T1: LS7 - Decisions

Question 1

What is the problem with predictions in economics

Answer 1

Assumptions about the behaviours of economic agents are made to create economic models.
- these are therefore sometimes unreliable
- understanding behaviours and decisions in economics then becomes very important.

Question 2

What are the two solution methods for issues in economics

Answer 2

Deduction
Induction

Question 3

Define deduction

Answer 3

Deduction: Starting with a hypothesis and proving or disproving this.

Question 4

Define induction

Answer 4

Induction is using and collecting evidence to make a final decision.

Question 5

Define Rational behaviour

Answer 5

Rational behaviour: the concept in economics that consumers and other economic agents aim to act in a way that best benefits them and maximises their utility through their actions if possible.

Question 6

Define utility

Answer 6

Utility: refers to the satisfaction/ benefits that consumers derive from the consumption of G&S.

Question 7

What information is needed to make Rational decisions

Answer 7

T - Time (to analyse information and the different product options)
I - Information (allowing them to make the best choices)
P - Processing intro (computational ability)

Question 8

Define behavioural economics

Answer 8

A school of economics which uses evidence in how consumers behave to make assumptions on economic decision making. This uses induction methods.

Question 9

Define bounded rationality

Answer 9

This is when consumers wish to make rational decisions but cannot due to a lack of Time, Information or Processing data ability.

Question 10

What can prevent rational decisions but aren’t related to bounded rationality

Answer 10

H - habitual behaviour/ consumer inertia
H - herd behaviour
**H* - hard to analyse due to computational weakness