Rational Decision Making

Question 1

Behavioural economics

Answer 1

Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.

Question 2

Incentives

Answer 2

Incentives matter enormously in any study of microeconomics, markets and market failure. For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.

Question 3

Income

Answer 3

Income represents a flow of earnings from using factors of production to generate an output of goods and services. For example, wages and salaries are a factor reward to labour and interest is the flow of income for the ownership of capital.

Question 4

Invisible hand of the market

Answer 4

Adam Smith - one of the founding fathers of modern economics, described how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society’s best interest.

Question 5

Market incentives

Answer 5

Signals that motivate economic actors to change their behaviour perhaps in the direction of greater economic efficiency.

Question 6

Profit maximisation

Answer 6

The assumption that producers wish to produce an output that will create maximum profit levels.

Question 7

Rational choice

Answer 7

Rational choice involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs.

Question 8

Utility

Answer 8

Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service.

Question 9

Utility Maximisation

Answer 9

The assumption that consumers behave rationally in allocating their limited budget between different products so as to maximise total satisfaction from their purchases.