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
2
Q
What do economic agents make their decision based on
A
Economic agents make their decisions based on the margin
3
Q
What are examples of decisions being made because of the margin
A
Marginal cost Marginal revenue Marginal tax Marginal product Marginal utility
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
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
6
Q
What is marginal revenue
A
Marginal revenue is the change in total revenue from selling an extra good or service
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)
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
9
Q
What is marginal product
A
Marginal product is the amount of extra output produced by an extra unit of input
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
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
12
Q
Draw a marginal utility graph
A
Seneca 2.1.1
13
Q
What is marginal utility
A
Marginal utility is the extra benefit to an individual of consuming a good or service
14
Q
How can marginal utility change
A
Marginal utility can change as you consume more of the same good or service
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
16
Q
What are the two types of diminishing marginal returns
A
Diminishing marginal product
Diminishing marginal utility
17
Q
What is utility
A
Utility is the satisfaction gained from the consumption of goods and services
18
Q
Draw Law of diminishing marginal utility graph
A
Seneca 2.1.2
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.
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.
21
Q
Draw the budget constraint
A
Seneca 2.1.2
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.
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
24
Q
What area of the budget constraint is affordable
A
Any area underneath the graph is affordable
25
What is a combination of affordable products known as
Combinations of affordable products are often known as a bundle.
26
Draw a total utility graph
Seneca 2.1.2
27
What is total utility used to understand
This is used to understand how households make choices.
28
What do economists look at on the budget constraint
Economists look at the possible bundles on the budget constraint
29
What do economists calculate after looking at the possible bundles on the budget constraint
calculate the total utility derived from those choices.
30
What is total utility
Total utility is the sum of the marginal utilities.
31
What bundles should households chose
Households should choose the bundle that maximises their total utility.
32
Draw a marginal utility graph
Seneca 2.1.2
33
What happens to utility gained with each unit added
The additional utility gained decreases with each unit added.
34
What will consumers try to maximise
Consumers will try to maximise their utility
35
What is the utility maximisation formula
P1 ÷ P2 = MU1 ÷ MU2.
36
What are rational agents
Rational agents are agents (people, governments or companies/producers)
37
What do rational agents use to guide their decisions
Rational agents use utility theory to guide their decision-making.
38
What does a rational agent want to do
A rational agent wants to maximise their utility.
39
How will a rational agent maximise their utility
To do this, they will try to maximise their total utility.
40
When will a rational consumer want to consume something up to
A rational consumer will want to consume something up until the point where marginal utility and price are equal.
41
What does traditional theory say firms will try to do
Traditional theory says that firms will try and maximise profits
42
What are the reasons for wanting to maximise profit
Reasons for wanting to maximise profit include:
Survival
To reinvest profits
To offer managers and staff members better rewards
43
What objectives may firms have in a world of asymmetric information
In a world of asymmetric information, firms may have other objectives too, such as:
Maximising revenue
Maximising market share
Ethical objectives
44
How should governments act
Governments should act in ways that best serve the population and, roughly speaking, try to maximise overall welfare
45
What should governments try to do to maximise overall welfare
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This includes:
Achieving economic growth
Reducing inflation
Reducing or eliminating unemployment
Achieving a balance between payments in and payments out
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46
How are consumers said to act
Consumers are said to act rationally and maximise utility within the limits of their income.
47
How can consumers act differently
One consumer might prioritise financial security
| Another consumer might want flashy clothes
48
What might consumers want to maximise
Consumers may also want to maximise their work-life balance
49
How can consumers maximise their work life balance
Maximising their income while enjoying as much free time as they can
50
What do consumers act as when maximising their work life balance
Consumers act as workers when they do this
51
What traditional economics principles does behavioural economics challenge
Behavioural economics challenges principles of traditional economics that are unrealistic
52
What does traditional economists assume about economic agents
Traditional economists assume that economic agents act rationally and want to maximise utility
53
What do behavioural economists consider what can affect decision making
They consider how emotional, psychological and social factors can affect decision-making.
