Microeconomics, part 1- Individual Economic Decision Making Flashcards
Graph of FC:
Horizontal line
Graph of AFC:
Downwards curve
Graph of VC:
Straight line going up
Graph of AVC:
Curve down a little then up (Nike tick)
Why does the graph for AVC go down at first?
Because of the fixed element
In terms of costs, when will firms produce in the short run?
Provided revenue is grater than or equal to variable costs
In terms of costs, where will firms produce in the long run?
When revenue is grater than or equal to total costs
Average cost definition:
Cost per unit
Marginal cost definition:
The additional cost to the total of the next unit
When is total revenue the highest?
When MR=0
Rational behaviour definition:
Acting in pursuit of self interest, which for a consumer means attempting to maximise the welfare, satisfaction and utility gained from the goods and services consumed
What does calculating welfare require?
A value judgement
Utility definition:
The satisfaction or economic welfare an individual gains from consuming a good or service
What is the measure of utility?
There is no measure
Marginal utility definition:
The additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good
Information gap definition:
When people do not posses or they ignore relevant information, leading them to make poor (irrational) decisions
Asymmetric information definition:
When one party in an economic transaction posses less information relevant to the exchange than the other
Behavioural economics definition:
A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions
Bounded rationality:
When making decisions an individual’s rationality is limited by the information they have, the limitations of their minds, and the finite amount of time available in which to make decisions
Bounded self control definition:
Limited self control in which individuals lack the self control to act in what they see as their self interest
Cognitive bias definition:
A mistake in reasoning or in some other mental thought process occurring as a result of, for example, using rules of thumb pr holding onto one’s preferences and beliefs, regardless of contrary information. Decisions are made on the bias of one’s own likes, dislikes and past experiences
Anchoring definition:
A cognitive bias describing the human tendency to rely too heavily on the first piece of information offered
Availability definition:
Occurs when individuals make judgements about the likelihood of future events according to how easy it is to recall examples of similar events
Social norms definition:
Forms or patterns of behaviour considered acceptable by a society or a group within that society
Altruism definition:
Concern for the welfare of others
Choice architecture definition:
A framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making
What are the types of choice architecture?
- Framing
- Loss aversion
- Nudge
- Default choice
- Mandated choices
- Restricted choices
Framing (choice architecture) definition:
How something is presented influences the choices people make
Loss aversion (choice architecture) definition:
People’s tendency to prefer to avoid potential losses rather than to acquire potential gains
Nudge (choice architecture) definition:
Tries to alter people’s behaviour in a predictable way without forbidding any options or significantly changing incentives
Default choice (choice architecture) definition:
An option that is selected automatically unless an alternative is specified
mandated choices (choice architecture) definition:
People are required by law to make a decision
Restricted choices (choice architecture) definition:
Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation
