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Economics Micro > Yr2 Individual Economic Decision Making > Flashcards

Yr2 Individual Economic Decision Making Flashcards

1
Q

PART 1

A

CONSUMER BEHAVIOUR

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2
Q

What is utility theory?

A

It is how rational decision makers make decisions and it is used to illustrate the idea of rationality

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3
Q

What are some examples of circumstances that effect utility of an invidual?

A
  • interests
  • practicality
  • likes/dislikes
  • atmosphere
  • external influences
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4
Q

What is the total utility?

+ what mathematical term is it similar to?

A

The total satisfaction that we get from purchasing and consuming a good or service

Cumulative frequency

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5
Q

What is marginal utility?

A

The change in satisfaction from a consuming an extra unit

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6
Q

In traditional theory, what does it mean if there is maximised utility?

A

The quantity consumed before marginal utility = 0

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7
Q

When does the max benefit of consumption occur?

A

When the marginal utility is at its peak

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8
Q

What are diminishing returns?

A

When marginal utility of extra units declines as more is consumed

Satisfaction decreases and marginal utility decreases

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9
Q

How does marginal utility impact a consumers willingness to pay?

  • what important part of economics does this help to explain?
A

If MU is falling, then consumers will only be willing to pay a lower price

Explains the downwards sloping of the demand curve

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10
Q

What is the key thing that economists reason that linked to utility theory?

A

That a consumer will only purchase a good or service if the utility exceeds the price

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11
Q

What is the idea of homoeconomicus?

A
  • alone
  • selfish
  • rational decision maker
  • utility maximiser
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12
Q

What is the idea of behaviour in economics?

A

Behavioural economics

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13
Q

Give a summary of the meaning of utility

A

Utility measures the satisfaction gained from either purchasing or consuming

  • it increases to a point but stops increasing once marginal utility is </= 0
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14
Q

PART 2

A

IMPERFECT INFORMATION

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15
Q

PART 3

A

ASPECTS OF BEHAVIOURAL ECONOMIC THEORY

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16
Q

What is the idea of traditional economies?

A

Viewing humans as robotic machines who make calculated decisions based on logic

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17
Q

What is the idea of behavioural economics?

A

Viewing humans as IRRATIONAL and EMOTIONAL beings who are influenced by BIASES and EXPERIENCE when making decisions

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18
Q

What are the 2 key things which lead to behavioural economics?

A
  1. Bounded rationality
  2. Bounded self-control
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19
Q

What is the definition of cognitive bias?

A

A mistake in reasoning or in some other mental thought process occurring as a result of, for example, using rules-of-thumb or holding onto beliefs and preferences, regardless of contrary information

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20
Q

What are the 10 key cognitive biases and what are they?

A
  1. Status-quo bias
    - maintenance of current affairs
  2. Memory bias
    - strong opinions based on past experiences
  3. Observational selection bias
    - opinion based on one particular element of it
  4. In-group bias
    - favour own groups ideas instead of alternative groups (friendships/peer pressure)
  5. Positive expectation bias
    - report a positive view of reality e.g. lottery
  6. Post-purchase rationalisation
    - persuasion it was a good purchase
  7. Neglecting probability
    - not knowing the risks/negatives
  8. Negativity bias
    - focus on bad elements > influences decisions
  9. Bandwagon effect bias
    - herd mentality > fear of missing out
  10. Current moment bias
    - spontaneous purchasing > dont look at LR impacts
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21
Q

What is the status quo bias?

A

Maintenance of current affairs

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22
Q

What is the memory bias?

A

Strong opinions based on past experience

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23
Q

What is the observational selection bias?

A

Opinions based on one particular element of it

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24
Q

What is In-group bias?

A

Favour own groups ideas instead of alternative groups (friendships/peer pressure)

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25
Q

What is positive expectation bias?

A

Reporting a positive view of reality e.g. lottery

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26
Q

What is post-purchase rationalisation?

A

Persuasion it was a good purchase

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27
Q

What is neglecting probability?

A

Not knowing the risks + negatives

28
Q

What is the negativity bias?

A

Focus on the bad elements > influences decisions

29
Q

What is the bandwagon effect bias?

A

Herd mentality and fear of missing out

30
Q

What is current moment bias?

A

Spontaneous purchasing and not looking at the LR implications

31
Q

What is the name of the bias when someone wants maintenance of their current affairs?

A

Status-quo bias

32
Q

What is the name of the bias when someone has strong opinions based on past experience?

A

Memory bias

33
Q

What is the name of the bias when someone develops an opinion based on only one element of something

A

Observational selection bias

34
Q

What is the name of the bias where people favour their own groups ideas instead of alternative groups?

A

In-group bias

35
Q

What is the name of the bias when people report a positive view of reality?

A

Positive expectation bias

36
Q

What is the name of the bias when after the purchase, there is persuasion it was a good purchase?

A

Post purchase rationalisation

37
Q

What is the name of the bias when someone doesn’t know the risks and negatives?

