Week 3 - Specialisation and division of labour; rational behaviour; alternative views on consumer behaviour

Question 1

Define division of labour

Answer 1

Involves the specialisation of individual, separate, tasks in a production process

Question 2

What can division of labour lead to?

Answer 2

Higher output per person/per hour worked - which is improved productivity

Question 3

What is speclisation?

Answer 3

When we concentrate on a product or task

Question 4

Give - and explain - one advantage of specialisation

Answer 4

Higher labour productivity and rising business profits. Learning by doing increases out put per hour worked = lowers costs of supply of goods and services = higher profits

Question 5

Give - and explain - another advantage from specialisation

Answer 5

Lower prices cause higher real incomes and GDP growth. Lower prices = consumers have greater real purchasing power. Higher productivity allows businesses to pay increased wages.

Question 6

Give 3 disadvantages of the division of labour

Answer 6

1. Unrewarding, repetitive work that requires little skill can cause alienations and eventually lower productivity. 2. Dissatisfied workers cause absenteeism to increase.

Question 7

What is rational behaviour?

Answer 7

A decision making process that is based on people making choices that result in optimal benefit or maximum utility.

Question 8

What is irrational behaviour?

Answer 8

When people make systematic and persistent deviations from rational choice

Question 9

Give three reasons why human are irrational

Answer 9

Herding; habit; computational weakness

Question 10

Give the 4 assumptions of rational behaviour

Answer 10

1. Agents choose independently of one another. 2. An agent has fixed and stable preferences. 3. An agent gathers complete information on all available alternatives. 4. Agents always make optimal choices

Question 11

Define habitual behaviour

Answer 11

Behaving as one has always done

Question 12

Why do people engage in habitual behaviour?

Answer 12

Repeat choices often become automatic because default choices don’t involve mental effort

Question 13

Give an example of habitual behaviour

Answer 13

Your choice of breakfast e.g. toast every morning

Question 14

Give an example of herd behaviour

Answer 14

Herd behaviour in financial markets - investors often act in herds - following the crowd.

Question 15

What does behavioural economics mean?

Answer 15

Applying psychological insights into human behaviour

Question 16

What does choice architecture mean?

Answer 16

Careful design of how options are presented can influence decisions

Question 17

What does computational weakness mean?

Answer 17

This occurs when customers find it difficult to calculate the probability of something happening when they are making purchasing decisions

Question 18

What does default choice mean?

Answer 18

Option selected if consumer does nothing

Question 19

What is a soft nudge?

Answer 19

Changing choice architecture

Question 20

Give an example of a hard nudge

Answer 20

Restricting availability of high fat foods in schools

Question 21

Give an example of a soft nudge

Answer 21

Changing the sizes of plates in restaurants or adding calorie details on menus

Question 22

What is a behavioural nudge?

Answer 22

It is a subtle prompt designed to change people choices which preserves liberty

Question 23

What does rational choice theory assume?

Answer 23

Consumers behave rationally in allocating their limited budget between difference products to maximise total satisfaction from their purchases.

Question 24

What is rational behaviour?

Answer 24

Decision making process based on people making choices that result in optimal benefit or maximum utility.

Question 25

What is irrational behaviour?

Answer 25

When people make systematic and persistent deviations from rational choice.