Unit 2 - Individual Economic Decision Making

Question 1

Rational behaviour

Answer 1

Acting in pursuit of self-interest, which for a consumer means attempting to maximise the welfare, satisfaction or utility gained from the good s and services consumed

Question 2

Utility

Answer 2

The satisfaction or economic welfare an individual gains from consuming a good or service

Question 3

Marginal utility

Answer 3

The additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good or service

Question 4

Hypothesis of diminishing utility

Answer 4

For a single consumer, the marginal utility derived from a good or service diminishes for each additional unit consumed

Question 5

Asymmetric information

Answer 5

One party to a market transaction possesses less information relevant to the exchange than the other

Question 6

Behavioural economics

Answer 6

A method of economics analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions

Question 7

Bounded rationality

Answer 7

When making decisions, individuals’ rationality is limited by the information they have l, the limitations of their minds, and the finite amount of time available in which to make decisions

Question 8

Bounded self-control

Answer 8

Limited self-control in which individuals lack the self-control to act in what they see as their self-interest

Question 9

Cognitive bias

Answer 9

Is a systematic error in thinking that affects the decisions and judgements that people make

Question 10

Availability bias

Answer 10

Occurs when individuals make judgements about the likelihood of future events according to how easy it is to recall examples of similar events

Question 11

Anchoring

Answer 11

A cognitive bias describing the human tendency when making decisions to rely too heavily on the first price of information offered (the so-called ‘anchor’). Individuals use an initial piece of information of information when making subsequent judgements

Question 12

Social norms

Answer 12

Forms or patterns of behaviour considered acceptable by a society or group within that society

Question 13

Nudges

Answer 13

Factors which encourage people to think and act in particular ways. Nudges try to shift group and individual behaviour in ways which comply with desirable social norms

Question 14

Altruism

Answer 14

Concern for the welfare

Question 15

Fairness

Answer 15

The quality of being impartial, just, or free of favouritism. It can mean treating people equally sharing with others, giving others respect and time, and not taking advantage of them

Question 16

Choice architecture

Answer 16

A framework setting out different ways in which choices can be presented to consumers, and the impact of the presentation on consumer decision making

Question 17

Default choice

Answer 17

An option that is selected automatically unless an alternative is specified

Question 18

Framing

Answer 18

How something is presented (the ‘frame’) influences the choices people make

Question 19

Mandated choice

Answer 19

People are required, often by law, to make a decision

Question 20

Restricted choice

Answer 20

Offering people a limited number of options so that they are not overwhelmed by the. Complexity of the situation. If there are too many choices, people may make a portly thought out decision or not make any decision