Rational Decision Making

Question 1

What do Economic Models show?

Answer 1

They show the assumed- 🏃‍♂‍- economic agents (government, consumer, producer)

Question 2

What is Consumer Utility?

Answer 2

Consumer Utility- benefit or satisfaction derived from consuming a 🚘

Question 3

What is Firm Utility?

Answer 3

Firm Utility- profit

Question 4

What are the 2 approaches to make assumptions?

Answer 4

1) Deduction- start- hypothesis

2) Induction- collect evidence

Question 5

What are decision makers assumed to be?

Answer 5

In classical & neoclassical economics- decision makers- assumed- rational- deductive approach

Question 6

How do Firms maximise Utility?

Answer 6

Maximising profit – produce efficiently- make things- consumers both want & afford

Question 7

What 3 things do Economic Agents require to make a rational decision?

Answer 7

1) Time ⏰
2) Information
3) Ability to process information

Question 8

What is Behavioural Economics?

Answer 8

Behavioural Economics- school of economic 💭- based on evidence & observations- develop assumptions- economic decision making- inductive approach

Question 9

What does Behavioural Economics assume?

Answer 9

Behavioural economics assumes- individuals- bounded rationality (limited rationality due to the 3 factors needed- make rational decision- individuals unable to maximise utility but wish to)

Question 10

What Human Behaviours prevent Rational Decision Making?

Answer 10

1) Habitual behaviour/Consumer inertia- consumers creatures of habit- prefer what they have- ✖️ like risks (uncertainty)- changing difficulties- time wasted- rather ✖️ change
2) Influence of others- consumers follow the behaviour of others & ✖️ maximise utility
3) Consumer weakness at computation- difficulty calculating best buy (maximum utility- lack skills)