marginal utility

A

As a person receives more of a good, the additional utility gained from each extra unit of the good received decreases.

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20
Q

What is an example of the law of diminishing marginal utility

A

The first slice of pizza brings more utility than the sixth.

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21
Q

Draw the budget constraint

A

Seneca 2.1.2

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22
Q

What does the budget constraint show

A

The budget constraint shows the various combinations of two goods that are affordable for a consumer.

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23
Q

What do specific choices along the budget constraint show

A

Specific choices along the budget constraint show the possible combinations of affordable products

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24
Q

What area of the budget constraint is affordable

A

Any area underneath the graph is affordable

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25
Q

What is a combination of affordable products known as

A

Combinations of affordable products are often known as a bundle.

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26
Q

Draw a total utility graph

A

Seneca 2.1.2

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27
Q

What is total utility used to understand

A

This is used to understand how households make choices.

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28
Q

What do economists look at on the budget constraint

A

Economists look at the possible bundles on the budget constraint

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29
Q

What do economists calculate after looking at the possible bundles on the budget constraint

A

calculate the total utility derived from those choices.

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30
Q

What is total utility

A

Total utility is the sum of the marginal utilities.

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31
Q

What bundles should households chose

A

Households should choose the bundle that maximises their total utility.

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32
Q

Draw a marginal utility graph

A

Seneca 2.1.2

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33
Q

What happens to utility gained with each unit added

A

The additional utility gained decreases with each unit added.

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34
Q

What will consumers try to maximise

A

Consumers will try to maximise their utility

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35
Q

What is the utility maximisation formula

A

P1 ÷ P2 = MU1 ÷ MU2.

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36
Q

What are rational agents

A

Rational agents are agents (people, governments or companies/producers)

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37
Q

What do rational agents use to guide their decisions

A

Rational agents use utility theory to guide their decision-making.

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38
Q

What does a rational agent want to do

A

A rational agent wants to maximise their utility.

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39
Q

How will a rational agent maximise their utility

A

To do this, they will try to maximise their total utility.

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40
Q

When will a rational consumer want to consume something up to

A

A rational consumer will want to consume something up until the point where marginal utility and price are equal.

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41
Q

What does traditional theory say firms will try to do

A

Traditional theory says that firms will try and maximise profits

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42
Q

What are the reasons for wanting to maximise profit

A

Reasons for wanting to maximise profit include:
Survival
To reinvest profits
To offer managers and staff members better rewards

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43
Q

What objectives may firms have in a world of asymmetric information

A

In a world of asymmetric information, firms may have other objectives too, such as:
Maximising revenue
Maximising market share
Ethical objectives

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44
Q

How should governments act

A

Governments should act in ways that best serve the population and, roughly speaking, try to maximise overall welfare

45
Q

What should governments try to do to maximise overall welfare

A 
This includes:
Achieving economic growth
Reducing inflation
Reducing or eliminating unemployment
Achieving a balance between payments in and payments out
46
Q

How are consumers said to act

A

Consumers are said to act rationally and maximise utility within the limits of their income.

47
Q

How can consumers act differently

A

One consumer might prioritise financial security

Another consumer might want flashy clothes

48
Q

What might consumers want to maximise

A

Consumers may also want to maximise their work-life balance

49
Q

How can consumers maximise their work life balance

A

Maximising their income while enjoying as much free time as they can

50
Q

What do consumers act as when maximising their work life balance

A

Consumers act as workers when they do this

51
Q

What traditional economics principles does behavioural economics challenge

A

Behavioural economics challenges principles of traditional economics that are unrealistic

52
Q

What does traditional economists assume about economic agents

A

Traditional economists assume that economic agents act rationally and want to maximise utility

53
Q

What do behavioural economists consider what can affect decision making

A

They consider how emotional, psychological and social factors can affect decision-making.

54
Q

Why do behavioural economists say consumers can’t act perfectly rationally

A

Behavioural economists say consumers can’t act perfectly rationally because of:
Lack of available information
Limits on time
Computation weakness

55
Q

What is computation weakness

A

Computation weakness is when people can’t properly process all the data they need to make an informed decision

56
Q

What must consumers have to act rationally

A

For consumers to act rationally, they must have symmetric information

57
Q

What does asymmetric information limit

A

Asymmetric information limits our ability to make rational decisions

58
Q

What do traditional economists assume about self-control

A

Traditional economists assume that people have perfect self-control

59
Q

What do behavioural economists recognise about self-control

A

Behavioural economists recognise that individuals have limited self-control

60
Q

What different biases exist when decision making

A
  • Social norms
  • Anchoring
  • Rules of thumb
  • Availability bias
61
Q

What are social norms

A

Social norms are the generally accepted modes of behaviour

62
Q

What’s an example of social norms changing

A
  • 40 years ago drink driving was seen as acceptable; today it isn’t
  • The social norm has changed
63
Q

When does availability bias occur

A

Availability bias occurs when we attach an emotional connection to an event in our head

