The Importance of Information for Decision Making Flashcards
Imperfect information -> Individual economic decision making -> Microeconomics
Perfect vs. Imperfect Information
What is perfect information in microeconomics?
Perfect information assumes that consumers know all relevant details about:
- Goods and services (availability, prices, and quality).
- Utility (satisfaction derived from consuming a product).
Perfect vs. Imperfect Information
What is imperfect information, and what are its effects?
Imperfect information occurs when consumers lack full knowledge, leading to:
- Suboptimal decisions (e.g., under-consumption of merit goods or over-consumption of demerit goods).
- A mismatch between expectations and actual utility derived.
Examples of Imperfect Information
How does imperfect information affect merit goods?
Consumers may under-consume merit goods like education due to underestimating their long-term benefits.
Examples of Imperfect Information
How does imperfect information affect demerit goods?
Consumers may over-consume demerit goods like tobacco due to underestimating their long-term harm.
Examples of Imperfect Information
Provide an example of imperfect information in individual purchases.
A student spends £100 on a concert ticket, expecting high utility but later regrets the decision.
Examples of Imperfect Information
How can a decision be rational despite imperfect information?
A decision can be rational if it is based on the best available information at the time, even if expectations and actual utility differ.
Key Concepts
What is utility maximisation?
Utility maximisation is the process by which consumers aim to achieve the highest satisfaction from their choices.
Key Concepts
How does imperfect information disrupt utility maximisation?
It prevents consumers from fully understanding the satisfaction they will derive, leading to suboptimal choices.
Key Concepts
What is opportunity cost, and how does it relate to decision-making?
Opportunity cost is the value of foregone alternatives. For example, spending £100 on a concert ticket could mean missing out on a high-class restaurant meal.
Related Theories and Models
What is bounded rationality?
Bounded rationality suggests consumers face cognitive and informational limitations, making it impossible to process all available data. They make satisficing (good enough) decisions rather than optimal ones.
Related Theories and Models
What is asymmetric information, and what are its two main market failures?
Asymmetric information occurs when one party has more or better information than the other. This leads to:
- Adverse Selection: Low-quality goods dominate the market (e.g., “lemons” in used cars).
- Moral Hazard: Altered behavior due to not bearing full risk (e.g., overuse of insurance).
Related Theories and Models
What are the consequences of information failures?
They can result in misallocation of resources, inefficiency, and externalities.
Related Theories and Models
How can governments address information failures?
Through interventions such as regulations, subsidies, and taxes.
Behavioural Economics Insights
What insights does behavioural economics provide about decision-making?
It explores deviations from traditional rational choice models due to:
- Heuristics: Simplified decision-making strategies that may lead to biases.
- Overconfidence: Overestimating one’s knowledge or predictive ability.
- Present Bias: Prioritising immediate gratification over long-term benefits.
Policy Implications
What policies can governments use to address imperfect information?
- Education Campaigns: Raise awareness about risks of demerit goods and benefits of merit goods.
- Labelling and Warnings: Provide clearer product information (e.g., nutritional labels, smoking warnings).
- Incentives: Subsidise merit goods to encourage consumption (e.g., education grants).
- Regulation: Mandate transparency and disclosures to reduce asymmetries.