A

Neglecting probability

38
Q

What is the name of the bias for when someone focuses on the bad elements?

A

Negativity bias

39
Q

What is the name of the bias for when herd mentality and fear of missing out occurs?

A

Bandwagon effect bias

40
Q

What is the name of the bias for when spontaneous purchasing occurs without looking at the LR impacts?

A

Current moment bias

41
Q

What is the definition of anchoring?

A

A cognitive bias describing the human tendency when making decisions to rely too heavily on the first piece of information offered e.g. restaurant menus

42
Q

What is the definition of availability bias?

A

When you make a judgment about future events according to how easy it is to recall examples of similar events

43
Q

What is the definition of social norms?

+ give an example of a positive and negative one

A

Pattern of behaviour considered as acceptable by society

Pos
- attitudes towards smoking

Neg
- binge drinking

44
Q

Explain loss aversion and the importance of it + what biases does this help explain

A

People tend to focus on potential loss more than potential gain as loss is more painfully (2x)

  • explains status quo bias + some framing techniques
45
Q

What does the prospect theory and loss aversion graph show?

A

Loss is more valued than gains

46
Q

Who developed prospect theory and loss aversion?

And what did they study

A

Kahneman and tversky

Studies behavioural biases leading to suboptimal decision-making

47
Q

What is Altruism and what is the importance of it?

A

The phenomenon in behavioural science for humans to behave with more kindness and fairness than would be the case if they behaved rationally

  • when individuals put others before themselves, so that their actions benefit others more than themselves
48
Q

PART 4

A

BEHAVIOURAL ECONOMICS AND ECONOMIC POLICY

49
Q

Who are the 3 key economists linked to behavioural economics?

A
  1. Richard Thaler
  2. Daniel Kahneman
  3. Sendhil Mullainathan
50
Q

Give a brief summary of Daniel Kahneman’s work (Incl date of Nobel)

A

Won a Nobel prize in 2002 for his work within behavioural economics and decision making
- prospect theory

Experience vs memory

51
Q

What are the 3 ways of decision making that Daniel Kahneman’s theories represented and describe what they mean?

A
  1. System 1
    - Intuitive and fast decision making where there is cognitive bias + errors made
  2. System 2
    - slower and more deliberate
  3. The Availability Heuristic
    - how we make decisions based on previous decisions - rule of thumb
52
Q

What is prospect theory and who was the idea developed by?

A

Balance between loss and gain
- loss aversion

By Daniel Kahneman

53
Q

Give a brief summary of Richard Thaler and his thoughts on behavioural economics (incl date of Nobel)

A

Won a Nobel prize in economics in 2017 for his work on behavioural economics and is best known for nudge theory

54
Q

RICHARD THALER

  1. What did his research specifically highlight?
  2. What 3 key things did Thaler come up with?
  3. What is mental accounting?
  4. What is the endowment effect?
  5. What is nudging?
A
  1. The influence of psychology and social factors on economic decision making
  2. Endowment Effect, Nudge theory and Mental Accounting
  3. Idea that people make decisions on mental categories rather than rational, financial decision
  4. People value items they own more than identical items you don’t own
  5. Using small and subtle changes to nudge people to make the correct decision
55
Q

What is Libertarian Paternalism?

And what is an example of it

A

A policy approach that combines two seemingly contradictory ideas - freedom of choice and nudging people towards certain choices

E.g. Austria have an opt out process for organ doning and therefore have 99.98% of the population on the donor list. On the other hand, Germany have an opt in system so only 12% of the population are signed up

55
Q

What is the breakdown of the vocabulary of Libertarian Paternalism?

A

Libertarian > emphasises people’s right to choose themselves

Paternalism > because it uses subtle nudges to encourage people to make better decisions

56
Q

What is choice architecture?

A

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

57
Q

What is default choice?

A

An option that is selected automatically unless an alternative is specified

58
Q

What is framing?

A

How something is presented influences the choices people make

59
Q

What is nudge?

A

A means of changing people’s behaviour in a predictable manner without removing their freedom of choice

60
Q

What is mandated choice?

A

When people are required by law to make a decision

61
Q

What is restricted choice?

A

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

62
Q

What are some examples of choice architecture?

A
  • getting more people to use the salad bar at lunch e.g. Harvester
  • traffic flow is influenced by road architecture
  • signage to avoid lift/special pass
  • making people use hand sanitiser
63
Q

Examples of mandated choice

A
  • use of masks during pandemic
  • mandate for vaccine passports for travel
  • vaccine requirement for certain jobs
64
Q

How is a nudge different to a shove in behavioural economics?

A

NUDGE
- provides information for people to respond to
- opt-out schemes rather than opt-in schemes and default choices
- active choosing by individuals

SHOVE
- uses taxation and subsidies to alter incentives and on occasion, in the case of taxes to punish people
- uses fines, laws banning activities and regulations

Economics Micro (8 decks)

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