1.2.1: Rational Decision Making Flashcards
What is economic welfare?
The level of prosperity (and standard of living) of an group/country.
What is utility?
The satisfaction derived from consuming a good or service.
What is Homo Economicus?
A theory of humans as agents who are consistently rational and maximise utility.
What is Homo Emotionalis?
A theory of humans as agents who are consistently irrational and don’t maximise utility.
Consumers aim to maximise ________.
Utility.
Firms aim to maximise ________.
Profit.
Governments aim to maximise ________.
Welfare.
How do consumers aim to maximise utility?
The rational consumer is called Homo Economicus (rational decisions, maximising utility), giving them the most satisfaction.
How do firms aim to maximise profit?
Firms are run for their owners and shareholders, aiming to maximise profit in order to keep them happy.
How do governments aim to maximise welfare?
Governments are voted in by the public, and work for the public, so should aim to maximise social welfare for their satisfaction.
What can influence decision making?
•Social factors.
•Emotional factors.
What are social factors that influence decision making?
-Social awareness (e.g. health risks).
-Social norms (e.g. demand for recycled bags).
-Social pressure (e.g. peer pressure affecting demand for drugs).
What are emotional factors that influence decision making?
-Emotional arousal (e.g. health insurance after an accident).
-Personal insecurity (e.g. binge eating/drinking).
-Personal attachment (e.g. season tickets).
Why may people not act rationally?
Economic agents don’t always have the necessary information to make rational decisions, and consumers don’t always make calculated decisions.
