MICRO - LS7 - Decision Making In Economics

Question 1

Problem: assumptions about the behaviour of economic agents must be made to create models
What’s the solution

Answer 1

Make assumptions using two approaches
- deduction (start with hypothesis)
- induction (collect evidence)

Question 2

Induction economists

Answer 2

Behavioural: Richard Thaler
Keynesian: Joan Robinson

Question 3

Deduction economists

Answer 3

Classical: Adam smith
Neoclassical: Alfred Marshall

Question 4

What assumption is made in classical and neoclassical economics

Answer 4

Decision makers are assumed to be rational

Question 5

What does being rational mean for consumers

Answer 5

• buying products that maximise utility

Question 6

Utility meaning

Answer 6

• the satisfaction or benefit derived from a good

Question 7

What does being rational mean for firms

Answer 7

• maximising profit
• do so by producing as efficiently as possible and making things that consumers want and need

Question 8

What do economic agents need to make rational decisions

Answer 8

• time
• information
• the ability to process information

Question 9

What prevents rational decision making

Answer 9

• habitual behaviour (habits, keep same behaviour)
• consumer inertia (fear of the change so don’t do it)
• influenced by behaviour of others
• consumer weakness at computation (get too much info so hard to process, and calculate probability of things when making decisions)

Question 10

What is behavioural economics

Answer 10

• school of economic thought based on evidence and observations to develop assumptions of economic decision making
• uses inductive not deductive approach

Question 11

What does behavioural economics assume

Answer 11

Bounded rationality - individuals wish to maximise utility but are unable to do so due to lack of time/info/ability to process info

Question 12

What does being rational mean for governments

Answer 12

Maximising social welfare