Unit 1 Flashcards
What is individual demand?
Demand of one person, the key is utility.
What is utility?
The satisfaction a consumer gains from consuming a good or service
Individual Demand assumptions?
Place a value equal to perceived satisfaction
Aim to maximise utility per pound spent and will compare to price paid
Rational consumers will only consume if the perceived satisfaction is greater than or equal to price
What is maximisation?
When an economics agent tries to obtain the most they can from the economic activity they undertake
Individuals maximise utility
Firms maximise profits
Governments maximise welfare
Economic objectives of households?
Maximise private benefit from consumption
Maximise private benefit from working
Economic objectives of firms?
Profit maximisation
Profit satisficing
Sales maximisation
Growth
What is utility theory?
The satisfaction that an individual derives from consuming a good or service
What is total utility?
The aggregate amount of satisfaction an individual derives from consuming a good or service
What is marginal utility?
The amount of satisfaction an individual derives from consuming one extra unit of a good or service
How do you calculate marginal utility?
change in total utility / change in number of units consumed
What is utility maximisation?
Where the last £ spent on each product yields the same amount of marginal utility
What is information failure?
Market failure where consumers do not have symmetric information or have asymmetric information
What is symmetric information?
When all relevant information is known by BOTH parties
What is information asymmetry?
When some parties in a transaction have more information regarding the product than others.
What is perfect knowledge?
A theoretical concept which occurs when ALL consumers in a market are fully aware of the price, quantity available and other relevant information when making decisions.
Significance of asymmetric information?
- Markets operate ineffectively
- Unable to make rational decisions
- Free markets misallocate resources
What is behavioural economics?
Takes into account social, moral and psychological factors that determine the behaviour of economic agents
What is bounded rationality?
Mind only have a limited ability to process and evaluate information
Information is incomplete and unreliable
Time avaliable
Bounded self-control?
Good intentions but lack self discipline to see them through
Rules of thumb?
Shortcuts individuals take to make decisions
Anchoring?
Relying on particular information in situations where they lack knowledge or experience
Availability?
Making judgements by recalling recent instances
Social norms?
Influence of others on decision making
Altruism and fairness?
People are motivated to do the right thing
What are heuristics?
Simple rules of thumb when making decisions
Tversky and Kahneman?
Availability - making judgements based on events we can remember rather than information given to us
Representativeness - categorising based on past information rather than what’s given
Anchoring and adjustments - using a number to estimate a new number
What is choice architecture?
Design of ways in which choice are presented to economic agents
What is Framing?
Actual way in which choices are presents
What are nudges?
Form of choice architecture using gentle suggestions and positive reinforcements
What is default choice?
Form of choice architecture that set the desirable option as the default choice
What is restricted choice?
Reducing the amount of available options
What is mandated choice?
Form of choice architecture where people are required to make a choice