64
Q

What’s an example of availability bias

A

England beating Panama 6-1 in the FIFA World Cup makes it seem more likely they will win the tournament

65
Q

When does anchoring occur

A

Anchoring occurs when we use a reference point from a previous decision to form the basis of another decision

66
Q

Why is the reference point in anchoring a form of bias

A

This reference point is normally irrelevant to the current decision, and so is a form of bias

67
Q

What is the rule of thumb

A

Rule of thumb is a guide of rules that ease the process of decision-making

68
Q

What is an example of the rule of thumb

A

Always going for the least expensive option

69
Q

What is habitual behaviour

A

Habitual behaviour is where someone repeats their decision-making actions many times

70
Q

What is nudging

A

Nudging is a system of guiding people into making more rational decisions

71
Q

What does the use of nudges imply

A

The use of nudges implies that people & agents do not act rationally all the time

72
Q

What does traditional economists assume that humans have

A

Traditional economists assume that human beings have complete control, but this is not always true

73
Q

What is choice architecture

A

Choices can be framed in ways that affect the outcome for consumers

74
Q

What is default bias

A

Default bias is a preference for the status quo

75
Q

Why are choices that can be repeated preferred

A

Choices that can be repeated are preferred because less brain power is necessary

76
Q

What is mandated choice

A

Mandated choices are those made in advance

77
Q

What is an example of a mandated choice

A

choosing to be an organ donor when you die

78
Q

What would choices be like in a world of perfect information

A

In a world of perfect information, choices would be clearer as rational decisions could be made

79
Q

What would be required less of when the number of options are restricted

A

By restricting the number of options available, less cognitive power is needed to make a choice

80
Q

What’s an example of choice architecture

A

Schools can encourage children to eat healthy foods by presenting the options on the plate in certain ways

81
Q

When is choice architecture more efficient

A

It’s more effective when actions are made easy

82
Q

What are purchases based on

A

Purchases are based on a belief that a particular good or service will provide satisfaction

83
Q

When does a situation of asymmetric information happen

A

A system of asymmetric information happens when both parties in a transaction have an unequal amount of information

84
Q

What can asymmetric information cause

A

Asymmetric information can cause a decline in prices or quantity of products sold

85
Q

What can imperfect information discourage

A

Imperfect information can discourage buyers and sellers from participation in the market

86
Q

What is a thin market

A

A thin market is when there are few buyers and sellers active in the market

87
Q

What is a thick market

A

A thick market is when there are many buyers and sellers available in the market

88
Q

What do buyers with imperfect information think price signals

A

Buyers with imperfect information often think that price signals product quality

89
Q

When can markets struggle to reach an equalibrium

A

When buyers use market price to make assumptions about quality, markets can struggle to reach an equilibrium

90
Q

What do markets enable

A

Markets enable the allocation of recources

91
Q

What do economists assume about individuals in the free market

A

Economists assume that individuals in the free market are rational

92
Q

What do economists assume workers like

A

Economists assume workers prefer having wages but restricted free time

93
Q

What do economists assume employers like

A

Economists assume employers prefer having less money but the labour

94
Q

What does market exchange mean

A

Market exchange means certain recourses are allocated

95
Q

What are markets

A

Markets are where goods and services are exchanged

96
Q

What are the two different types of markets

A

A free market and a command economy are 2 different types of market system

97
Q

How does the free market allocate scarce recourses

A

Free market allocates scarce resources based on the price mechanism

98
Q

What are the benefits of the free market

A

The benefits of the free markets are:

  • It is efficient
  • It rewards entrepreneurship
  • Consumers have greater choice of product
99
Q

How is the free market efficient

A

The free market is efficient because only the highest value products are in demand. So firms are incentivised to produce as efficiently as they can

100
Q

Why do consumers have greater choice of products

A

Consumers have greater choice of product in the free market because of the increased level of innovation

101
Q

What are the negatives of the free market

A

Negatives of the free market:

  • Inequitable
  • Missing Markets
  • Monopolies may arise
102
Q

Why is the free market inequitable

A

The free market is inequitable because what is fair in the free market may not necessarily be fair in reality

103
Q

Why does the free market have missing markets

A

The free market may have missing markets because the goods we need in society may not be produced if they cannot generate a profit

104
Q

How does a command economy work

A

In a command economy the government is in charge of resource allocation

105
Q

What is an example of a command economy

A

North Korea has a command economy

106
Q

What are the advantages of a command economy

A

Advantages of command economy are:

  • Can correct the inequality that exists in the free market
  • Possible reduction in unemployment
  • They can break up monopolies
107
Q

What are the negatives of a command economy

A

Negatives of a command economy:

  • Less efficient
  • Asymmetric information
  • Choice restriction
108
Q

Why is a command economy less effective

A

Command economy is less efficient because the government isn’t a profit maximising entity, so the incentive for entrepreneurship and efficiency pushing activities is reduced

109
Q

How do command economies have asymmetric information

A

Command economies have asymmetric information because the government may not actually know what is best because of asymmetric information

Economics (16 decks)

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