test III: individuals and rational decision-making Flashcards
psychology in economics
related to changes in behaviours for consumers
psychological incentives
psychological: motivation, perception, learning, beliefs, values, confidence, etc.
personal: age and life-cycle, occupation, lifestyle, etc.
social: reference groups, family, roles and statues
cultural: culture, subculture, social class system
maslow’s hierarchy of needs
theory of motivation and individual behaviour
human motivation: how people’s needs differ
behavioural economics
why people make decisions about how much to pay for a good or service
- rational choice theory
- opportunity cost and budget constraints
rational choice theory
the highest amount of personal satisfaction
in reality: psychological factors and emotions influence the actions of individuals
determination of price
amount of money that has to be paid to acquire a given product
determination of value
the measurement of the benefit derived from a good or service
theory of value: cost-of-production analysis
pricing primarily on the basis of the cost of production
theory of value: theory of utility
prices determined simultaneously by the cost of production and demand (supply and demand)
total utility
amount of satisfaction (measured in utils) from consuming a good or service
marginal utility
the change in TU due to a one-unit change in the quantity of a good consumed
law of diminishing demand MU
as more of any good or service is consumed, its extra benefit declines
law of demand
the price a consumer is willing to pay for a good depends on his MU, which declines with each additional unit of consumption, according to the law of diminishing MU
diamond-water paradox (paradox of values)
the total utility of water exceeds that of diamonds, but MU determines the price (demand and supply)
elasticity of demand
responsiveness of Qd of a commodity to changes in its price