54
Why do behavioural economists say consumers can't act perfectly rationally
Behavioural economists say consumers can't act perfectly rationally because of:
Lack of available information
Limits on time
Computation weakness
55
What is computation weakness
Computation weakness is when people can't properly process all the data they need to make an informed decision
56
What must consumers have to act rationally
For consumers to act rationally, they must have symmetric information
57
What does asymmetric information limit
Asymmetric information limits our ability to make rational decisions
58
What do traditional economists assume about self-control
Traditional economists assume that people have perfect self-control
59
What do behavioural economists recognise about self-control
Behavioural economists recognise that individuals have limited self-control
60
What different biases exist when decision making
- Social norms
- Anchoring
- Rules of thumb
- Availability bias
61
What are social norms
Social norms are the generally accepted modes of behaviour
62
What's an example of social norms changing
- 40 years ago drink driving was seen as acceptable; today it isn't
- The social norm has changed
63
When does availability bias occur
Availability bias occurs when we attach an emotional connection to an event in our head
64
What's an example of availability bias
England beating Panama 6-1 in the FIFA World Cup makes it seem more likely they will win the tournament
65
When does anchoring occur
Anchoring occurs when we use a reference point from a previous decision to form the basis of another decision
66
Why is the reference point in anchoring a form of bias
This reference point is normally irrelevant to the current decision, and so is a form of bias
67
What is the rule of thumb
Rule of thumb is a guide of rules that ease the process of decision-making
68
What is an example of the rule of thumb
Always going for the least expensive option
69
What is habitual behaviour
Habitual behaviour is where someone repeats their decision-making actions many times
70
What is nudging
Nudging is a system of guiding people into making more rational decisions
71
What does the use of nudges imply
The use of nudges implies that people & agents do not act rationally all the time
72
What does traditional economists assume that humans have
Traditional economists assume that human beings have complete control, but this is not always true
73
What is choice architecture
Choices can be framed in ways that affect the outcome for consumers
74
What is default bias
Default bias is a preference for the status quo
75
Why are choices that can be repeated preferred
Choices that can be repeated are preferred because less brain power is necessary
76
What is mandated choice
Mandated choices are those made in advance
77
What is an example of a mandated choice
choosing to be an organ donor when you die
78
What would choices be like in a world of perfect information
In a world of perfect information, choices would be clearer as rational decisions could be made
79
What would be required less of when the number of options are restricted
By restricting the number of options available, less cognitive power is needed to make a choice
80
What's an example of choice architecture
Schools can encourage children to eat healthy foods by presenting the options on the plate in certain ways
81
When is choice architecture more efficient
It's more effective when actions are made easy
82
What are purchases based on
Purchases are based on a belief that a particular good or service will provide satisfaction
83
When does a situation of asymmetric information happen
A system of asymmetric information happens when both parties in a transaction have an unequal amount of information
84
What can asymmetric information cause
Asymmetric information can cause a decline in prices or quantity of products sold
85
What can imperfect information discourage
Imperfect information can discourage buyers and sellers from participation in the market
86
What is a thin market
A thin market is when there are few buyers and sellers active in the market
87
What is a thick market
A thick market is when there are many buyers and sellers available in the market
88
What do buyers with imperfect information think price signals
Buyers with imperfect information often think that price signals product quality
89
When can markets struggle to reach an equalibrium
When buyers use market price to make assumptions about quality, markets can struggle to reach an equilibrium
90
What do markets enable
Markets enable the allocation of recources
91
What do economists assume about individuals in the free market
Economists assume that individuals in the free market are rational
92
What do economists assume workers like
Economists assume workers prefer having wages but restricted free time
93
What do economists assume employers like
Economists assume employers prefer having less money but the labour
94
What does market exchange mean
Market exchange means certain recourses are allocated
95
What are markets
Markets are where goods and services are exchanged
96
What are the two different types of markets
A free market and a command economy are 2 different types of market system
97
How does the free market allocate scarce recourses
Free market allocates scarce resources based on the price mechanism
98
What are the benefits of the free market
The benefits of the free markets are:
- It is efficient
- It rewards entrepreneurship
- Consumers have greater choice of product
99
How is the free market efficient
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
Why do consumers have greater choice of products
Consumers have greater choice of product in the free market because of the increased level of innovation
101
What are the negatives of the free market
Negatives of the free market:
- Inequitable
- Missing Markets
- Monopolies may arise
102
Why is the free market inequitable
The free market is inequitable because what is fair in the free market may not necessarily be fair in reality
103
Why does the free market have missing markets
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
How does a command economy work
In a command economy the government is in charge of resource allocation
105
What is an example of a command economy
North Korea has a command economy
106
What are the advantages of a command economy
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
What are the negatives of a command economy
Negatives of a command economy:
- Less efficient
- Asymmetric information
- Choice restriction
108
Why is a command economy less effective
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
How do command economies have asymmetric information
Command economies have asymmetric information because the government may not actually know what is best because of asymmetric information
